Impressive 4Q at Aimco

Zacks

Apartment Investment and Management Company (AIV) – a real estate investment trust (:REIT), better known as Aimco – reported its fourth quarter 2012 pro forma funds from operations (:FFO) of 52 cents per share, exceeding the Zacks Consensus Estimate by a couple of cents and the year-ago quarter’s figure by 10 cents.

The quarterly increase was attributable to improved property operating results, lower interest expenses, additional income from increased consolidated properties ownership and lower preferred stock dividends. It was, however, partially offset by lower income from discontinued operations. For full year 2012, pro forma FFO came in at $1.84 per share, surpassing the Zacks Consensus Estimate of $1.70 and up from $1.49 per share reported a year ago.

For fourth quarter 2012, adjusted FFO jumped 90% to 38 cents per share from 20 cents in the year-ago period. For full year 2012, adjusted FFO escalated 54% to $1.34 per share from 87 cents in 2011.

Inside the Headlines

During the quarter, total revenue was $266.0 million, higher than $248.5 million in the year-ago period. Also, revenues in the reported quarter surpassed the Zacks Consensus Estimate of $257 million. For full year 2012, total revenue stood at $1.0 billion, up 5% year over year and in line with the Zacks Consensus Estimate.

Conventional real estate portfolio: This includes a diversified range of market-rate apartment communities. In same-store portfolio, the average daily occupancy was flat year over year at 95.3% in the reported quarter. However, average rents in the same-store portfolio increased 4.0% to $1,188 per unit from $1,142 prior-year quarter.

Rental rates on new leases and renewals in the portfolio were 0.4% and 5.1% higher, respectively, than the expiring lease rates. Also, same-store revenues increased 5.1% year over year to $184.9 million, while net operating income (:NOI) increased 5.7% to $122.1 million. Moreover, average revenue per unit increased 5.1% year over year to $1,330.

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 120 bps to 98.9% in the quarter. Average revenue per unit increased 1.1% year over year to $981.

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, Chicago and Ill. Going forward, the company expects to sell each year the lowest rated 5%–10% of its portfolio and increase its investment in target markets through redevelopment and acquisitions. Furthermore, the company intends to completely sell its affordable portfolio by 2017–2018.

During the fourth quarter, Aimco sold 8 Conventional (1,865 units) and 16 Affordable assets (1,417 units) for $271.1 million of total gross proceeds.

Also, the company completed the sale of its legacy asset management business – NAPICO portfolio. Aimco financed the transaction and it will pay off the associated notes over the next 6 years. Aimco projects to add $6–$8 million in FFO over the expected term of the notes.

During the quarter, Aimco started redevelopment work on multi-phase capital projects – Park Towne Place and The Sterling – in Center-City Philadelphia.

Dividend Hike

On Jan 31, 2013, Aimco declared fourth quarter dividend of 24 cents per share – a hike of 20% from the prior dividend rate. The dividend is payable on Feb 28 to shareholders of record as of Feb 15.

Liquidity

As of Dec 31, 2012, Aimco had cash and cash equivalents worth $84.4 million. The company had no outstanding balance under its revolving credit facility. By the year-end, however, Aimco had an available capacity of $454.6 million on its revolving credit facility, net of $45.4 million of letters of credit backed by the facility.
 
2013 Outlook

For the first quarter of 2013, Aimco expects pro forma FFO per share in the range of 42–46 cents. For full year 2013, the company expects pro forma FFO per share in the range of $1.92–$2.08.

Our Take

We are encouraged by the solid fourth quarter results of Aimco. This leading multi-family apartment REIT continues to sell older assets to reposition its portfolio and focus on fewer markets with higher growth potential. Furthermore, redevelopment activity will help it to mitigate operating risk amid challenging macroeconomic environment. This provides compelling growth potential to the company. Moreover, the recent dividend hikes boost investors’ confidence in the stock.

In addition to Aimco, many other REITs have raised their dividends recently. Simon Property Group Inc. (SPG) raised its dividend by 4.5% sequentially, AvalonBay Communities Inc. (AVB) hiked its dividend by 10.3% and BRE Properties Inc. (BRE) declared a 2.6% sequential hike in its quarterly cash dividend.

Aimco currently holds a Zacks Rank #3 (Hold).

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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