Apartment Investment and Management Company AIV, better known as Aimco, recently announced two transactions related to the partnership which owns Parkmerced Apartments — a 3,221-apartment home community positioned on a 152-acre site in southwest San Francisco. The move is expected to be slightly accretive to fourth-quarter 2019 funds from operations (FFO) as well as boost full-year 2020 FFO projections.
Aimco announced a $275-million loan to the partnership which owns Parkmerced Apartments. Accruing interest at 10% per annum, the loan has a five-year term. Also, there is the right of the partnership to extend for a second five-year term. Moreover, it is secured by a pledge of the ownership of the partnership. This loan will offer current income to Aimco.
Notably, the partnership is led by Maximus Real Estate Partners, established in 2012 and run by its founder Rob Rosania.
Furthermore, Aimco has acquired a 10-year option to buy a 30% stake in the partnership and thus, participate in its substantial development pipeline. The exercise price is $1 million. Notably, besides owning a rent-control portfolio of 3,221 apartment homes, the partnership also has the vested right to develop 4,093 new market-rate apartment homes. Therefore, the option offers Aimco a risk-adjusted scope to take part in the significant value creation anticipated from the partnership’s vested rights for development.
Aimco met the funding needs for the loan through borrowing on its bank line and expects to repay by second-quarter 2020. Therefore, because of increase in bank borrowings, the company expects debt and preferred equity to EBITDA to be 7.2x at the end of 2019, before dropping to 6.5x by the end of 2020. The repayment is to be made from the $275 million, in proceeds from sales of apartment communities in California, to make the transaction “leverage neutral.”
The loan, after taking into account the funding costs, is projected to be slightly accretive to the current-quarter FFO and adjusted FFO. Further, it is estimated to boost the full-year 2020 FFO and adjusted FFO per share by 6 cents to $2.65-$2.69 and $2.37-$2.41, respectively. This indicates increase of 6-8% and 8-10%, respectively, versus 2019.
The latest move is a strategic fit for Aimco, as besides benefiting from the current income from the loan, the company has scope to participate in the substantial development pipeline in a thriving market. Notably, the San Francisco market has highly-educated tech- and finance-heavy workforce.
The workforce earns a median income of $130,000 per year, ranking #2 out of the top 50 U.S. markets. Moreover, over the last 20 years, multi-family rents have increased at a 4.12% CAGR, #5 in the nation, while median home price is $1.1 million, ranking #1 in the nation, with a home price-to-income ratio of 8.5x. These indicate the prospects for solid demand for residential properties in the market.
At present, Aimco carries a Zacks Rank #3 (Hold). In the past three months, shares of the company have gained 3.6%, while its industry has depreciated 0.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
American Homes 4 Rent AMH carries a Zacks Rank of 2 (Buy), currently. The Zacks Consensus Estimate for 2019 FFO per share has been revised marginally upward in the past month to $1.12.
Sun Communities, Inc. SUI currently holds a Zacks Rank of 2. The Zacks Consensus Estimate for the current-year FFO per share has moved marginally north to $4.89 over the past two months.
Cousins Properties Incorporated CUZ also carries a Zacks Rank of 2, at present. The Zacks Consensus Estimate for the ongoing year’s FFO per share moved up 2.1% to $2.96 in two months’ time.
Note: FFO, 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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