Apartment Investment & Management : Aimco Reports Fourth Quarter Results

Apartment Investment and Management Company (“Aimco”) (NYSE: AIV) announced today fourth quarter results for 2017.

Chairman and Chief Executive Officer Terry Considine comments: “2017 was a solid year for Aimco. Revenues were up, expenses were almost flat, and Aimco achieved NOI growth greater than 4% for the 7th year in a row. The quality of the Aimco portfolio improved through value created by our redevelopment and transaction activities, contributing to average revenue per apartment home of $2,123, up 7%.

“In 2018, we expect consumer demand for apartments to be strong, supported by favorable demographics and an accelerating economy. The diversification of the Aimco portfolio provides a hedge against elevated supply in some markets. We expect Aimco’s investment in redevelopment and development activities to increase Net Asset Value and to contribute to future earnings growth.”

Chief Financial Officer Paul Beldin adds: “2017 AFFO of $2.12 per share met the midpoint of our guidance range, Pro forma FFO of $2.45 per share was $0.01 ahead of the midpoint of guidance, and Same Store NOI growth was comfortably within our guidance range. The Aimco balance sheet is safe and strong with abundant liquidity and with minimal borrowings on our $600 million revolving credit facility.

“In 2018, Aimco expects earnings from our Same Store, Redevelopment and Other Real Estate portfolios to add $0.10 per share to AFFO. This earnings growth will be offset somewhat by lower earnings from the planned and continuing wind down of our Asset Management business and lower income tax benefits due to the recent tax law change. We anticipate Pro forma FFO per share in a range of $2.42 to $2.52 and AFFO per share in a range of $2.11 to $2.21.”

Financial Results: Full Year Pro forma FFO Up 6%; AFFO Up 8%

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

Pro forma FFO (per diluted common share) - Aimco’s fourth quarter Pro forma FFO increased by $0.03 per share, or 5%, on a year-over-year basis. Property results contributed the following to Pro forma FFO:

• $0.02 from Same Store Property Net Operating Income growth of 3.1%, driven by a 2.8% increase in revenue, offset by a 2.1% increase in expenses; and
• $0.01 from the lease-up over the last 12 months of more than 800 renovated homes at Redevelopment communities and completion of the lease-up of One Canal in Boston, Massachusetts and Indigo in Redwood City, California; offset by
• ($0.03) lower Property Net Operating Income from apartment communities sold in 2016.

As compared to 2016, lower interest rates, higher transactional income, and other factors contributed an additional $0.03 to Pro forma FFO.

The results above exclude Property Net Operating Income from the second quarter reacquisition of the 47% interest in the Palazzo communities, which was largely offset by higher interest expense related to temporary borrowings used to fund the purchase.

Adjusted Funds from Operations (per diluted common share) - The $0.03 increase year-over-year in Pro forma FFO per share plus $0.03 in lower capital replacement spending due to fewer apartment homes increased AFFO per share by $0.06, or 12%.

Operating Results: Fourth Quarter Same Store NOI Up 3.1%; Full Year Up 4.2%

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 either as 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.

During fourth quarter, Aimco focused on increasing occupancy, resulting in a 30 basis point increase in Average Daily Occupancy as compared to the third quarter.

Redevelopment/Development

Aimco’s second line of business is the redevelopment and development of apartment communities. Aimco invests in this line of business when it believes the investment will yield risk-adjusted returns in excess of those expected from the apartment communities sold in paired trades to fund these construction projects. Aimco favors redevelopment because it permits adjustment of the scope and timing of spending to align with changing market conditions. Aimco also undertakes ground-up development of apartment communities when warranted by risk-adjusted investment returns.

During the fourth quarter, Aimco invested $51 million in redevelopment and development. In Center City, Philadelphia, Aimco completed de-leasing of and commenced construction on the fourth and final tower of Park Towne Place. Lease-up of this tower is scheduled to commence in the spring of 2018. At December 31, 2017, the first three towers combined were 89% leased with approximately 40 homes remaining to lease at the third tower in order to reach stabilized occupancy.

As previously announced, Aimco is developing Parc Mosaic, a $117 million, 226 apartment home community located in Boulder, Colorado on the site of its former Eastpointe apartment community. During the fourth quarter, Aimco completed de-leasing of Eastpointe and commenced demolition and construction.

During the fourth quarter, Aimco leased 103 apartment homes at its redevelopment communities. At December 31, 2017, Aimco’s lease-up exposure at active redevelopment and development projects included approximately 611 apartment homes, 232 of which were in the fourth tower of Park Towne Place and 215 were in Parc Mosaic.

Portfolio Management: Revenue Per Apartment Home Up 7% to $2,123

Aimco portfolio strategy seeks predictable rent growth from a portfolio of apartment communities that is diversified across “A,” “B” and “C+” price points, averaging “B/B+” in quality, and that is also diversified across the largest markets in the U.S. Please refer to the Glossary for a description of Aimco Portfolio Quality Ratings.

As part of its portfolio strategy, Aimco seeks to sell each year up to 10% of the apartment communities in its portfolio and to reinvest the proceeds from such sales in uses such as property upgrades, redevelopment of communities in its current portfolio, occasional development of new communities, and selective acquisitions of apartment communities with projected free cash flow returns higher than expected from the communities sold to fund the activity. Through this disciplined approach to capital recycling, Aimco has significantly increased the quality and expected growth rate of its portfolio.

Fourth Quarter Real Estate Portfolio - For its entire portfolio, Aimco’s average monthly revenue per apartment home was $2,123 for fourth quarter 2017, a 7% increase compared to fourth quarter 2016. This increase is due to year-over-year growth in Same Store revenue as well as Aimco’s second quarter reacquisition of the 47% interest in the Palazzo communities, lease-up of redevelopment and acquisition properties, and the sale of apartment communities with average monthly revenues per apartment home lower than those of the retained portfolio.

Dispositions - In the fourth quarter, Aimco sold five lower-rated apartment communities with 2,291 apartment homes for a gain of $298 million and gross proceeds of $397 million resulting in $381 million in net proceeds to Aimco. Two of these properties are affordable communities located in Washington, DC and Philadelphia, and three are located in southern New Jersey and southern Virginia.

In January 2018, Aimco agreed to sell its interests in the entities owning the La Jolla Cove property in settlement of legal actions filed in 2014 by a group of disappointed buyers who had hoped to acquire the property. As a result of the settlement, Aimco recognized in its 2017 results a gross impairment loss of $35.8 million, $25.6 million of which relates to the establishment of a deferred tax liability assumed at acquisition. Upon closing of the transaction, the tax liability will be assumed by the buyer, resulting in no economic loss to Aimco. The remaining $10.2 million accounting loss is offset by cash distributions paid to Aimco during its ownership and avoided legal costs for continued litigation.

On an economic basis, Aimco agreed to sell the entity at roughly its purchase price, adjusted for retained cash distributions and avoided legal costs.

Also in January 2018, Aimco sold three additional apartment communities with 513 apartment homes for a gain of approximately $50 million, net of tax, and gross proceeds of $72 million resulting in $65 million in net proceeds to Aimco. Two of these communities are located in southern Virginia and one is located in suburban Maryland.

Proceeds from the 2017 and 2018 sales were used to repay outstanding borrowings on Aimco’s revolving credit facility, effectively funding the equity portion of the Palazzo reacquisition as well as Aimco’s 2017 redevelopment and development activities.

Balance Sheet and Liquidity

Aimco Leverage

Aimco targets net leverage of $3.8 billion. As of the end of the year, Aimco’s leverage was above this target due to the timing of three apartment community sales discussed above, which closed in January 2018.

Non-recourse Property Debt - During the fourth quarter, Aimco closed or rate-locked two non-recourse, fixed-rate property loans totaling $189 million. On a weighted average basis, these loans have a 7.7 year term and an interest rate of 3.48%, 117 basis points above the corresponding treasury rates at the time of pricing.

The net effect of 2017 property debt refinancing activities has been to lower Aimco’s weighted average fixed interest rates by about 20 basis points to 4.64%.

Aimco leverage includes Aimco’s share of long-term, non-recourse, property debt secured by apartment communities, a term loan, outstanding borrowings under its revolving credit facility, and outstanding preferred equity. Aimco leverage excludes non-recourse property debt obligations of consolidated partnerships served by its Asset Management business (described further in the Glossary). Please refer to Supplemental Schedule 5(a) for the presentation of Aimco leverage and a reconciliation of Aimco proportionate leverage to Aimco’s consolidated leverage.

Leverage Ratios

Aimco target leverage ratios are Proportionate Debt and Preferred Equity to Adjusted EBITDA below 7.0x and Adjusted EBITDA to Interest Expense and Preferred Dividends greater than 2.5x. Aimco also focuses on the ratios of Proportionate Debt to Adjusted EBITDA and Adjusted EBITDA to Adjusted Interest Expense. Please see the Glossary for definitions of these non-GAAP measures and, where appropriate, reconciliations to the nearest GAAP measure.

Aimco calculates Adjusted EBITDA and Adjusted Interest Expense used in its leverage ratios based on current quarter amounts, annualized.

Aimco’s leverage ratios have been adjusted on a pro forma basis to reflect the disposition of five apartment communities during the period as if the sales had closed on October 1, 2017. The effect of this pro forma adjustment may be found in the Adjusted EBITDA reconciliation in the Glossary.

Liquidity

At December 31, 2017, Aimco held cash and restricted cash of $95 million and had available capacity to borrow $521 million under its revolving credit facility, after consideration of outstanding borrowings of $67 million and $12 million of letters of credit backed by the facility. Aimco uses its credit facility primarily for working capital and other short-term purposes and to secure letters of credit.

Aimco also held unencumbered apartment communities with an estimated fair market value of approximately $1.8 billion at December 31, 2017.

Dividend - As previously announced, the Aimco Board of Directors declared a quarterly cash dividend of $0.38 per share of Class A Common Stock for the quarter ended December 31, 2017. On an annualized basis, this represents an increase of 6% compared to the dividends paid during 2017. This dividend is payable on February 28, 2018, to stockholders of record on February 16, 2018.

2018 Outlook

The Aimco strategy remains unchanged: focusing on excellence in property operations; value creation through redevelopment and occasional development; portfolio management based on a disciplined approach to capital recycling; a safe, flexible balance sheet with abundant liquidity; and a simple business model executed by a performance-oriented and collaborative team. Aimco executes this consistent strategy with an eye on sustainable long-term growth.

Components of 2017 to 2018 AFFO Growth

Aimco expects 2018 Pro forma FFO per share in the range of $2.42 to $2.52 with AFFO per share of $2.11 to $2.21. At the guidance range midpoint, Aimco’s projected 2018 AFFO growth of 2% reflects:

• $0.14 per share growth from its core business of market-rate apartment ownership and Redevelopment and Development;
• $0.01 per share of growth from lower offsite costs and lower casualties; and
• income lost from apartment communities sold to fund redevelopment and development activity ($0.04 per share), lower tax benefits primarily from the effect of the recent tax law change ($0.04 per share), and planned lower income from the wind down of Aimco’s Asset Management business ($0.03 per share).

Aimco is engaged in litigation with Airbnb to protect Aimco’s property right to select its residents and their neighbors. Due the unpredictable nature of these cases and associated legal costs, Aimco will exclude such costs from 2018 Pro forma FFO and AFFO.

Aimco projects its Same Store portfolio to provide NOI growth in the range of 1.70% to 3.10%, resulting from revenue growth in the range of 2.10% to 3.10% and expense growth between 2.60% and 3.60%. At the midpoint, Aimco expects revenue growth of 2.60%, comprised of average daily occupancy 10 basis points higher than 2017 and lease rate growth of 2.50%, based on blended lease rates similar to 2017. At the midpoint, Aimco expects expenses to increase by 3.10%, of which 110 basis points is due to the increase in real estate taxes compared to 2017 taxes that were lowered by successful appeals, and higher property hazard insurance costs resulting from worldwide casualty events in 2017.

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 www.aimco.com/investors.

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 (“GAAP”). These measures are defined in the Glossary in the Supplemental Information and 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 182 communities in 22 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 first quarter and full year 2018 results, including but not limited to: FFO, Pro forma FFO and selected components thereof; AFFO; Aimco redevelopment/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 redevelopments and developments; 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, 2016, 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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