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Apartment Investment and Management Company (AIV - Analyst Report) – a real estate investment trust (REIT), better known as Aimco – reported pro forma funds from operations (FFO) of 48 cents per share in the first quarter 2013, exceeding the Zacks Consensus Estimate by a cent and the year-ago quarter’s FFO per share by 8 cents. Pro forma FFO was also ahead of the high point of Aimco's guidance range of 42 cents – 46 cents per share.

The quarterly increase was attributable to improved property operating results, a rise in ownership in consolidated properties and lower preferred stock dividends. It was, however, partially offset by lower income from discontinued operations.

For first-quarter 2013, adjusted FFO jumped 31% to 38 cents per share from 29 cents in the year-ago period.

Inside the Headlines

During the quarter, total revenue was $255.5 million, increasing 1.2% from the year-ago period. Also, total revenue in the reported quarter surpassed the Zacks Consensus Estimate of $252 million.

Conventional real estate portfolio: This includes a diversified range of market-rate apartment communities. In same-store portfolio, the average daily occupancy was down 60 basis points (bps) year over year to 95.4% in the reported quarter. However, average rent per unit in the same-store portfolio increased 4.4% to $1,201 from $1,150 in the prior-year quarter. Moreover, average revenue per unit increased 5.3% year over year to $1,344.

Rental rates on new leases and renewals in the portfolio were 2.6% and 5.3% higher, respectively, than the expiring lease rates.

Same-store revenues increased 4.7% year over year to $188.5 million while expenses escalated 4.9% year over year to $67.1 million. As a result, net operating income (NOI) climbed up 4.6 % from the prior-year quarter to $121.4 million.

Affordable real estate portfolio: This includes properties with rents that are generally paid (in whole or in part) by a government agency. In same-store portfolio, the average daily occupancy upped 0.7% to 98.9% in the quarter. Average revenue per unit increased 1.5% year over year to $977.

Portfolio Restructuring Activity

Aimco is currently focusing on the largest markets in the U.S. that are concentrated mostly in the coastal areas including the Sun Belt cities. Going forward, the company expects to sell the lowest rated 5%–10% of its portfolio each year and increase its investment in target markets through redevelopment and acquisitions. Furthermore, the company intends to completely sell its affordable portfolio over the next four to five years.

During the first quarter, Aimco sold 3 Affordable Properties (66 units) for $8.0 million in gross proceeds. Aimco's share of net sales proceeds was $0.3 million, following distributions to limited partners, paying back of existing property debt and transaction costs.

During the reported quarter, Aimco carried on with the redevelopment of 9 properties, which it commenced in the prior year. Also, the company continued redevelopment work on multi-phase capital projects – Park Towne Place and The Sterling – in Center-City Philadelphia.

Dividend

On May 2, 2013, Aimco declared first-quarter 2013 cash dividend of 24 cents per share of its Class A common stock. The dividend is payable on May 31 to shareholders of record as of May 17, 2013.

Liquidity

As of Mar 31, 2013, Aimco had cash and restricted cash on hand of $193.9 million. Moreover, there were 3 unencumbered properties that the company plans to retain beyond 2013, with estimated fair values of around $165 million.

Furthermore, as of that date, Aimco had outstanding borrowings of $49.2 million on its revolving credit facility, while available capacity was $405.4 million, net of $45.4 million of letters of credit backed by the facility.

Going forward, Aimco aims to achieve leverage targets of Debt and Preferred Equity to EBITDA of less than 7.0x; and EBITDA Coverage of Interest and Preferred Dividends greater than 2.5x.

Outlook

For second-quarter 2013, Aimco expects pro forma FFO per share in the range of 45 – 49 cents. For full-year 2013, the company has slightly raised its outlook and now expects pro forma FFO per share in the range of $1.94–$2.10, compared with the prior guidance of $1.92–$2.08.

Our Take

We are encouraged by the better-than-expected first quarter results of Aimco. Aimco has a strong portfolio and continues to sell non-core assets to reposition its portfolio and focus on markets with higher growth potential.

Furthermore, redevelopment activity will help it mitigate operating risks amid a challenging macroeconomic environment. However, Aimco faces stiff competition from other players in the market that undermines its growth potential. Its leverage is also high.

Aimco currently holds a Zacks Rank #3 (Hold). Other REITs that are performing better and are worth a look include Simon Property Group Inc. (SPG - Analyst Report), Acadia Realty Trust (AKR - Snapshot Report) and CubeSmart (CUBE - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

Note: Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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