Is Apartment Investment Management A Buy?

Apartment Investment Management and Company, also known as Aimco, has undergone a massive change over the last year. Formerly merged between the current Aimco and Apartment Income Properties, the company recently split into two publicly-traded companies. Aimco consists of a small operating portfolio of stabilized apartments, while its core business has been directed toward apartment development and redevelopment. 

In contrast, Apartment Income REIT Corp. consists of solely stabilized apartments. Such assets require little or no capex and renovations. More attention among investors and analysts has been given to AIRC. The company's stabilized asset approach is less risky and prone to produce more steady earnings with a frequent dividend. 

Pledging at least 30% of their equity to stabilized apartments, Aimco is balancing higher risk development activity with lower risk and more stable cash flowing apartments. With 54% of the company’s equity in stabilized apartment properties, a greater portion of future investment may be directed toward apartment development. 

Investors willing to tolerate a higher risk and reward REIT without a recurring dividend should consider the new Aimco. Complexity risk associated with apartment development is a contributing factor to Aimco's discounted valuation. The pricing provides an attractive entry point as the market becomes more familiarized with the new company. 

Portfolio Overview The new Aimco portfolio is very similar to the previous combined company in terms of property type and location. The stabilized portfolio consists of 24 properties containing just over 6,000 units. They are located across coastal and urban markets in the United States. The largest of its markets include Boston, Los Angeles, Washington, D.C.,and Miami. 

The development portfolio covers seven properties with over 1,000 units. Aimco's development portfolio is shifting into the hotel and office sectors as well. 

Coastal apartments have experienced large decreases in net operating income because of COVID-19. Future migration and employment trends continue to favor the Southeast and Sunbelt regions.

Secondary markets, including the Charlotte, Atlanta, and Dallas metro regions, are best positioned for future rental growth. 

Mid-America Apartments and BSR REIT are two attractive REITs invested in these markets. Aimco reported a decline in NOI of 5.7% for 2020. In contrast, Mid-America and BSR REIT reported NOI growth of 1.2% and 2.7%, respectively. 

Management acknowledged the more attractive prospects of high growth, secondary and tertiary markets on the third-quarter conference call.

Terry Considine, the CEO of Aimco, mentioned the increased appetite for the Florida, Georgia, Tennessee, North Carolina, and Rocky Mountain West markets. These are among the lowest cost, tax and regulation property markets across the United States. 

In addition to the stabilized apartment and development portfolio, Aimco also holds a very large mezzanine loan. Such loans are typically used by buyers to reduce the amount of cash needed to purchase a property. Aimco's mezzanine loan is made to the owners of the Parkmerced apartments in San Francisco, California. Carrying an interest rate of 10%, the loan is much higher yielding compared to the 3.5%-5% yields on apartment properties in coastal and urban markets. 

Given the loan is accruing, principal and interest payments are expected to be paid back in 2024 when the loan matures. Until then, the investment is not cash flow generating. Aimco’s development model and lack of cash flow from their mezzanine loan means their value is better defined by net asset value than a traditional earnings multiple. Regardless, each valuation method reveals Aimco's valuation discount and potential capital appreciation. 

Valuation: Aimco trades at a modest discount to its book value. With gross book value per share of $7.36, Aimco's trading at a 10% discount. Assets are reported on the balance sheet at cost versus market value. Given that Aimco’s assets have likely appreciated since purchase, its NAV discount is likely much greater than the price/book. 

Aimco produced a run rate FFO per share of 28 cents, resulting in a P/FFO multiple of 24, several turns below most of its peer apartment REITs. Apartment REITs located in the Sunbelt and secondary markets have better future growth outlooks than coastal, urban, and gateway apartments. However, Aimco provides a compelling valuation at current prices. The company has been unjustifiably discounted, likely a result of its perceived complexity risk and lack of operating history.