Overview: Pershing Square's new positions and disposals in 1Q14 (Part 3 of 7)
Bill Ackman’s Pershing Square took new stakes in Platform Specialty Products (PAH), Apartment Investment & Management Company (AIV), Allergan Inc. (AGN), and Home Properties Inc. (HME). Positions sold include General Growth Properties (GGP) and Procter & Gamble Co (PG).
Pershing Square disclosed a new position in Apartment Investment & Management Company (AIV), or AIMCO, that accounts for 1.35% of Pershing Square’s $8.3 billion 1Q14 portfolio.
AIMCO is a self-administered and self-managed real estate investment trust (or REIT). It is is focused on the ownership, management, and redevelopment of quality apartment communities located in the largest coastal and job growth markets in the United States. AIMCO’s target markets are primarily coastal markets, including Chicago, Illinois and several Sun Belt cities.
On March 31, 2014, AIMCO’s conventional property operations included 161 apartment communities with 49,314 apartment homes in which the REIT held an average ownership of approximately 97%. It also operates a portfolio of affordable apartment communities, which consist of apartments with rents that are generally paid, in whole or part, by a government agency. On March 31, 2014, AIMCO’s affordable property operations consisted of 72 apartment communities with 9,680 apartment homes in which the REIT held an average ownership of approximately 89%. Its conventional and affordable property operations generated 91% and 9%, respectively, of its proportionate property net operating income. Over the next four to five years, AIMCO expects to dispose of its affordable apartment communities and reinvest the proceeds in the conventional portfolio.
AIMCO measures asset quality based on rents compared to local market average rents as reported by REIS, a third-party provider of commercial real estate performance information and analysis. AIMCO defines asset quality as follows: “A” quality assets are those with rents greater than 125% of local market average; “B” quality assets are those with rents 90–125% of local market average; and “C” quality assets are those with rents lower than 90% of local market average. For fourth quarter 2013, the most recent period for which REIS information is available, AIMCO Conventional Apartment Community rents averaged 105% of local market average rents.
Each year, AIMCO expects to sell the lowest rated 5–10% of its portfolio and reinvest the proceeds from such sales in redevelopment and acquisition of higher quality apartment communities. Through this approach to capital recycling, from 2010–2013, AIMCO increased its year-end conventional portfolio average monthly revenue per apartment home at a compound annual growth rate of more than 8%.
First quarter 2014 pro forma funds from operations (or FFO) increased 4% to $0.50 per share as a result of improved property operating results, lower offsite costs, and lower interest expense. These results were somewhat offset by sales of apartment communities, higher casualty losses as a result of severe weather in the Northeast and Midwest, and lower interest income. Revenue increased to $174.9 million from $167.2 million in 1Q 2013. The management noted, “Operating results were ahead of plan, notwithstanding the severe winter weather and its related costs.” The company added that, “Pro forma FFO (Funds From Operations) of $0.50 per share was at the high end of our guidance primarily due to strong property operating results and higher than expected transaction income, offset somewhat by higher than anticipated casualty losses related to severe weather during the quarter.”
Conventional portfolio average monthly revenue per apartment home was $1,505—a 9.9% increase compared to first quarter 2013, as a result of year-over-year (or YoY), Same Store monthly revenue per apartment home growth of 4.3%, and the sale of Conventional Apartment Communities during 2013.
AIMCO is forecasting a net investment of approximately $670 million in redevelopment projects currently underway and those projects that were completed during the past year. These investments are expected to add approximately $1.50 to AIMCO’s net asset value per share. The company also declared a quarterly cash dividend of $0.26 per share.
A recent release from Fitch provided a positive rating to AIMCO and noted that the REIT has a well-diversified portfolio, an improving balance sheet highlighted by reduced leverage and growing unencumbered asset pool, a simplified portfolio strategy, and conservative dividend payout ratio. These strengths are balanced by an unencumbered asset pool, weak credit metrics relative to Fitch-rated investment grade peers, and execution risk tied to completing existing redevelopment projects.
According to an April release from the National Association of Real Estate Investment Trusts (or NAREIT), returns of stock exchange-listed U.S. REITs were nearly five times greater than those of the broader equity market in the first quarter of 2014. The Apartment segment was the top performer, with a 13.84% total return. NAREIT reported in December that Fitch Ratings maintained a “stable” outlook for REITS for 2014, and added that interest rate increases resulting from stronger economic growth are positive for REITs, whereas a stagflation scenario of higher rates would certainly be detrimental. AIMCO peers include Camden Property Trust (CPT), Essex Property Trust (ESS), and UDR Inc. (UDR).
To learn about investing in mortgage REITs, please read this article on the MarketRealist website: Investing in REITs during a rising interest rate environment.
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