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MarketScreener Homepage  >  Equities  >  Nyse  >  Apartment Investment and Management Company    AIV

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

(AIV)
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Apartment Investment and Management : Aimco Separation Tax Q&A

09/25/2020 | 03:10pm EST

September 25, 2020

Transaction Update

Tax Q&A

1. Why was the transaction structured as a taxable spin?

  • Aimco's Board and management team believe that a taxable separation today will increase AIR's strategic and financial flexibility to grow, return capital, and create long-term value for shareholders
  • The taxable spin structure has several keybenefits:
    • It increases AIR's strategic and financial flexibility to grow and/or return capital to shareholders. The stepped-up tax basis creates future depreciation, which lowers REIT taxable income and allows the REIT to retain cash that can be re-invested for growth or returned to shareholders via dividends
    • One specific example is the ability to access tax efficient alternative sources of capital, including low cost joint ventures and property sales. The stepped-up tax basis increases the amount of net proceeds that can be retained and used to de-lever our balance sheet or to reinvest in growth opportunities as we execute AIR's strategic plan
  1. For example, our recently completed California joint venture generated $936M of gross proceeds applied to de-lever the Company and approximately $1B of taxableincome
  1. The additional $1B of property sales to de-lever our balance sheet also generates taxable income that is a large percentage of the cash received
  1. In the past, we have used the 80/20 elective stock/cash dividend tax regime to distribute excess taxable income. The announced sales and de-levering this year will require up to two taxable stock dividends to distribute the resulting taxable income. (Absent the spin-off transaction, this would have been five to six taxable stock dividends under a normal 80/20 elective stock/cash dividend regime.)
    1. Stock dividends are burdensome to our shareholders. Their use will be largely ended going forward thanks to the step-upin basis that results from the taxable spin
  • Reduction of non-cash stock dividends is also important to attract potential new investors who have repeatedly told us that they find non-cash stock dividends overly complex
    1. The reduction of taxable non-cash stock dividends is important to AIR's business strategy to provide a simple vehicle for investing in multifamily assets1
      1. In 2019, the Company paid ~$300M in taxable stock dividends. In 2020, we expect to pay approximating $1.2B in taxable stock dividends. In comparison, multifamily peers have not paid taxable stock dividends in recentyears
    • These important tax advantages will matter even more if, as many advocate, taxation of real estate transactions is increased in future years, for example by eliminating 1031 tax-free exchanges
  • As a result, the Board and management team believe that the contemplated transaction structure will make AIR significantly more competitive and also more appealing to a broader investor audience going forward - including generalists, REIT dedicated, and foreign investors
  • We believe that any potential tax leakage to investors today will be meaningfully offset by the future value creation opportunity from owning AIR and Aimco
  • Aimco's management and Board arrived at this conclusion with the advice of outside financial, legal, and tax advisors and after evaluating a broad range of alternative transaction structures
  • For additional details about the tax treatment of the transaction, please refer to our press releasedated September 22, 2020

1. The potential need for non-cash stock dividends may not be completely eliminated as possible changes in tax laws or future appreciation in property values combined with the reduction of the refreshed tax basis by future tax depreciation may result in the

need for their future use

1

September 25, 2020

Transaction Update

Tax Q&A

  1. What other structures and alternatives did the Board consider? Why does this structure make the most sense?
    • The Board reviewed several other structures and alternatives in connection with the announced transaction, including alternative methods for segment reporting, tracking stocks, ceasing redevelopment altogether, a sale of more complex assets, a tax-freespin-off, a spin-off of DevelopmentCo, other spin-off structures, and other strategicalternatives
    • The final decision was based on a strategic review over the past several months made by a highly engaged, independent board, together with the management team and with the advice of outside legal, financial, and tax advisors
    • Based on the alternatives reviewed, the Board believes that the announced transaction and structure optimizes future opportunities for both entities and will make AIR significantly more competitive and also more appealing to abroader investor audience going forward
  2. How and when will the stepped-up basis of AIR be determined? What is the estimated tax basis step up for AIR?
    • The tax basis step up will be determined based on the valuation of AIR shares at the time that the transaction is completed
    • Assuming an AIR value of $30 - $50/share, the step up in tax basis is estimated at $1.7B - $4.7B
    • For additional details about the tax treatment of the transaction, please refer to our press releasedated September 22, 2020
  3. How / when will the final valuation be determined? How do you expect AIR and Aimco to trade?
    • The valuation, and basis step up, will be based on trading prices at the time of the separation
    • While we don't intend to speculate on specific valuations for each company, the separation will provide investors with the opportunity to invest in two companies with compelling and unique value propositions
    • We believe that both AIR and Aimco will benefit from the separation with increased strategic and financial flexibility, enhanced management focus, expanded investment opportunities, and distinctive risks and rewards for shareholders, creating greater value than possible as a combined entity

2

September 25, 2020

Transaction Update

Tax Q&A

5. Why did the Board determine to step up the basis in AIR now, rather than spinning off the development company or selling assets and distributing the gain as a stock dividend and reverse stock split for example?

  • The Board reviewed several other structures and alternatives in connection with the announced transaction, including alternative methods for segment reporting, tracking stocks, ceasing redevelopment altogether, a sale of more complex assets, a tax-freespin-off, a spin-off of DevelopmentCo, other spin-off structures, and other strategicalternatives
  • The taxable spin structure has several key benefits:
    • It increases AIR's strategic and financial flexibility to grow and/or return capital to shareholders. The stepped-up tax basis creates future depreciation, which lowers REIT taxable income and allows the REIT to retain cash that can be re-invested for growth or returned to shareholders via dividends
    • One specific example is the ability to access tax efficient alternative sources of capital, including low cost joint ventures and property sales. The stepped-up tax basis increases the amount of net proceeds that can be retained and used to de-lever our balance sheet or to reinvest in growth opportunities as we execute AIR's strategic plan
  1. For example, our recently completed California joint venture generated $936M of gross proceeds applied to de-lever the Company and approximately $1B of taxableincome
  1. The additional $1B of property sales to de-lever our balance sheet also generates taxable income that is a large percentage of the cash received
  1. In the past, we have used the 80/20 elective stock/cash dividend tax regime to distribute excess taxable income. The announced sales and de-levering this year will require up to two taxable stock dividends to distribute theresulting taxable income
    1. Stock dividends are burdensome to our shareholders. Their use will be largely ended going forward thanks to the step-upin basis that results from the taxable spin
  • Reduction of non-cash stock dividends is also important to attract potential new investors who have repeatedly told us that they find non-cash stock dividends overly complex
    1. The reduction of taxable non-cash stock dividends is important to AIR's business strategy to provide a simple vehicle for investing in multifamily assets1
      1. In 2019, the Company paid ~$300M in taxable stock dividends. In 2020, we expect to pay approximating $1.2B in taxable stock dividends. In comparison, multifamily peers have not paid taxable stock dividends in recentyears
    • These important tax advantages will matter even more if, as many advocate, taxation of real estate transactions is increased in future years, for example by eliminating 1031 tax-free exchanges
  • Aimco's management and Board believe that a taxable separation today will increase AIR's strategic and financial flexibility to grow, return capital, and create long term value for shareholders more tax efficiently
  • We believe that any potential tax leakage to investors today will be meaningfully offset by the future value creation opportunity from owning AIR and Aimco
  • Aimco's management and Board arrived at this conclusion with the advice of outside financial, legal, and tax advisors and after evaluating a broad range of alternative transaction structures
  • For additional details about the tax treatment of the transaction, please refer to our press releasedated September 22, 2020

1. The potential need for non-cash stock dividends may not be completely eliminated as possible changes in tax laws or future appreciation in property values combined with the reduction of the refreshed tax basis by future tax depreciation may result in the

need for their future use

3

September 25, 2020

Transaction Update

Tax Q&A

  1. How did you arrive at the hypothetical share values outlined in your September 22, 2020, press release? (For example, is the $58 per share hypothetical total value after spin-off presented the theoretical upper limit on the Aimco combined entities' valuation?)
    • We picked numbers that we felt provided a useful comparison and a useful range to help shareholders evaluate the tax implications of the plannedtransactions
    • The amounts chosen are for illustrative purposes only. The actual tax consequences of the transactions will depend on the specific situations of individual shareholders, Aimco's actual earnings and profits as finally determined for U.S. federal income tax purposes, the fair market value of the AIR common stock determined after it begins trading, and other factors
    • We recommend shareholders consult with their tax advisors as to the particular tax consequences of these transactions in their specificcircumstances
  2. What are tax implications to shareholders from the transaction?
    • The tax implications will depend on the circumstances of each shareholder
    • For additional details about the tax treatment of the transaction, please refer to our press releasedated September 22, 2020
    • We recommend that shareholders consult with their tax advisors as to the particular tax consequences of these transactions in their specificcircumstances
  3. Do OP unit holders, and LTIP holders all incur the same tax as common shareholders?
    • The transaction structure was not driven by a decision to optimize the tax treatment for OP unit holders, LTIP holders, or commonshareholders
    • The Board determined that a taxable spin today will increase AIR's strategic and financial flexibility to grow, return capital and create-long term value for shareholders more tax efficiently
    • Because a taxable spin is a REIT action, and not an OP action, OP unit holders do not incur tax as a result of the planned spin-off. As a result and unlike common shareholders, they do not benefit from the tax basis step up and will receive lower depreciation allocations, and thus higher annual taxable income from operations, and also recognize more capital gains on future property sales than will common shareholders
    • OP units, LTIPs, and common stock are each different securities with different tax treatments. For example, since 2000, OP unit holders have recognized about $212M more income than their proportionate share of the OP's total taxable income. Assuming the mid-point in our press release of $22/share gain, OP unit holders will still have recognized more than their proportionate share of the OP's total taxableincome
    • For the announced property sales, including the California JV, there is no difference in the tax treatment among OP unit holders, LTIP holders, and common shareholders
  4. Has the Company received any tax or fairness opinions in connection with the transaction?
    • It is not customary to receive a fairness opinion for a transaction of this nature and, as such, the Board did not request one
    • The Company expects to receive certain tax opinions in connection with the consummation of the transaction

4

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Disclaimer

AIMCO - Apartment Investment & Management Company published this content on 25 September 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 September 2020 19:09:07 UTC


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Financials (USD)
Sales 2020 856 M - -
Net income 2020 111 M - -
Net Debt 2020 4 330 M - -
P/E ratio 2020 97,3x
Yield 2020 5,21%
Capitalization 4 689 M 4 689 M -
EV / Sales 2020 10,5x
EV / Sales 2021 10,7x
Nbr of Employees 950
Free-Float 99,1%
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Mean consensus OUTPERFORM
Number of Analysts 13
Average target price 38,36 $
Last Close Price 31,50 $
Spread / Highest target 46,0%
Spread / Average Target 21,8%
Spread / Lowest Target -4,76%
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Managers
NameTitle
Terry Considine Chairman, President & Chief Executive Officer
Paul L. Beldin Executive VP, Chief Financial & Accounting Officer
Michael Alan Stein Independent Director
Thomas L. Keltner Independent Director
Robert A. Miller Lead Independent Director
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