APARTMENT INVESTMENT AND MANAGEMENT COMPANY Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report contains or may contain information that is forward-looking, within the meaning of the federal securities laws, including, without limitation, statements regarding: the impact of the COVID-19 pandemic, including on our ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, redevelopments, and developments; our ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to our redevelopment and development investments; expectations regarding sales of our apartment communities and the use of proceeds thereof; the availability and cost of corporate debt; and our 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 our 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 we operate
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;
• Impact of the COVID-19 pandemic on our residents, commercial tenants, and
operations, including as a result of government restrictions and the overall
impact on the real estate industry and economy generally, and the ongoing,
dynamic and uncertain nature and duration of the pandemic, all of which
heightens the impact of the other risks and factors described below;
• Financing risks, including the availability and cost of capital markets'
financing; the risk that our cash flows from operations may be insufficient
to meet required payments of principal and interest; and the risk that our
earnings may not be sufficient to maintain compliance with debt covenants;
• Insurance risks, including the cost of insurance, 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 us 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 us.
In addition, our 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 our 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 our financial statements and the notes thereto, as well as Item 1A. Risk Factors in Part II of this report, the section entitled "Risk Factors" described in Item 1A ofApartment Investment and Management Company's andAIMCO Properties, L.P.'s combined Annual Report on Form 10-K for the year endedDecember 31, 2019 , and the other documents we file from time to time with theSecurities and Exchange Commission . As used herein and except as the context otherwise requires, "we," "our," and "us" refer toApartment Investment and Management Company (which we refer to as Aimco),AIMCO Properties, L.P. (which we refer to as theAimco Operating Partnership ) and their consolidated entities, collectively. Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted inthe United States , or GAAP. These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading and include: Nareit Funds from Operations, Pro forma Funds from Operations, Adjusted Funds from Operations, Free Cash Flow, Net Asset Value, Economic Income, and the measures used to compute our leverage ratios. 23
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Table of Contents Executive Overview We are focused on the ownership, management, redevelopment, and some development of quality apartment communities located in several of the largest markets inthe United States . Our principal financial objective is to provide predictable and attractive returns to our equity holders. We measure our long-term total return using Economic Income, defined as changes in the per share Net Asset Value, or NAV, growth plus dividends. NAV is used by many investors because the value of company assets can be readily estimated, even for non-earning assets such as land or properties under development. NAV has the advantage of incorporating the investment decisions of thousands of real estate investors, enhancing comparability among companies that have differences in their accounting and avoiding disparity that can result from application of GAAP to investment properties and various ownership structures. NAV also provides real estate investors a basis for the perceived quality and predictability of future cash flows as well as their expected growth. Some investors focus on multiples of Adjusted Funds from Operations, or AFFO, and Funds from Operations as defined by theNational Association of Real Estate Investment Trusts , or Nareit FFO. Our disclosure of AFFO, a measure of current return, complements our focus on Economic Income. We also use Pro forma FFO as a secondary measure of operational performance.
Our Economic Income is the result of performance in five key business areas:
• increase revenue based on high levels of resident retention, through
superior customer selection and satisfaction, coupled with innovation
resulting in sustained cost control, to further improve net operating income
margins;
• create value and future earnings growth by the renovation and repositioning
of apartment communities through short-cycle and long-cycle redevelopments;
• own an apartment portfolio diversified by geography and price point with a
focus on properties with high land value located in submarkets with outsized
future growth prospects, and diversify the portfolio by maintaining
allocation to both "income" properties (high quality properties with
predictable, "low beta" AFFO returns, usually with B or C+ rents) where we
expect appreciation of the substantial land value will create opportunities
for "high alpha" value creation through profitable redevelopment;
• primarily utilize safe property debt that is low-cost, long-dated,amortizing, and non-recourse, limiting entity and refunding risk while
maintaining flexibility to sell or redevelop properties; and
• emphasize an intentional culture that is collaborative and productive, based
on respect for others and personal responsibility, strengthened by a
preference for promotion from within and explicit talent development and
succession planning to produce the strong, stable team that is the enduring
foundation of our success.
Over our first 25 years as a public company, our Economic Income compounded at an annual rate of 14%.
Impacts of COVID-19 and Government Lockdown
The impact of the COVID-19 pandemic and Government Lockdown continued into the second quarter of 2020. As discussed in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 , we formed a cross-functional committee that meets weekly to adjust to the changing conditions in order to keep our team and our residents safe. We continued our commitment to employees by allowing flexible work arrangements, undertook to pay all costs associated with COVID-19 testing and treatment, kept our team intact without layoffs or pay cuts, and continued clear and frequent communication. Utilizing our previous investment in technology and artificial intelligence, paired with policies providing flexibility, our team continued to lease apartments and fulfill service requests in a safe environment for both the team and our residents.
We also implemented enhanced cleaning procedures and physical distancing measures during the second quarter.
Seeing residents as individuals, each impacted differently by the pandemic and lockdown, our teammates have undertaken to speak to every resident in need, to listen, and to help each solve his or her problems. We also seek to assist the communities where our residents and employees live and work. Since March, we have provided free temporary furnished housing for healthcare providers at 21 Fitzsimons on the Anschutz Medical Campus, Parc Mosaic nearBoulder Community Health , andRiver Club nearNewark University Hospital . During the three months endedJune 30, 2020 , we estimate that we incurred$8.0 million of incremental costs related to additional interest costs resulting from our increased liquidity; incremental bad debt expense; lower commercial revenue; local restrictions on our ability to charge late fees; and enhanced cleaning and safety procedures and other COVID-19 related items. 24
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Since the outbreak of the COVID-19 pandemic and government lockdown, we have sold one community and entered into a contract to sell another, both at values greater than their respective gross asset value one year ago. We continue to monitor economic and market conditions and can provide no assurance that a prolonged recession will not result in lower property values and non-cash impairment losses.
As of
Residential Rent Collection Update
In response to the economic effects of the COVID-19 pandemic and government lockdown, some jurisdictions where our communities are located, includingLos Angeles ,Philadelphia , andNew York City , have enacted laws seeking to suspend contractual obligations of residents, including government-mandated deferrals, rent freezes, repayment extensions, fee abatement measures or concessions, and prohibitions on lease terminations or evictions for tenants. Some states and municipalities are also implementing rental assistance programs and encouraging landlord-tenant negotiations. We measure residential rent collection as the amount of payments received as a percentage of all residential amounts billed. The table below represents the percentage of residential billed amounts for the three months endedJune 30, 2020 , and the month endedJuly 31, 2020 . Three months ended 2020 June 30, 2020 April May June July Payments received during the period 95.3 % 95.6 % 95.1 % 95.0 % 95.8 % Payments received after period close 1.9 % 3.1 % 1.7 % 1.1 % n/a Total payments received as of July 31, 2020 97.2 % 98.7 % 96.8 % 96.1 % 95.8 % During the three months endedJune 30, 2020 , we recognized 98.4% of all residential revenue, treating the balance of 1.6% as bad debt. Of the 98.4% of residential revenue recognized, we collected in cash all but 120 basis points. The amounts uncollected and not reserved as bad debt include balances collateralized by security deposits of approximately 70 basis points, or those considered collectable based on our review of individual customers' credit of approximately 50 basis points, or$1.0 million . In July, we recognized 98.4% of all residential revenue, treating the balance of 1.6% as bad debt. Of the 98.4% of residential revenue recognized, we collected 95.8% in cash, 30 basis points is collateralized by security deposits, and$1.6 million , or 2.3%, is expected to be collected in future periods, half of which is expected to be collected in August.
Results for the Three Months Ended
The results from the execution of our business plan during the three months
ended
Operations
We own and operate a portfolio of apartment communities, diversified by both geography and price point. As ofJune 30, 2020 , our portfolio included 125 apartment communities with 32,938 apartment homes in which we held an average ownership of approximately 99%. Our property operations team, adapting to changing guidelines and regulations due to COVID-19, produced solid results for our portfolio for the three months endedJune 30, 2020 . Same Store highlights include:
• Renewal rents increased 5.1%, whereas new lease rents decreased 2.4%, for a
weighted-average increase of 1.8%;
• Net operating income margin declined approximately 30 basis points
year-over-year to 73.0% due to elevated bad debt expense and lowercommercial revenue resulting from COVID-19 and the government lockdown, but
increased approximately 40 basis points over the six months ended
2020, as compared to 2019; and
• Average daily occupancy of 95.5%, a year-over-year decline of approximately
140 basis points due primarily to reduced demand resulting from COVID-19 and
the government lockdown.
Our focus on efficient operations through productivity initiatives such as centralization of administrative tasks, optimization of economies of scale at the corporate level, and increased automation has helped us control operating expenses. These and other innovations contributed to a growth rate in Same Store controllable operating expense, which we define as property expenses less taxes, insurance, and utility expenses, compounding for the 12 years endedDecember 31, 2019 , at an annual rate 25
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of negative 0.2%. During the three months ended
Redevelopment and Development
Our second line of business is the redevelopment and some development of apartment communities. Through redevelopment activities, we expect to create value by repositioning communities within our portfolio. We undertake ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the redevelopment of an existing apartment community. When warranted, we rely on the expertise and credit of a third-party developer familiar with the local market to limit our exposure to construction risk. We invest to earn risk-adjusted returns in excess of those expected from the apartment communities sold in "paired trades" to fund the redevelopment or development. Of these two activities, we generally favor redevelopment because it permits adjustment of the scope and timing of spending to align with changing market conditions and customer preferences. We execute redevelopments using a range of approaches. We prefer to limit risk by executing redevelopments using a short-cycle approach, in which we renovate an apartment community in stages. These short-cycle redevelopments can be completed one apartment home at a time, when that home is vacated and available for renovation, or one floor at a time, thereby limiting the number of down homes and lease-up risk. As a result, short-cycle redevelopments provide us the flexibility to maintain current earnings while aligning the timing of the completed apartment homes with market demand. When short-cycle redevelopments are not possible, we may engage in redevelopment activities where an entire building or community is vacated. We refer to these as long-cycle redevelopments. Redevelopment work may include seeking entitlements from local governments, which enhance the value of our existing portfolio by increasing density; that is, the right to add apartment homes to a site. During the three months endedJune 30, 2020 , we invested$62.3 million in redevelopment and development. We continued five long-cycle redevelopment and development projects already under construction, including the full redevelopment of theNorth Tower atFlamingo Point and 707 Leahy; and ground-up construction at TheFremont on the Anschutz Medical Campus;Eldridge Townhomes ; and Prism. Our estimated cost to complete these projects is$151.0 million , an amount readily funded from our liquidity. In the first quarter, we announced plans to pause our short-cycle redevelopments in response to COVID-19 and the government lockdown, and their potential economic ramifications. In June, with the economy beginning to reopen, we resumed short-cycle redevelopments at Bay Parc and theCenter Tower atFlamingo Point . Our estimated cost to complete these projects is$13.4 million .
The following table summarizes our significant redevelopment and development
communities as of
Expected
Homes Total Planned Initial Expected NOI
Approved for Investment Investment to Occupancy Stabilization
Location Redevelopment Homes Completed Homes Leased (1) Date (2) (3)
Short-cycle redevelopments:
Bay Parc Miami, FL 90 75 67 $ 27.7 $ 26.4 N/A N/A
Flamingo Point
Center Tower Miami Beach, FL 58 18 13 16.0 3.9 N/A N/A
Long-cycle redevelopments:
707 Leahy (4) Redwood City, CA 110 12 41 25.0 21.7 1Q 2020 2Q 2022
Eldridge Townhomes
(5) Elmhurst, IL 58 18 29 35.1 31.0 2Q 2020 4Q 2022
Flamingo Point North Tower Miami Beach, FL 366 - - 171.0 64.4 4Q 2021 2Q 2024 The Fremont (6) Denver, CO (MSA) 253 21 37 87.0 81.1 3Q 2020 1Q 2023 Parc Mosaic (7) Boulder, CO 226 226 175 124.6 123.6 3Q 2019 1Q 2022 Prism (8) Cambridge, MA 136 - 1 73.2 42.1 1Q 2021 3Q 2023 Total 1,297 370 363$ 559.6 $ 394.2
(1) Planned investment relates to the current phase of the redevelopment or
development.
(2) Delivery timing and stabilization is subject to change and are based on the
best estimate at this time. Temporary local restrictions halting construction
activity and extended ''shelter-in-place" orders, related to COVID-19 or
otherwise, may delay project completion and impact the timing of
stabilization. Any additional delays may also result in increased costs.
(3) Represents the period in which we expect the communities to achieve
stabilized rents and operating costs, generally five quarters after occupancy
stabilization.
(4) In
stoppage. We have completed construction on 43 apartment homes and leased 77%
of those completed.
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(5) As of
been leased. Construction is on track to deliver the remaining 35 townhomes
by year end.
(6) As of
leased. Completion is expected in the fourth quarter 2020.
(7) Construction is substantially complete. As of
84% of the apartment homes at rents exceeding underwriting.
(8) In
were lifted, allowing construction activities to resume. Completion of this
community is expected in the first quarter of 2021.
As ofJune 30, 2020 , our total estimated net investment at redevelopment and development communities is$559.6 million , of which we have funded$394.2 million . We expect to fund the remaining estimated net investment of$165.4 million on these communities in 2020 and future years, on a leverage-neutral basis, with proceeds from sales of apartment communities with lower forecasted free cash flow, or FCF, internal rates of return. During the three months endedJune 30, 2020 , we leased 59 redeveloped or newly developed apartment homes. As ofJune 30, 2020 , our exposure to lease-up at long-cycle redevelopment and development communities was 809 apartment homes; 44 homes where construction is complete, 289 homes expected to be delivered during the remainder of 2020, and 476 homes expected to be delivered in 2021.
Portfolio Management and Capital Allocation
Our portfolio of apartment communities is diversified across "A," "B," and "C+" price points, averaging "B/B+" in quality, and is also diversified across several of the largest markets inthe United States . We measure the quality of apartment communities in our portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance data and analysis. Under this rating system, we classify as "A" quality apartment communities those earning rents greater than 125% of local market average; as "B" quality apartment communities those earning rents between 90% and 125% of local market average; as "C+" quality apartment communities those earning rents greater than$1,100 per month, but lower than 90% of local market average; and as "C" quality apartment communities those earning rents less than$1,100 per month and lower than 90% of local market average. We classify as "B/B+" quality a portfolio that on average earns rents between 100% and 125% of local market average rents. Although some companies and analysts within the multifamily real estate industry use apartment community quality ratings of "A," "B," and "C," some of which are tied to local market rent averages, the metrics used to classify apartment community quality as well as the period for which local market rents are calculated may vary from company to company. Accordingly, our rating system for measuring apartment community quality is neither broadly nor consistently used in the multifamily real estate industry.
The following table summarizes information about our portfolio relative to the
market for the three months ended
Average revenue per Aimco apartment home (1) $
2,254
Portfolio average rents as a percentage of local market average rents 112 %
Percentage A (average revenue per Aimco apartment home
53 %
Percentage B (average revenue per Aimco apartment home $1,987 ) 29 %
Percentage C+ (average revenue per Aimco apartment home $1,758 ) 18 %
(1) Represents average monthly rental and other property revenues (excluding
resident reimbursement of utility cost) divided by the number of occupied
apartment homes as of the end of the period.
Our average monthly revenue per apartment home was$2,254 for the three months endedJune 30, 2020 , representing an increase of approximately 2% compared to the same period in 2019. This increase is due primarily to growth in Same Store rent, lease-up of redeveloped apartment homes, and the sale of communities with average monthly rent per apartment home lower than those of the retained portfolio, offset partially by lower average fees and other revenue per home. We follow a disciplined paired trade policy in making investments. As part of our portfolio strategy, we seek to sell up to 10% of our portfolio annually and to reinvest the proceeds from such sales in accretive uses such as capital enhancements, redevelopments, some developments, and selective acquisitions with projected FCF internal rates of return higher than expected from the communities being sold. We prefer well-located real estate where land is a significant percentage of total value and provides potential upside from development or redevelopment. Through this disciplined approach to capital recycling, we increase the quality and expected growth rate of our portfolio. As we execute our portfolio strategy, we expect to increase average revenue per Aimco apartment home at a rate greater than market rent growth, increase FCF margins, and maintain sufficient geographic and price point diversification to limit volatility and concentration risk. 27
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Table of Contents Acquisitions
During the three months ended
Dispositions
During the three months endedJune 30, 2020 , we sold one apartment community located inAnnandale, Virginia with 219 homes at a price of$58.9 million , 3% better than its estimated gross asset value one year prior. Net sales proceeds from this transaction were$36.9 million . In July, we accepted a non-refundable deposit on a community to be sold later in 2020, and agreed to sell this community at a price of approximately$126 million , 3% better than its estimated gross asset value as ofDecember 31, 2019 . Proceeds from this transaction are expected to be used to reduce leverage.
Balance Sheet
Leverage
Our leverage strategy seeks to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; build financial flexibility by maintaining ample unused and available credit; holding properties with substantial value unencumbered by property debt; maintaining an investment grade rating; and using partners' capital when it enhances financial returns or reduces investment risk. Our leverage includes our share of long-term, non-recourse property debt encumbering apartment communities, outstanding borrowings on the revolving credit facility, our term loan, and other leverage. Please refer to the Liquidity and Capital Resources section for additional information regarding our leverage. Other leverage includes mezzanine equity instruments, including preferred OP Units and redeemable noncontrolling interests in a consolidated real estate partnership. Our target leverage ratios are Net Leverage to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre to Adjusted Interest Expense and Preferred Distributions greater than 2.5x. We calculate Adjusted EBITDAre and Adjusted Interest Expense used in our leverage ratios based on the most recent three-month amounts, annualized. Our leverage ratios for the three months endedJune 30, 2020 , are presented below: Proportionate Debt to Adjusted EBITDAre
7.9x
Net Leverage to Adjusted EBITDAre
8.1x
Adjusted EBITDAre to Adjusted Interest Expense
3.5x
Adjusted EBITDAre to Adjusted Interest Expense and Preferred Distributions
3.3x
Net Leverage to Adjusted EBITDAre increased by 0.4x fromMarch 31, 2020 , due primarily to a$6.1 million reduction in quarterly Adjusted EBITDAre primarily as a result of COVID-19 and the government lockdown. We expect to meet our leverage target through a combination of property net operating income growth, including the$30 million of incremental net operating income we expect to receive from our long-cycle redevelopment communities now underway, and through approximately$350 million of property sales, including the previously mentioned under-contract community, expected to close in 2020. Depending upon the communities sold and the timing of sales, taxable gains may exceed our regular quarterly dividend. If so, our Board of Directors may declare a taxable stock dividend. Under our revolving credit facility and term loan, we have agreed to maintain a fixed charge coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the trailing twelve months endedJune 30, 2020 , our fixed charge coverage ratio was 2.02x. We expect to remain in compliance with these covenants.
Please refer to the Leverage Ratios subsection of the Non-GAAP Measures section for further information about the calculation of our leverage ratios.
Liquidity
Our$1.2 billion liquidity consists of cash and restricted cash balances and available capacity on our revolving credit facility. As ofJune 30, 2020 , we had cash and restricted cash, excluding amounts related to tenant security deposits, of$428.4 million and had the capacity to borrow up to$793.5 million on our revolving credit facility, after consideration of$6.5 million of letters of credit backed by the facility. 28
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We manage our financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. As ofJune 30, 2020 , we held unencumbered communities with an estimated fair value of approximately$2.3 billion . Two credit rating agencies rate our creditworthiness, using different methodologies and ratios for assessing our credit, and both have rated our credit and outlook as BBB- (stable), an investment grade rating. Although some of the ratios they use are similar to those we use to measure our leverage, there are differences in our methods of calculation and therefore our leverage ratios disclosed above are not indicative of the ratios that may be calculated by these agencies. Financing Activity During the three months endedJune 30, 2020 , we placed$608.8 million of new property debt, generating incremental proceeds of$370.6 million , and closed the refinancing of another$79.9 million inJuly 2020 . The loans have a weighted-average term to maturity of 9.3 years and a weighted-average interest rate of 2.9%, lowering our weighted-average borrowing cost of leverage to 3.69%. We addressed all of our 2020 loan maturities and reduced 2021 to 2024 maturities by 18%, resulting in average annual maturities of$262 million remaining for the four years. Also during the three months endedJune 30, 2020 , we secured a$350.0 million term loan. Proceeds from the loan were primarily used to repay borrowings on our$800.0 million revolving credit facility. Please refer to the Leverage and Capital Resources section for further information about the terms of our term loan.
Equity Capital Activities
OnJuly 28, 2020 , our Board of Directors declared a quarterly cash dividend of$0.41 per share of Common Stock, an increase of 5% compared to the regular quarterly dividends paid in 2019. This amount is payable onAugust 28, 2020 , to stockholders of record onAugust 14, 2020 .
Team and Culture
Our team and culture are keys to our success. Our intentional focus on a collaborative and productive culture based on respect for others and personal responsibility is reinforced by a preference for promotion from within. We focus on succession planning and talent development to produce a strong, stable team that is the enduring foundation of our success. We offer benefits reinforcing our value of caring for each other, including paid time for parental leave, paid time annually to volunteer in local communities, college scholarships for the children of team members, an emergency fund to help team members in crisis, financial support for our team members who are becomingUnited States citizens, and a bonus structure at all levels of the organization. We also pay full compensation and benefits for team members who are actively deployed bythe United States military. Out of hundreds of participating companies in 2020, we were one of only six recognized as a "Top Workplace" inColorado for each of the past eight years, and were one of only two real estate companies to receive a BEST award from theAssociation for Talent Development in recognition of our company-wide success in talent development, marking our third consecutive year receiving this award. Results of Operations Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we redevelop, acquire, and dispose of our apartment communities affect our operating results.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements included in Item 1.
Financial Highlights
Net income attributable to common stockholders per common share, on a dilutive basis, decreased by$0.14 during the three months endedJune 30, 2020 , compared to 2019, due primarily to fewer gains from dispositions and more prepayment penalties incurred during second quarter refinancing activity undertaken to increase liquidity and to benefit from current interest rates. Pro forma FFO per share increased$0.03 during the three months endedJune 30, 2020 , compared to 2019, due primarily to the contribution from communities in lease-up, the net contribution from the Parkmerced mezzanine loan, and lower general and administrative expenses; offset partially by impacts of the pandemic and government lockdown mentioned previously and by "drag", or lower contribution, from Redevelopment communities under construction. 29
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We have not excluded from Pro forma FFO and AFFO$8.0 million , or$0.05 per share, for the following COVID-19 related impacts:$2.6 million of net incremental interest expense primarily on our$350.0 million term loan, which we secured to increase liquidity;$2.5 million of incremental bad debt expense;$1.5 million of lower commercial revenue;$0.6 million of lower other income, resulting from local restrictions on our contractual right to charge late fees; and$0.8 million of other amounts resulting from COVID-19. Additionally, we have not excluded from Pro forma FFO and AFFO for the six months endedJune 30, 2020 , the write-off of$2.9 million of our straight-line rent receivables for certain commercial tenants for which collectability of future rent is uncertain and$2.2 million of deferred broker commissions related to the same commercial tenants.
AFFO per share increased
Detailed Results of Operations for the Three and Six Months Ended
Net income decreased by$26.8 million and$309.1 million during the three and six months endedJune 30, 2020 , compared to 2019, respectively, as described more fully below. Property Operations We have three segments: (i) Same Store, (ii) Redevelopment and Development, and (iii) Acquisition andOther Real Estate . Our Same Store segment includes communities that have reached a stabilized level of operations as of the beginning of a two-year comparable period and maintained it throughout the current and comparable prior year and are not expected to be sold within 12 months. Our Redevelopment and Development segment includes communities that are currently under construction, and those that have been completed in recent years that have not achieved and maintained stabilized operations for both the current and comparable prior year. Our Acquisition andOther Real Estate segment includes: (i) communities that we have acquired since the beginning of a two-year comparable period; (ii) communities that are subject to limitations on rent increases; (iii) communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale; (iv) communities that we expect to redevelop; and (v) certain commercial spaces.
As of
From
• the addition of one redeveloped apartment community with 940 apartment homes
that was classified as Same Store upon maintaining stabilized operation for
the entirety of the periods presented;
• the addition of six acquired apartment communities with 1,480 apartment
homes that were classified as Same Store because we have now owned them for
the entirety of both periods presented;
• the reduction of three apartment communities with 974 apartment homes that
we have classified in Acquisition and
to redevelop these communities; and
• the reduction of one apartment community with 219 apartment homes that was
sold as of
As ofJune 30, 2020 , our Redevelopment and Development segment included eight apartment communities with 2,521 apartment homes, and our Acquisition andOther Real Estate segment included 19 apartment communities with 2,399 apartment homes and one office building.
We use proportionate property net operating income to assess the operating performance of our communities. Proportionate property net operating income reflects our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements, for consolidated communities. Accordingly, the results of operations of our segments discussed below are presented on a proportionate basis and exclude the results of four apartment communities with 142 apartment homes that we do not consolidate.
We do not include offsite costs associated with property management, casualty
gains or losses, or the results of apartment communities sold or held for sale,
reported in consolidated amounts, in our assessment of segment performance.
Accordingly, these items are not allocated to our segment results discussed
below.
Please refer to Note 7 to the condensed consolidated financial statements in
Item 1 for further discussion regarding our segments, including a reconciliation
of these proportionate amounts to consolidated rental and other property
revenues and property operating expenses.
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Proportionate Property Net Operating Income
The results of our segments for the three months endedJune 30, 2020 and 2019, as presented below, are based on segment classifications as ofJune 30, 2020 . Three Months Ended June 30, (in thousands) 2020 2019 $ Change % Change Rental and other property revenues, before utility reimbursements: Same Store$ 180,779 $
182,816
Redevelopment and Development 11,589
12,695 (1,106 ) (8.7 %)
Acquisition and Other Real Estate 17,415 14,097 3,318 23.5 % Total 209,783 209,608 175 0.1 % Property operating expenses, net of utility reimbursements: Same Store 48,720
48,893 (173 ) (0.4 %)
Redevelopment and Development 4,912 4,990 (78 ) (1.6 %) Acquisition and Other Real Estate 6,485 5,431 1,054 19.4 % Total 60,117 59,314 803 1.4 % Proportionate property net operating income: Same Store 132,059
133,923 (1,864 ) (1.4 %)
Redevelopment and Development 6,677
7,705 (1,028 ) (13.3 %)
Acquisition and Other Real Estate 10,930 8,666 2,264 26.1 % Total$ 149,666 $ 150,294 $ (628 ) (0.4 %) For the three months endedJune 30, 2020 , compared to 2019, our Same Store proportionate property net operating income decreased by$1.9 million , or 1.4%. This decrease was attributable primarily to a$2.0 million , or 1.1%, decrease in rental and other property revenues due to$2.1 million , or 120 basis point, increase in bad debt and$1.1 million , or 70 basis point, reduction in other rental income due to local restrictions on our contractual right to charge late fees, and an approximately 140-basis point decrease in average daily occupancy. This decrease was offset partially by a 250 basis point increase in average residential rents. Same Store property operating expenses decreased$0.2 million for the three months endedJune 30, 2020 , compared to 2019, due primarily to a$1.6 , or 6.3%, decrease in controllable operating expenses, which exclude utility costs, real estate taxes, and insurance. Redevelopment and Development proportionate property net operating income decreased by$1.0 million , or 13.3%, for the three months endedJune 30, 2020 , compared to 2019. This decrease was attributable primarily to de-leasing in 2019 at Flamingo Point and 707 Leahy in preparation for redevelopment, offset partially by increased occupancy driven by the lease-up at Parc Mosaic. Acquisition andOther Real Estate proportionate property net operating income increased by$2.3 million , or 26.1%, for the three months endedJune 30, 2020 , compared to 2019, due to the lease-up of One Ardmore acquired inApril 2019 and the acquisition of1001 Brickell Bay Drive inJuly 2019 , offset partially by a decrease in revenues related to commercial tenants due to the economic impacts of COVID-19 and the government lockdown.
The results of our segments for the six months ended
Six Months Ended June 30,
(in thousands) 2020 2019 $ Change % Change
Rental and other property revenues,
before utility reimbursements:
Same Store $ 367,564 $ 363,187 $ 4,377 1.2 %
Redevelopment and Development 23,502 26,708 (3,206 ) (12.0 %)
Acquisition and Other Real Estate 36,174 28,210 7,964 28.2 % Total 427,240 418,105 9,135 2.2 % Property operating expenses, net of utility reimbursements: Same Store 97,154 97,519 (365 ) (0.4 %) Redevelopment and Development 9,599 10,245 (646 ) (6.3 %) Acquisition and Other Real Estate 13,061 10,547 2,514 23.8 % Total 119,814 118,311 1,503 1.3 % Proportionate property net operating income: Same Store 270,410 265,668 4,742 1.8 % Redevelopment and Development 13,903 16,463
(2,560 ) (15.6 %)
Acquisition and Other Real Estate 23,113 17,663 5,450 30.9 % Total$ 307,426 $ 299,794 $ 7,632 2.5 % 31
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For the six months endedJune 30, 2020 , compared to 2019, our Same Store proportionate property net operating income increased by$4.7 million , or 1.8%. This increase was attributable primarily to a$4.4 million , or 1.2%, increase in rental and other property revenues due primarily to a 270 basis point increase in average residential rents, offset partially by a 60 basis point increase in bad debt and a 40 basis point reduction in other rental income due to local restrictions on our contractual right to charge late fees. Same Store property operating expenses decreased by$0.4 million , contributing to the proportionate property net operating income growth, driven by a$2.4 million , or 4.9%, decrease in controllable operating expenses, offset primarily by an increase in real estate taxes and insurance. Redevelopment and Development proportionate property net operating income decreased by$2.6 million , or 15.6%, for the six months endedJune 30, 2020 , compared to 2019. This decrease was attributable primarily to de-leasing in 2019 at Flamingo Point and 707 Leahy in preparation for redevelopment, offset partially by increased occupancy driven by the lease-up at Parc Mosaic. Acquisition andOther Real Estate proportionate property net operating income increased by$5.5 million , or 30.9%, for the six months endedJune 30, 2020 , compared to 2019, due to the lease-up of One Ardmore acquired inApril 2019 and the acquisition of1001 Brickell Bay Drive inJuly 2019 , offset partially by a decrease in revenues related to commercial tenants due to the economic impacts of COVID-19 and government lockdown.
Non-Segment Real Estate Operations
Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, write-off of straight-line rent receivables, and the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.
During the six months ended
Net operating income decreased for the three and six months endedJune 30, 2020 , compared to 2019, by$4.0 million and$11.7 million , respectively, due to the sale of apartment communities in 2020 and 2019.
Depreciation and Amortization
For the three and six months endedJune 30, 2020 , compared to 2019, depreciation and amortization expense increased by$5.8 million , or 6.3%, and$12.7 million , or 6.8%, respectively, due primarily to communities acquired in 2019, redeveloped apartment homes placed in service after completion of construction, and the write-off of deferred leasing costs. This increase was offset partially by decreases in depreciation associated with apartment communities sold and assets fully depreciated in 2020 and 2019.
General and Administrative Expenses
For the three and six months endedJune 30, 2020 , compared to 2019, general and administrative expenses decreased by$1.8 million , or 15.7%, and$1.5 million , or 7.1%, respectively, due primarily to a decrease in personnel costs.
Other Expenses, Net
Other expenses, net, includes costs associated with our risk management activities, partnership administration expenses, ground lease rent expense, and certain non-recurring items.
For the three months ended
For the six months endedJune 30, 2020 , compared to 2019, other expenses, net decreased by$2.9 million , or 32.8%, due primarily to a favorable incremental cash receipt in the first quarter of 2020 related to a previous settlement and lower ground lease expense, offset partially by unrealized losses on our interest rate derivative. 32
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Table of Contents Interest Income
Interest income for the three months ended
Interest income for six months endedJune 30, 2020 , compared to 2019, increased$1.6 million , or 27.2%, due primarily to a gain recognized on the early payoff of a seller financing note. Interest Expense For the three months endedJune 30, 2020 , compared to 2019, interest expense increased by$9.3 million , or 23.4%, due primarily to refinancing activity and interest expense related to our term loan. As a result of our refinancing activity, we incurred prepayment penalties, offset partially by more favorable interest rates on refinanced fixed rate debt. For the six months endedJune 30, 2020 , compared to 2019, interest expense increased by$9.2 million , or 11.4%, due primarily to refinancing activity and interest expense related to our term loan, offset partially by an increase in capitalized interest related to our active redevelopments and developments. As a result of our refinancing activity, we incurred prepayment penalties, offset partially by more favorable interest rates on refinanced fixed rate debt.
Gain on Dispositions of Real Estate
During the three and six months ended
During the three months endedJune 30, 2019 , we sold one apartment community with 399 apartment homes for a gain on disposition of$64.3 million and net proceeds of$78.1 million . During the six months endedJune 30, 2019 , we sold eight apartment communities with 2,605 apartment homes for a gain on dispositions of$355.8 million and net proceeds of$418.3 million . The apartment community sold in 2020 was in a lower-rated location within our primary markets and had average revenues per apartment home significantly below those of our retained portfolio.
Mezzanine Investment Income, Net
OnNovember 26, 2019 , we loaned$275.0 million to the partnership owningParkmerced Apartments . During the three and six months endedJune 30, 2020 , we recognized$6.9 million and$13.7 million , respectively, of income in connection with the mezzanine loan. For the six months endedJune 30, 2020 , we have received a cash payment of$0.6 million . We have accrued all interest amounts due as required by GAAP. Our loan is secured by approximately$300 million of borrower equity junior to our loan. In the event we determine that a portion of the loan or accrued interest is not collectable, we will cease income recognition and, if appropriate, recognize an impairment. Income Tax Benefit (Expense) Certain of our operations, including property management and risk management, are conducted through taxable REIT subsidiaries, or TRS entities. Additionally, some of our apartment communities and1001 Brickell Bay Drive are owned through TRS entities. Our income tax benefit calculated in accordance with GAAP includes: (a) income taxes associated with the income or loss of our TRS entities including tax on gains on dispositions, for which the tax consequences have been realized or will be realized in future periods; (b) low income housing tax credits generated prior to the sale of our Asset Management business that offset REIT taxable income, primarily from retained capital gains; and (c) historic tax credits that offset income tax obligations of our TRS entities. Income taxes related to these items, as well as changes in valuation allowance and the establishment of incremental deferred tax items in conjunction with intercompany asset transfers (if applicable), are included in income tax benefit in our condensed consolidated statements of operations. For the three months endedJune 30, 2020 , we recognized income tax benefit of$2.9 million , compared to a$1.8 million benefit during the same period in 2019. The change is due primarily to income tax benefit associated with1001 Brickell Bay Drive , offset partially by decreased benefit due to lower net operating losses at communities held by TRS entities. For the six months endedJune 30, 2020 , we recognized income tax benefit of$6.1 million , compared to income tax provision of$1.2 million during the same period in 2019. The change is due primarily to income tax provision on the gain on dispositions of real estate in 2019 and an income tax benefit associated with1001 Brickell Bay Drive , offset partially by decreased benefit due to lower net operating losses at communities held by TRS entities. 33
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Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements relate to the impairment of long-lived assets and capitalized costs. Our critical accounting policies are described in more detail in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of Aimco's and theAimco Operating Partnership's combined Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no significant changes in our critical accounting policies from those reported in our Form 10-K and we believe that the related judgments and assessments have been consistently applied and produce financial information that fairly depicts the financial condition, results of operations, and cash flows for all periods presented. Non-GAAP Measures
Certain key financial indicators we use in managing our business and in evaluating our financial condition and operating performance are non-GAAP measures. Key non-GAAP measures we use are defined and described below, and for those non-GAAP measures used or disclosed within this quarterly report, we provide reconciliations of the non-GAAP measures to the most comparable financial measure computed in accordance with GAAP.
We measure our long-term total return using Economic Income, which is a non-GAAP financial measure. Economic Income represents stockholder value creation as measured by the per share change in estimated NAV plus cash dividends. We believe Economic Income is important to investors as it represents a measure of total return earned by our stockholders. We report and reconcile Economic Income annually. Please refer to the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations described in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for more information about Economic Income. Free Cash Flow, as calculated for our retained portfolio, represents property net operating income, less spending for Capital Replacements, which represents our estimation of the capital additions made to replace capital assets consumed during our ownership period (further discussed under the Nareit Funds From Operations, Pro forma Funds From Operations, and Adjusted Funds From Operations heading and the Liquidity and Capital Resources heading). FCF margin as calculated for apartment communities sold represents the sold apartment community's net operating income less$1,200 per apartment home of assumed annual capital replacement spending, as a percentage of the apartment community's rental and other property revenues. Capital replacement spending represents a measure of capital asset usage during the period; therefore, we believe that FCF is useful to investors as a supplemental measure of apartment community performance because it takes into consideration costs incurred during the period to replace capital assets that have been consumed during our ownership.
Nareit Funds From Operations, Pro forma Funds From Operations, and Adjusted Funds From Operations
Nareit FFO is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets such as machinery, computers, or other personal property. Nareit defines FFO as net income computed in accordance with GAAP, excluding: depreciation and amortization related to real estate; gains and losses from sales and impairment of depreciable assets and land used in our primary business; and income taxes directly associated with a gain or loss on the sale of real estate, and including our share of the FFO of unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine Nareit FFO. We calculate Nareit FFO attributable to Aimco common stockholders (diluted) by subtracting amounts allocated from Nareit FFO to participating securities. In addition to Nareit FFO, we compute Pro forma FFO and AFFO, which are also non-GAAP financial measures that we believe are helpful to investors in understanding our short-term performance. Pro forma FFO represents Nareit FFO attributable to Aimco common stockholders (diluted), excluding certain amounts that are unique or occur infrequently.
In computing 2020 Pro forma FFO, we made the following adjustments to Nareit FFO:
• Prepayment penalties: as a result of debt refinancing activity, we incurred
debt extinguishment costs. We excluded these costs from Pro forma FFO
because we believe these costs are not representative of ongoing operating
performance.
• Straight-line rent: in 2018, we assumed a 99-year ground lease withscheduled rent increases. Due to the terms of the lease, GAAP rent expense
will exceed cash rent payments until 2076. We include the cash rent payments
for this
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ground lease in Pro forma FFO but exclude the incremental straight-line
non-cash rent expense. We include the rent expense for this lease in other
expenses, net, in our condensed consolidated statements of operations.
• Severance costs, litigation, and other, net: during the three months ended
incurred other non-recurring costs. We excluded the unrealized loss and
other costs from Pro forma FFO because we believe they are not
representative of current operating performance. The unrealized loss andcosts are included in other expenses, net, on our condensed consolidated
statements of operations.
In computing 2019 Pro forma FFO, we made the following adjustments to Nareit FFO:
• Preferred equity redemption related costs: on
Class A Preferred Perpetual Stock. We excluded the redemption-related costs
from Pro forma FFO because we believe these costs are not representative of
operating performance.
• Straight-line rent: as described above.
• Severance costs, litigation, and other, net: in 2019, we incurred severance
and restructuring costs, and costs related to our litigation with Airbnb. We
excluded these amounts from Pro forma FFO because we believe these costs are
not representative of operating performance.
AFFO represents Pro forma FFO reduced by Capital Replacements, which represent
our estimation of the actual capital additions made to replace capital assets
consumed during our ownership period. When we make capital additions at an
apartment community, we evaluate whether the additions extend the useful life of
an asset as compared to its condition at the time we purchased the apartment
community. We classify as Capital Improvements those capital additions that meet
this criterion, and we classify as Capital Replacements those that do not. AFFO
is a key financial indicator we use to evaluate our short-term operational
performance and is one of the factors that we use to determine the amounts of
our dividend payments.
Nareit FFO, Pro forma FFO, and AFFO should not be considered alternatives to net
income determined in accordance with GAAP, as indications of our performance.
Although we use these non-GAAP measures for comparability in assessing our
performance compared to other REITs, not all REITs compute these same measures
and those who do may not compute them in the same manner. Additionally,
computation of AFFO is subject to our definition of Capital Replacement
spending. Accordingly, there can be no assurance that our basis for computing
these non-GAAP measures is comparable with that of other REITs.
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For the three and six months endedJune 30, 2020 and 2019, Aimco's Nareit FFO, Pro forma FFO, and AFFO are calculated as follows (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income attributable to Aimco common stockholders (1)$ 39,212 $ 59,234 $ 45,891 $ 330,802 Adjustments: Real estate depreciation and amortization, net of noncontrolling partners' interest 95,109 89,780 192,901 181,154 Gain on dispositions and other, net of noncontrolling partners' interest (47,238 ) (64,310 ) (47,204 ) (355,783 ) Income tax adjustments related to gain on dispositions and other tax-related items 152 210 378 6,736 Common noncontrolling interests inAimco Operating Partnership's share of above adjustments (2,446 ) (1,356 ) (7,542 ) 8,893 Amounts allocable to participating securities (15 ) (73 ) (54 ) 243 Nareit FFO attributable to Aimco common stockholders$ 84,774 $ 83,485 $ 184,370 $ 172,045 Adjustments, all net of common noncontrolling interests in AimcoOperating Partnership and participating securities: Prepayment penalties 6,203 - 6,203 - Straight-line rent 633 634 1,268 2,946 Preferred equity redemption related amounts - 3,864 - 3,864 Severance costs, litigation, and other, net 1,731 595 1,731 620 Pro forma FFO attributable to Aimco common stockholders$ 93,341 $ 88,578 $ 193,572 $ 179,475 Capital Replacements, net of common noncontrolling interests inAimco Operating Partnership and participating securities (11,403 ) (13,134 ) (23,008 ) (22,845 ) AFFO attributable to Aimco common stockholders$ 81,938 $ 75,444 $
170,564
Total share and dilutive share equivalents used to calculate Net income and Nareit FFO per share (2) 148,553 148,599 148,670 147,220 Adjustment to weight reverse stock split (3) - - - 1,242 Pro forma shares and dilutive share equivalents used to calculate
Pro forma FFO and AFFO per share 148,553 148,599 148,670 148,462
Net income attributable to Aimco per common share - diluted$ 0.26 $ 0.40 $ 0.31 $ 2.25 Nareit FFO per share - diluted$ 0.57 $ 0.56 $ 1.24 $ 1.17 Pro forma FFO per share - diluted$ 0.63 $ 0.60 $ 1.30 $ 1.21 AFFO per share - diluted$ 0.55 $ 0.51 $ 1.15 $ 1.06
(1) Represents the numerator for calculating Aimco's earnings per common share in
accordance with GAAP.
(2) Represents the denominator for Aimco's earnings per common share - diluted,
calculated in accordance with GAAP.
(3) During the three months ended
split and a special dividend paid primarily in stock. For stock splits, GAAP
requires the restatement of weighted average shares as if the reverse stock
split occurred at the beginning of the period presented; while shares issued
in the special dividend are included in weighted average shares outstanding
from the date issued. To minimize confusion and facilitate comparison of
period-over-period Pro forma FFO and AFFO, we calculated pro forma weighted
average shares for 2019 based on the effective date of the reverse stock
split and ex-dividend date for the shares issued in the special dividend,
thereby eliminating the per-share impact of the GAAP treatment to Aimco's
reported Pro forma FFO and AFFO.
Please refer to Financial Highlights above for discussion of the factors affecting our Pro forma FFO and AFFO growth for 2020, as compared to 2019.
The Aimco Operating Partnership does not separately compute or report Nareit FFO, Pro forma FFO, or AFFO. However, based on Aimco's method for allocation of such amounts to noncontrolling interests in theAimco Operating Partnership , as well as limited differences between the amounts of net income attributable to Aimco's common stockholders and theAimco Operating Partnership's unit holders during the periods presented, Nareit FFO, Pro forma FFO, and AFFO amounts on a per unit basis for theAimco Operating Partnership would be substantially the same as the corresponding per share amounts for Aimco. 36
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Table of Contents Leverage Ratios As discussed under the Balance Sheet heading, our leverage strategy targets the ratio of Net Leverage to Adjusted EBITDAre to be below 7.0x and the ratio of Adjusted EBITDAre to Adjusted Interest Expense and Preferred Distributions to be greater than 2.5x. We believe these ratios, which are based in part on non-GAAP financial information, are commonly used by investors and analysts to assess the relative financial risk associated with companies within the same industry, and they are believed to be similar to measures used by rating agencies to assess entity credit quality. Proportionate Debt, as used in our leverage ratios, is a non-GAAP measure and includes our share of the long-term, non-recourse property debt, outstanding borrowings under our revolving credit facility, and our term loan. Proportionate Debt excludes unamortized debt issuance costs because these amounts represent cash expended in earlier periods and do not reduce our contractual obligations. We reduce our recorded debt by the amounts of cash and restricted cash on-hand (which are primarily restricted under the terms of our property debt agreements), excluding tenant security deposits included in restricted cash, assuming the remaining amounts of cash and restricted cash would be used to reduce our outstanding leverage. We further reduce our recorded debt by the value of our investment in a securitization trust that holds certain of our property debt, as our payments of principal and interest associated with such property debt will ultimately repay our investments in the trust. We believe Proportionate Debt is useful to investors as it is a measure of our net exposure to debt obligations. Proportionate Debt, as used in our leverage ratios, is calculated as set forth in the table below. Preferred OP Units, as used in our leverage ratios, represents the redemption amount for theAimco Operating Partnership's preferred OP Units and, although perpetual in nature, is another component of our overall leverage. The reconciliation of total indebtedness to Proportionate Debt and Net Leverage, as used in our leverage ratios as ofJune 30, 2020 , is as follows (in thousands): June 30, 2020 Total indebtedness$ 4,892,183 Adjustments:
Debt issuance costs related to non-recourse property debt and term loan
23,490
Proportionate share adjustments related to debt obligations of consolidated and unconsolidated
partnerships (7,639 ) Cash and restricted cash (442,508 ) Tenant security deposits included in restricted cash
14,074
Proportionate share adjustments related to cash and restricted cash held by consolidated and
unconsolidated partnerships
874
Securitization trust investment and other (97,311 ) Proportionate Debt$ 4,383,163 Preferred OP Units 96,449 Redeemable noncontrolling interests in consolidated real estate partnership 4,492 Net Leverage$ 4,484,104 We calculated Adjusted EBITDAre used in our leverage ratios based on the most recent three-month amounts, annualized. EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and allow for comparison of our credit strength to different companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income (loss) as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. Nareit defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation, and amortization expense, further adjusted for: • gains and losses on the dispositions of depreciated property; • impairment write-downs of depreciated property;
• impairment write-downs of investments in unconsolidated partnerships caused
by a decrease in the value of the depreciated property in such partnerships;
and
• adjustments to reflect Aimco's share of EBITDAre of investments in
unconsolidated entities.
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EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted to exclude the effect of the following items for the reasons set forth below:
• net income attributable to noncontrolling interests in consolidated real
estate partnerships and EBITDAre adjustments attributable to noncontrolling
interests, to allow investors to compare a measure of our earnings before
the effects of our capital structure and indebtedness with that of other
companies in the real estate industry;
• the amount of interest income related to our investment in the subordinated
tranches in a securitization trust holding primarily Aimco property debt, as
we view our interest cost on this debt to be net of any interest income
received from the investment; and
• the amount by which GAAP rent expense exceeds cash rents for a long-term
ground lease for which expense exceeds cash payments until 2076. The excess
of GAAP rent expense over the cash payments for this lease does not reflect
a current obligation that affects our ability to service debt.
The reconciliation of net income to EBITDAre and Adjusted EBITDAre for the three months endedJune 30, 2020 , as used in our leverage ratios, is as follows (in thousands): Three Months Ended June 30, 2020 Net income $ 43,204 Adjustments: Interest expense 48,802 Income tax benefit (2,879 ) Depreciation and amortization
97,689
Gain on dispositions of real estate (47,238 ) Adjustment related to EBITDAre of unconsolidated partnerships
212
EBITDAre $
139,790
Net loss attributable to noncontrolling interests in consolidated real
estate partnerships
17
EBITDAre adjustments attributable to noncontrolling interests
(513 )
Interest income received on securitization investment (2,216 )
Non-cash straight-line rent 633
Pro forma adjustments, net (1)
1,491
Adjusted EBITDAre $
139,202
Annualized Adjusted EBITDAre $
556,808
(1) Adjusted EBITDAre has been calculated on a pro forma basis to reflect the
disposition of one apartment community during the period as if the
transaction closed on April 1, 2020 , as well as other items affecting
quarterly results for which annualization would distort results.
We calculated Adjusted Interest Expense, as used in our leverage ratios, based
on the most recent three-month amounts, annualized. Adjusted Interest Expense is
a non-GAAP measure that we believe is meaningful for investors and analysts as
it presents our share of current recurring interest requirements associated with
leverage. Adjusted Interest Expense represents our proportionate share of
interest expense on non-recourse property debt and interest expense on our
revolving credit facility borrowings and term loan. We exclude from our
calculation of Adjusted Interest Expense:
• debt prepayment penalties, which are items that, from time to time, affect
our interest expense, but are not representative of our scheduled interest
obligations; and
• the income we receive on our investment in the securitization trust that
holds certain of our property debt, as this income is being generated
indirectly from interest we pay with respect to property debt held by the
trust.
Preferred Distributions represents the distributions paid on the Aimco Operating
Partnership's preferred OP Units. We add Preferred Distributions to Adjusted
Interest Expense for a more complete picture of the interest and dividend
requirements of our leverage.
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The reconciliation of interest expense to Adjusted Interest Expense and
Preferred Distributions for the three months ended
Three Months Ended
June 30, 2020
Interest expense $ 48,802
Adjustments:
Proportionate share adjustments related to interest of
consolidated and
unconsolidated partnerships (84 )
Debt prepayment penalties (6,537 )
Interest income earned on securitization trust investment (2,216 )
Adjusted Interest Expense $ 39,965
Preferred distributions 1,859
Adjusted Interest Expense and Preferred Distributions $ 41,824
Annualized Adjusted Interest Expense $
159,860
Annualized Adjusted Interest Expense and Preferred Distributions $ 167,296
Liquidity and Capital Resources
Liquidity
Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flow from operations. Additional sources are proceeds from dispositions of apartment communities, proceeds from refinancing existing property debt, borrowings under new property debt, borrowings under our revolving credit facility, and proceeds from equity offerings.
As of
Our available liquidity consists of:
•
•
security deposits, consists primarily of escrows held by lenders for capital
additions, property taxes, and insurance; and
•
facility after consideration of
the facility.
Additional liquidity may also be provided through property debt financing at
properties unencumbered by debt. As of
Uses for liquidity include normal operating activities, payments of principal and interest on outstanding property debt, capital expenditures, dividends paid to stockholders, distributions paid to noncontrolling interest partners, and acquisitions of apartment communities. We use our cash and cash equivalents and our cash provided by operating activities to meet short-term liquidity needs. In the event that our cash and cash equivalents and cash provided by operating activities are not sufficient to cover our short-term liquidity needs, we have additional means, such as short-term borrowing availability and proceeds from apartment community sales and refinancings. We may use our revolving credit facility for working capital and other short-term purposes, such as funding investments on an interim basis. We expect to meet our long-term liquidity requirements, including redevelopment spending and apartment community acquisitions, through primarily non-recourse, long-term borrowings, the issuance of equity securities (including OP Units), the sale of apartment communities, and cash generated from operations. Additionally, we expect to meet our liquidity requirements associated with our debt maturities. Our revolving credit facility matures onJanuary 22, 2022 , and our term loan matures onApril 20, 2021 , prior to consideration of its one-year extension option. The following table summarizes the payments due under our non-recourse property debt commitments, excluding debt issuance costs, as ofJune 30, 2020 (in thousands): Less than More than Five One Year 2-3 Years 4-5 Years Years (2025 and Total (2020) (2021-2022) (2023-2024) Thereafter) Non-recourse property debt$ 4,565,673 $ 123,707 $ 873,971 $ 577,229 $ 2,990,766 39
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During the six months ended
Leverage and Capital Resources
The availability of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to historical levels. Recent events have increased volatility in interest rates, resulting in substantial movements, both up and down, in short periods of time. Capital is still available, but with fewer sources than in past periods. Any adverse changes in the lending environment could negatively affect our liquidity. We believe we have mitigated much of this exposure by reducing our short and intermediate term maturity risk through refinancing such loans with long-dated, fixed-rate property debt. However, if property financing options become unavailable for our future debt needs, we may consider alternative sources of liquidity, such as reductions in capital spending or proceeds from apartment community dispositions. Two credit rating agencies rate our creditworthiness and both have rated our credit and outlook as BBB- (stable), an investment grade rating. Our investment grade rating would be useful in accessing capital through the sale of bonds in private or public transactions. However, our intention and historical practice has been to raise debt capital in the form of property-level, non-recourse, long-dated, fixed-rate, amortizing debt, the cost of which is generally less than that of recourse debt and the terms of which also provide for greater balance sheet safety. As ofJune 30, 2020 , approximately 91% of our leverage consisted of property-level, non-recourse, long-dated, amortizing debt. Approximately 99% of our property-level debt is fixed-rate, which provides a hedge against increases in interest rates, capitalization rates, and inflation. The weighted-average remaining term to maturity of our property-level debt was 7.7 years. On average, 6.2% of our unpaid principal balances will mature each year from 2021 through 2023. While our primary source of leverage is property-level, non-recourse, long-dated, fixed-rate, amortizing debt, we also have a credit facility with a syndicate of financial institutions. As ofJune 30, 2020 , we had no outstanding borrowings under our revolving credit facility and had capacity to borrow up to$793.5 million after consideration of$6.5 million of letters of credit backed by the facility. During the three months endedJune 30, 2020 , we amended our Second Amended and Restated Senior Secured Credit Agreement to include a$350.0 million term loan. The term loan represents approximately 7% of our total leverage, includes a one-year extension option, and bears interest at 30-day LIBOR plus 185-basis points with a 50-basis point LIBOR floor. As ofJune 30, 2020 , our outstanding preferred OP Units represented approximately 2% of our total leverage. Preferred OP Units are redeemable at the holder's option; however, for illustrative purposes, we compute the weighted-average maturity of our total leverage assuming a 10-year maturity on the units. The combination of non-recourse property-level debt, borrowings under our revolving credit facility, term loan, preferred OP Units, and redeemable noncontrolling interests in a consolidated real estate partnership comprise our total leverage. The weighted-average remaining term to maturity for our total leverage described above was 7.3 years as ofJune 30, 2020 . Under the revolving credit facility and term loan, we have agreed to maintain a Fixed Charge Coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the trailing 12-month period endedJune 30, 2020 , our Fixed Charge Coverage ratio was 2.02x. We expect to remain in compliance with this covenant during the next 12 months. We like the discipline of financing our investments in real estate through the use of fixed-rate, amortizing, non-recourse property debt, as the amortization gradually reduces our leverage and reduces our refunding risk, and the fixed-rate provides a hedge against increases in interest rates, and the non-recourse feature avoids entity risk.
Changes in Cash, Cash Equivalents, and Restricted Cash
The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing and financing activities, which are presented in our condensed consolidated statements of cash flows in Item 1 of this report.
Operating Activities
For the six months endedJune 30, 2020 , net cash provided by operating activities was$184.4 million . Our operating cash flow is affected primarily by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment communities. Cash provided by operating activities for the six months endedJune 30, 2020 , increased by$14.3 million 40
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compared to 2019, due to higher contribution from our Same Store, Acquisition,
and
Investing Activities
For the six months ended
Total capital additions at apartment communities totaled$177.5 million and$177.7 million during the six months endedJune 30, 2020 and 2019, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.
We categorize capital spending for communities in our portfolio broadly into seven primary categories:
• capital replacements, which do not increase the useful life of an asset from
its original purchase condition. Capital replacements represent capital
additions made to replace the portion of our investment in acquired
apartment communities consumed during our period of ownership;
• capital improvements, which represent capital additions made to replace the
portion of acquired apartment communities consumed prior to our period of
ownership;
• capital enhancements, which may include kitchen and bath remodeling, energy
conservation projects, and investments in more durable, longer-lived
materials designed to reduce costs, all of which differ from redevelopment
additions in that they are generally lesser in scope and do not
significantly disrupt property operations;
• initial capital expenditures, which represent capital additions contemplated
in the underwriting of our recently acquired communities;
• redevelopment additions, which represent capital additions intended to
enhance the value of the apartment community through the ability to generate
higher average rental rates, and may include costs related to entitlement,
which enhance the value of a community through increased density, and costs
related to renovation of exteriors, common areas, or apartment homes;• development additions, which represent construction and related capitalized
costs associated with the ground-up development of apartment communities;
and
• casualty capital additions, which represent capitalized costs incurred in
connection with the restoration of an apartment community after a casualty
event.
We exclude the amounts of capital spending related to commercial spaces and to
apartment communities sold or classified as held for sale at the end of the
period from the foregoing measures. We have also excluded from these measures
indirect capitalized costs, which are not yet allocated to communities with
capital additions, and their related capital spending categories.
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A summary of the capital spending for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying condensed consolidated statements of cash flows for the six months endedJune 30, 2020 and 2019, are presented below (in thousands): Six Months Ended June 30, 2020 2019 Capital replacements$ 18,521 $ 18,886 Capital improvements 4,648 6,100 Capital enhancements 16,683 41,057 Redevelopment 69,512 41,240 Development 60,198 55,611 Initial capital expenditures 2,203
11,052
Casualty 5,709
3,750
Total apartment community capital additions
1,650 106
Plus: additions related to apartment communities sold or held for sale 49
3,550
Consolidated capital additions$ 179,173 $ 181,352 Plus: net change in accrued capital spending 3,175 (4,864 ) Capital expenditures per condensed consolidated statement of cash flows$ 182,348
For the six months ended
We invested$16.7 million in capital enhancements and$129.7 million in redevelopment and development during the six months endedJune 30, 2020 . Capital enhancement spend decreased$24.4 million for the six months endedJune 30, 2020 , compared to 2019, due primarily to the delay of certain capital projects in response to the potential economic impacts of COVID-19 and the government lockdown. The increase in redevelopment spending is driven by the full redevelopments ofFlamingo Point North Tower and 707 Leahy. Further details regarding our redevelopment and development activities, including apartment communities constructed and delivered as ofJune 30, 2020 , is discussed in the Executive Overview section above.
Financing Activities
For the six months ended
Proceeds from non-recourse property debt during the period consisted of the
closing of nine fixed-rate, amortizing, non-recourse property loans totaling
Principal payments on non-recourse property debt during the period totaled
Proceeds of
Net repayments on our revolving credit facility of
Aimco common share repurchases during the six months ended
Net cash provided by financing activities also includes
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Equity and Partners' Capital Transactions
The following table presents the
Cash distributions paid by the Aimco Operating Partnership to$ 3,728 preferred unitholders Cash distributions paid by theAimco Operating Partnership to
128,851
common unitholders (1) Cash distributions paid to holders of noncontrolling interests in
118
consolidated real estate partnerships
Total cash distributions paid by the
(1)
represented distributions paid to holders of common OP Units.
The following table presents Aimco's dividend and distribution activity during
the six months ended
Cash distributions paid to holders of OP Units $
10,521
Cash distributions paid to holders of noncontrolling interests in
118
consolidated real estate partnerships Cash dividends paid by Aimco to common stockholders
122,058
Total cash dividends and distributions paid by Aimco$ 132,697 Future Capital Needs We expect to fund any future acquisitions, redevelopment, development, and other capital spending principally with proceeds from apartment community sales, short-term borrowings, debt and equity financing, and operating cash flows. Our near-term business plan does not contemplate the issuance of equity. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for 2020 and beyond.
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