Shares of Apartment Investment And Management Company (AIV - Free Report) , commonly known as Aimco, gained 7.1% on Sep 14, indicating investors’ optimism on the company’s plans to bifurcate its business into two separate publicly traded companies focused on ownership with active management and development, respectively. The company also entered a ten-year joint venture (JV) for joint ownership of 12 multi-family properties in California.
Spin-Off Transaction Details
As part of the spin-off, Aimco will separate its business into two publicly traded companies — Apartment Income REIT (“AIR”), which will be a pure-play apartment investment vehicle, while Aimco will retain the development and redevelopment of apartment communities.
AIR will own 93.5% of a portfolio of 98 stabilized properties that have 26,599 apartment homes, with fair market value (or GAV) of $10.4 billion and net asset value (NAV) of $7.8 billion. These communities are primarily A/B in quality and provide diversification across geography and price points.
The strategic location of the properties across submarkets with above-average growth projections likely enabled the assets to enjoy above-average market rents as well as decent net operating income (NOI) margins and occupancy rates.
AIR will operate at low leverage and a conservative capital structure. It will have debt, net of cash and receivables of $2.7 billion, indicating net debt to annualized EBITDA of 5.9X for the March-end quarter.
Meanwhile, Aimco will retain the ownership of 11 stabilized multi-family properties, the loan made to the partnership owning Parkmerced Apartments and the related option to extend the same, the land assembly of Yacht Club, and an office building in Miami, 1001 Brickell Bay Tower.
Moreover, the company’s portfolio will include Hamilton on the Bay, a multi-family property that was recently purchased, and the land and zoning to develop 389 additional apartment homes, as well as other assets and liabilities. Aimco expects the fair market value or GAV of these properties to be $1.3 billion. The properties are subject to property debt of $0.2 billion. This along with $0.1 billion of cash is likely to result in an expected NAV of $1.2 billion.
The 1:1 split will enable Aimco shareholders to receive a share of AIR for each owned share of Aimco. Moreover, the planned transaction is expected to be a taxable event, enabling the reduction of the tax burden for future taxable transactions and the need for continued non-cash stock dividends in compliance with REIT requirements.
Additionally, AIR will be headquartered in Denver, CO, while Aimco will be based in Bethesda, MD, as well as Denver.
The spin-off will facilitate Aimco to simplify its business, and focus on a pipeline of redevelopment and development opportunities as well as additional scope to pursue real estate opportunities in partnership with AIR.
In fact, five of AIR’s properties are currently under construction or in lease-up and will likely be so at the time of the separation. Per plans, the five properties will be leased to Aimco to complete the work. The net leases are estimated to contribute $25 million annually or around 5% of AIR’s NOI.
Moreover, since AIR will not be involved in development and redevelopment activities, it can eliminate earnings dilution from properties with reduced or no earnings from such activities. This along with lower management costs is likely to result in higher funds from operations (FFO). Higher FFO also supports increased levels of dividends.
JV Transaction Details
Aimco entered a ten-year JV with a passive institutional investor for 12 multi-family properties, consisting of 4,051 units in California.
These properties are valued at $2.4 billion, indicating an implied NOI cap rate and free cash flow cap rate of approximately 4.2% and 4%, respectively (based on annualized figures for the six months ended Jun 30, 2020). The properties have an implied equity value of $1.18 billion and non-recourse debt of $1.22 billion.
The company has sold a 39% stake in the properties, subject to $475 million of property debt, for $461 million cash and an additional $24 million for future redevelopment spending. Along with the remaining 61% interest, Aimco will be responsible for the operations of the properties, enabling it to earn property and asset management fees.
The transaction is a strategic fit as it allows the company to reduce financial leverage by 1.2X. Moreover, it aids in reducing capital allocation to California, while providing proceeds to invest in other target markets, thereby, demonstrating its plan to rebalance capital allocation across its markets.
Markedly, the properties are anticipated to be owned by AIR post separation.
Zacks Rank and Price Performance
Aimco carries a Zacks Rank of 3 (Hold) at present. Shares of the company have depreciated 7.5% compared with the industry’s decline of 8.8% over the past three months.
Stocks to Consider
Alpine Income Property Trust, Inc.’s (PINE - Free Report) FFO per share estimates for 2020 have been revised 4.4% upward to $1.18 over the past week. It currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Duke Realty Corporation’s (DRE - Free Report) Zacks Consensus Estimate for 2020 FFO per share has been revised 3.5% upward to $1.49 over the past two months. The company currently carries a Zacks Rank of 2.
Sabra Healthcare REIT, Inc.’s (SBRA - Free Report) FFO per share estimates for the ongoing year have been revised 4.9% upward to $1.72 over the past month. The company currently carries a Zacks Rank of 2.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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