Aimco Reports 2Q 2019 Results; Raises Same Store and AFFO Guidance

Apartment Investment and Management Company (“Aimco”) (NYSE: AIV) announced today second quarter results for 2019.

Chairman and Chief Executive Officer Terry Considine comments: “Aimco had another solid quarter, raising guidance for a second time this year. In Operations, we achieved peer-leading growth in revenue, margins, and bottom-line. We expanded the scope of work for accretive redevelopment of Flamingo Point in Miami Beach and, in early July, acquired a 95% interest in waterfront land, adjacent to our Yacht Club community in Brickell, currently improved with an office building. We also acquired a property under construction in Kendall Square in Cambridge, Massachusetts. We reduced our cost of leverage by refinancing with lower-cost property loans. And we were recognized as a Top Work Place in the San Francisco Bay Area and in Colorado (for the seventh consecutive year). We are upbeat about our prospects to create value for our residents, teammates, and shareholders.”

Chief Financial Officer Paul Beldin adds: “Second quarter 2019 AFFO of $0.51 per share and Pro forma FFO of $0.60 per share were $0.01 ahead of the midpoint of our respective guidance ranges due to strong operating results at our Same Store properties. Based on our year-to-date results, I am raising Same Store guidance for a second time this year and also increasing Pro forma FFO and AFFO guidance by $0.02 at their respective midpoints.”

“In the second quarter, Aimco lowered its cost of leverage by redeeming its 6.875% Class A perpetual preferred shares and by rate-locking $587 million of property loans at an average rate of 3.37% and a weighted-average term to maturity of 11.5 years. Combined with refinancing activity late last year, Aimco has lowered its weighted average cost of leverage by 50 basis points, saving about $20 million annually.”

Financial Results: 2Q AFFO Per Share $0.01 Ahead of Guidance Midpoint

In July 2018, Aimco sold its Asset Management business, accepting near-term earnings dilution as the price of an increased long-term growth rate. Year-to-date, Aimco has overcome the earnings headwinds resulting from the sale and has posted Pro forma FFO per share $0.01 above 2018. In the third quarter, Pro forma FFO per share will also be diluted by the lost contribution from the sale. In the fourth quarter the dilutive impact of the sale will be past and Aimco expects Pro forma FFO per share growth of 5% at the midpoint.

* See Supplemental Schedule 1 for a detailed list of Pro forma adjustments to FFO.
nm – not meaningful

Net Income (per diluted common share) - Year-over-year, second quarter net income increased primarily due to higher gains on the sale of apartment communities.

Pro forma FFO (per pro forma diluted common share) - Aimco’s second quarter Pro forma FFO per share was down $0.01 year-over-year due to the following items:

• $0.04 contribution from Same Store Property Net Operating Income growth of 4.6%, driven by a 3.8% increase in revenue, offset by a 1.8% increase in expenses;
• $0.03 lower cost of leverage; and
• $0.01 lower general and administrative expenses; offset by
• ($0.03) contribution eliminated following the 2018 Asset Management business paired trade, including related tax benefits, net of the benefit of reinvestment in apartment communities with higher long-term growth prospects;
• ($0.01) higher casualty losses; and
• ($0.05) net reduction from other activities including contributions from investments in accretive redevelopment and development, offset by sales of lower growth apartment communities to fund these investments.

Adjusted Funds from Operations (per pro forma diluted common share) – Aimco’s second quarter AFFO per share decreased due to the $0.01 decline in Pro forma FFO per share and a $0.02 increase in capital replacement spending due to timing. For the full year 2019, Aimco expects total capital replacement expenditures, per share, to be flat year-over-year as Aimco continues to upgrade its portfolio and invest capital in fewer, but more valuable, properties.

Operating Results: Second Quarter Same Store NOI Up 4.6%; Year-to-Date NOI Up 5.0%

Same Store Rental Rates - Aimco measures changes in rental rates by comparing, on a lease-by-lease basis, the rate on a newly executed lease to the rate on the expiring lease for that same apartment. Newly executed leases are classified as either a new lease, where a vacant apartment is leased to a new customer, or as a renewal. The table below details changes in new and renewal lease rates.

Redevelopment and Development: Aimco Increases Investment in Flamingo Point by Expanding Scope of Redevelopment

Redevelopment is Aimco’s second line of business where Aimco creates value by repositioning communities within the Aimco portfolio. Aimco also undertakes some ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the redevelopment of an existing apartment community. Aimco invests to earn leverage-neutral risk-adjusted returns in excess of those expected from the apartment communities sold in “paired trades” to fund the redevelopment and development. Of these two activities, Aimco generally favors redevelopment because it permits adjustment of the scope and timing of spending to align with changing market conditions and customer preferences.

During the second quarter, Aimco invested $52 million in redevelopment and development. Aimco continued phased redevelopment activities at Bay Parc in Miami, the full redevelopment of 707 Leahy in Redwood City, California, and ground-up construction at Parc Mosaic in Boulder, Colorado, The Fremont on the Anschutz Medical Campus in Aurora, Colorado, and Elm Creek Townhomes in Elmhurst, Illinois.

At Parc Mosaic, an unusually wet spring slowed the delivery of the first building to August. Aimco now expects its total investment to be $123 million, an increase of $6 million due primarily to weather. The expected rate of return is unchanged as rental rates have increased sufficiently to offset the higher cost.

In the second quarter, Aimco also began the next phase of redevelopment at Flamingo Point in Miami Beach, Florida. This phase includes the full renovation of the North Tower with completely reconfigured floor plans and on-the-turn redevelopment of homes in the Center Tower at a pace dictated by the market. Upon completion of the amenities, common areas, and apartments in the North and Center towers, Aimco will have invested $280 million, generating a Free Cash Flow internal rate of return of approximately 10% on the incremental investment.

Portfolio Management: Aimco Increases Investment in High-growth Markets

Aimco’s portfolio of apartment communities is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality and is also diversified across several of the largest markets in the United States.

As part of its portfolio strategy, Aimco seeks to sell up to 10% of its portfolio annually and to reinvest the proceeds from such sales in accretive uses such as capital enhancements, redevelopments, some developments, and selective acquisitions with projected Free Cash Flow internal rates of return higher than expected from the communities being sold. Through this disciplined approach to capital recycling, Aimco significantly increases the quality and expected growth rate of its portfolio.

Second Quarter Portfolio - For its entire portfolio, Aimco’s average monthly revenue per apartment home was $2,218 for second quarter 2019, a 6% increase compared to second quarter 2018. This increase is due to year-over-year growth in Same Store revenue, as well as Aimco’s acquisition activities, lease-up of redevelopment communities, and sales of communities with average monthly revenues per apartment home lower than those of the retained portfolio.

Acquisitions - Aimco evaluates potential acquisitions with an eye for unique and opportunistic investments and funds acquisitions pursuant to its strict “paired trade” discipline.

In 2019, Aimco has acquired three properties with a weighted-average Free Cash Flow internal rate of return of about 9%, approximately 300 basis points better than expected from the properties being sold in paired trades to fund the acquisitions.

In April, as previously reported, Aimco closed the $66 million acquisition of One Ardmore, the fifth and final community included in the Philadelphia portfolio acquisition announced one year ago.

In June, Aimco acquired a community under development in Cambridge, Massachusetts for $5 million and expects its total investment to develop the community will be approximately $70 million.

In early July, Aimco purchased for $157 million a 95% interest in 1001 Brickell Bay Drive, a waterfront parcel adjacent to its Yacht Club apartment community in Brickell and currently improved with an office building. Brickell, a dynamic submarket within Miami, is described in further detail on page 10 of the supplemental schedules. Aimco plans to operate both properties for their existing uses while planning their future development.

Dispositions - In the second quarter, Aimco sold one apartment community with 399 apartment homes for gross proceeds of $79 million. Proceeds, net of debt repayment and transaction costs, were $78 million. The community is located in suburban Chicago, Illinois.

Balance Sheet: Aimco Extends Duration and Lowers its Cost of Leverage

Aimco Leverage

Aimco’s leverage strategy seeks to increase financial returns by using leverage with appropriate caution. Aimco limits risk through its balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; and Aimco builds financial flexibility by maintaining ample unused and available credit as well as holding properties with substantial value unencumbered by property debt; and uses partners’ capital when it enhances financial returns or reduces investment risk.

Aimco total leverage includes the Aimco share of long-term, non-recourse, property debt encumbering apartment communities, outstanding borrowings under its revolving credit facility, and outstanding Preferred Equity.

* Aimco’s Preferred Equity is redeemable at the holder’s option. For illustrative purposes, Aimco has computed the weighted average maturity of its total leverage assuming a 40-year maturity for its Preferred Equity.

Subsequent to quarter-end, Aimco rate-locked $587 million of new non-recourse, fixed-rate property debt, with substitution rights, a weighted average interest rate of 3.37%, and a weighted average term to maturity of 11.5 years. After repayment of existing debt, Aimco expects $462 million of proceeds to be used to repay borrowings on its credit facility.

Aimco is taking advantage of today’s interest rates to extend duration, reduce refinancing risk, and lower its cost of debt. Aimco’s current net leverage and leverage to EBITDAre are above target levels, but Aimco expects to be at or below these targets at year-end.

Leverage Ratios

Aimco target leverage ratios are Proportionate Debt and Preferred Equity to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre to Interest Expense and Preferred Dividends greater than 2.5x. Aimco calculates Adjusted EBITDAre and Adjusted Interest Expense used in its leverage ratios based on current quarter amounts, annualized.

Aimco’s Adjusted EBITDAre has been calculated on a pro forma basis to reflect the disposition of one community during the period as if the transaction closed on April 1, 2019.

Liquidity

Aimco uses its credit facility primarily for working capital and other short-term purposes and to secure letters of credit. At June 30, 2019, Aimco held cash and restricted cash of $66 million and had the capacity to borrow up to $498 million under its revolving credit facility, after consideration of $7 million of letters of credit backed by the facility. Pro forma the third quarter 2019 financing activity mentioned above, Aimco has full capacity of $793 million on its revolving credit facility.

Aimco also manages its financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. At June 30, 2019, Aimco held unencumbered apartment communities with an estimated fair market value of approximately $3.2 billion which, pro forma the third quarter 2019 financing activity mentioned above, will be $2.3 billion.

Equity Capital Activities

On July 29, 2019, the Aimco Board of Directors declared a quarterly cash dividend of $0.39 per share of Class A Common Stock for the quarter ended June 30, 2019, representing an increase of 3% compared to the dividends paid in third quarter 2018. This dividend is payable on August 30, 2019, to stockholders of record on August 16, 2019.

2019 Outlook

Earnings Conference Call Information

Supplemental Information

The full text of this Earnings Release and the Supplemental Information referenced in this release are available on Aimco’s website at investors.aimco.com.

Glossary & Reconciliations of Non-GAAP Financial and Operating Measures

Financial and operating measures found in this Earnings Release and the Supplemental Information include certain financial measures used by Aimco management that are measures not defined under accounting principles generally accepted in the United States, or GAAP. Certain Aimco terms and Non-GAAP measures are defined in the Glossary in the Supplemental Information and Non-GAAP measures reconciled to the most comparable GAAP measures.

About Aimco

Aimco is a real estate investment trust focused on the ownership and management of quality apartment communities located in select markets in the United States. Aimco is one of the country’s largest owners and operators of apartments, with ownership interests in 128 apartment communities in 17 states and the District of Columbia. Aimco common shares are traded on the New York Stock Exchange under the ticker symbol AIV and are included in the S&P 500. For more information about Aimco, please visit our website at www.aimco.com.

Forward-looking Statements

This Earnings Release and Supplemental Information contain forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements regarding projected results and specifically forecasts of third quarter and full year 2019 results, including but not limited to: Nareit FFO, Pro forma FFO and selected components thereof; AFFO; Aimco redevelopment and development investments and projected yield on such investments, timelines and Net Operating Income contribution; expectations regarding sales of Aimco apartment communities and the use of proceeds thereof; and Aimco liquidity and leverage metrics.

These forward-looking statements are based on management’s judgment as of this date, which is subject to risks and uncertainties. Risks and uncertainties include, but are not limited to: Aimco’s ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, redevelopments and developments; Aimco’s ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to Aimco redevelopment and development investments; expectations regarding Aimco sales of apartment communities and the use of proceeds thereof; and Aimco’s ability to comply with debt covenants, including financial coverage ratios.

Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond Aimco’s control, including, without limitation:

• Real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which Aimco operates and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing of acquisitions, dispositions, redevelopments and developments; and changes in operating costs, including energy costs;
• Financing risks, including the availability and cost of capital markets’ financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; and the risk that earnings may not be sufficient to maintain compliance with debt covenants;
• Insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; and
• Legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of governmental regulations that affect Aimco and interpretations of those regulations; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by Aimco.

In addition, Aimco’s current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on Aimco’s ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership.

Readers should carefully review Aimco’s financial statements and the notes thereto, as well as the section entitled “Risk Factors” in Item 1A of Aimco’s Annual Report on Form 10-K for the year ended December 31, 2018, and the other documents Aimco files from time to time with the Securities and Exchange Commission.

These forward-looking statements reflect management’s judgment as of this date, and Aimco assumes no obligation to revise or update them to reflect future events or circumstances. This press release does not constitute an offer of securities for sale.

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