Apartment Investment and Management Company (AIV - Free Report) — better known as Aimco — has been making diligent efforts to reposition its portfolio by shedding non-strategic properties and investing the proceeds in opportunistic acquisitions. However, the dilutive impact on earnings from such asset dispositions cannot be bypassed in the near term. Also, new supply in various markets is anticipated to dampen the company’s rent growth and new-lease pricing ability.
Recently, Aimco reported in-line results for first-quarter 2018 with respect to pro forma funds from operation (FFO) per share. The results displayed growth in property net operating income (NOI), supported by same-store properties, and lease-up of redevelopment and acquisition communities. However, these positives were partially offset by lower NOI from apartment sales in 2017 and 2018.
Notably, Aimco is revamping its portfolio through property sales and reinvesting the proceeds in select apartment homes with higher rents, superior margins and greater-than-expected growth. Through these efforts, the company increased its revenues per apartment home by 7% to $2,052 in first-quarter 2018. Additionally, it enhanced the quality and expected growth rate of its portfolio. In the reported quarter, the percentage of A, B and C+ home was 49%, 35% and 16%, respectively.
Moreover, in April 2018, in sync with its portfolio revamping strategy, Aimco opted for the acquisition of six apartment communities in Philadelphia for $445 million. Further, the company plans to sell its asset-management portfolio along with four affordable garden-style communities for $590 million. Also, during the first quarter, the company invested $47 million in redevelopment and development. Such efforts are expected to help the company enhance its overall portfolio quality and achieve a favorable mix for long-term growth.
Additionally, due to changing lifestyle, people, on an average, are settling later in life and thereby buying homes later, leading to a rising tendency of living in a rented home. Further, as renting is the only viable option for customers, who cannot avail mortgage loans or are unwilling to buy a house at present, demand for Aimco’s premium properties are expected to continue to rise in the coming quarters.
Also, the company has been on track to enhance its balance sheet and liquidity position, and bring down leverage. Aimco is focusing on boosting its financial flexibility by increasing the pool of unencumbered apartment assets.
Nonetheless, apartment supply remained elevated in the first quarter. Particularly, new supply is competing with some of the company’s higher-rent properties. This high supply is a concern because it curtails landlords’ ability to command more rent and results in lesser absorption.
However, although Aimco’s effort to sell non-core assets and buy properties in higher-growth infill areas is a strategic fit for the long term, the dilutive impact on earnings from such asset dispositions cannot be avoided in the near term.
Further, hike in interest rate remain a concern for Aimco. This is because the company’s ability to refinance existing debt would be restricted, while the interest cost on new debt would increase. This could adversely affect the company’s results and consequently dent its dividend payout.
Moreover, amid rising rates, not only the financing costs will increase, but the common stock buyers will also demand a higher dividend yield and this may negatively impact the market price of the common stock.
In the past three months, this Zacks Rank #3 (Hold) stock has underperformed the industry. While the company’s shares have gained 3.8%, the industry has recorded 7.5% rise.
Stocks Worth a Look
A few better-ranked stocks from the REIT space include Arbor Realty Trust (ABR - Free Report) , Chatham Lodging Trust (CLDT - Free Report) and Host Hotels & Resorts, Inc. (HST - Free Report) . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share rose 14.4% to $1.03 over the past month. Its shares have returned 16.6% in the past three months.
Chatham Lodging’s FFO per share estimates for the current year inched up 1% to $1.93 in a month’s time. Its shares have gained 12.1% over the past 12 months.
Host Hotels & Resorts’ FFO per share estimates for 2018 witnessed rise of 3% and moved to $1.71 over the past month. The stock has gained 7.1% during the past three months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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