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AIRC Aimco Properties

Filed: 24 Feb 20, 4:44pm
0000922864 aiv:StGeorgeVillasMember us-gaap:SegmentContinuingOperationsMember aiv:OtherRealEstateMember 2019-01-01 2019-12-31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number 1-13232 (Apartment Investment and Management Company)

Commission file number 0-24497 (AIMCO Properties, L.P.)

 

Apartment Investment and Management Company

AIMCO Properties, L.P.

(Exact name of registrant as specified in its charter)

 

Maryland (Apartment Investment and Management Company)

 

84-1259577

Delaware (AIMCO Properties, L.P.)

 

84-1275621

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

 

4582 South Ulster Street, Suite 1700

Denver, Colorado

 

80237

(Zip Code)

(Address of principal executive offices)

 

 

 

Registrant’s telephone number, including area code (303) 757-8101

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Class A Common Stock (Apartment Investment and Management Company)

 

AIV

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

 

None (Apartment Investment and Management Company)

Partnership Common Units (AIMCO Properties, L.P.)

(title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

 

Apartment Investment and Management Company:  Yes  ☒   No  

AIMCO Properties, L.P.:  Yes  ☒   No  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Apartment Investment and Management Company:  Yes  ☐   No  

AIMCO Properties, L.P.:  Yes  ☐   No  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Apartment Investment and Management Company:  Yes  ☒   No  

AIMCO Properties, L.P.:  Yes  ☒   No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Apartment Investment and Management Company:  Yes  ☒   No  

AIMCO Properties, L.P.:  Yes  ☒   No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 


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Apartment Investment and Management Company:

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

AIMCO Properties, L.P.:

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Apartment Investment and Management Company:  

AIMCO Properties, L.P.:  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Apartment Investment and Management Company:  Yes     No  

AIMCO Properties, L.P.:  Yes     No  

 

The aggregate market value of the voting and non-voting common stock of Apartment Investment and Management Company held by non-affiliates of Apartment Investment and Management Company was approximately $7.4 billion based upon the closing price of $50.12 on June 30, 2019.

 

As of February 21, 2020, there were 148,930,402 shares of Class A Common Stock outstanding.

 

 

Documents Incorporated by Reference

Portions of Apartment Investment and Management Company’s definitive proxy statement to be issued in conjunction with Apartment Investment and Management Company’s annual meeting of stockholders to be held April 28, 2020, are incorporated by reference into Part III of this Annual Report.

 

 


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EXPLANATORY NOTE

This filing combines the Annual Reports on Form 10-K for the fiscal year ended December 31, 2019, of Apartment Investment and Management Company, or Aimco, and AIMCO Properties, L.P., or the Aimco Operating Partnership. Where it is important to distinguish between the two entities, we refer to them specifically. Otherwise, references to “we,” “us,” or “our” mean collectively Aimco, the Aimco Operating Partnership, and their consolidated entities.

Aimco, a Maryland corporation, is a self-administered and self-managed real estate investment trust, or REIT. Aimco, through wholly-owned subsidiaries, is the general and special limited partner of and, as of December 31, 2019, owned a 94.0% ownership interest in the common partnership units of the Aimco Operating Partnership. The remaining 6.0% interest is owned by limited partners. As the sole general partner of the Aimco Operating Partnership, Aimco has exclusive control of the Aimco Operating Partnership’s day-to-day management.

The Aimco Operating Partnership holds all of Aimco’s assets and manages the daily operations of Aimco’s business. Pursuant to the Aimco Operating Partnership agreement, Aimco is required to contribute to the Aimco Operating Partnership all proceeds from the offerings of its securities. In exchange for the contribution of such proceeds, Aimco receives additional interests in the Aimco Operating Partnership with similar terms (e.g., if Aimco contributes proceeds of a stock offering, Aimco receives partnership units with terms substantially similar to the stock issued by Aimco).

We believe combining the periodic reports of Aimco and the Aimco Operating Partnership into this single report provides the following benefits:

 

We present our business as a whole, in the same manner our management views and operates the business;

 

We eliminate duplicative disclosure and provide a more streamlined and readable presentation because a substantial portion of the disclosures apply to both Aimco and the Aimco Operating Partnership; and

 

We save time and cost through the preparation of a single combined report rather than two separate reports.

We operate Aimco and the Aimco Operating Partnership as one enterprise, the management of Aimco directs the management and operations of the Aimco Operating Partnership, and the members of the Board of Directors of Aimco are identical to those of the Aimco Operating Partnership’s general partner.

We believe it is important to understand the few differences between Aimco and the Aimco Operating Partnership in the context of how Aimco and the Aimco Operating Partnership operate as a consolidated company. Aimco has no assets or liabilities other than its investment in the Aimco Operating Partnership. Also, Aimco is a corporation that issues publicly traded equity from time to time, whereas the Aimco Operating Partnership is a partnership that has no publicly traded equity. Except for the net proceeds from stock offerings by Aimco, which are contributed to the Aimco Operating Partnership in exchange for additional limited partnership interests (of a similar type and in an amount equal to the shares of stock sold in the offering), the Aimco Operating Partnership generates all remaining capital required by its business. These sources include the Aimco Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility, the issuance of debt and equity securities, including additional partnership units, and proceeds received from the sale of apartment communities.

Equity, partners’ capital, and noncontrolling interests are the main areas of difference between the consolidated financial statements of Aimco and those of the Aimco Operating Partnership. Interests in the Aimco Operating Partnership held by entities other than Aimco, which we refer to as OP Units, are classified within partners’ capital in the Aimco Operating Partnership’s financial statements and as noncontrolling interests in Aimco’s financial statements.

To help investors understand the differences between Aimco and the Aimco Operating Partnership, this report provides separate consolidated financial statements for Aimco and the Aimco Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, and earnings per share or earnings per unit, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity.

This report also includes separate Part II, Item 9A. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for Aimco and the Aimco Operating Partnership in order to establish that the requisite certifications have been made and that Aimco and the Aimco Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

 

 


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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

AIMCO PROPERTIES, L.P.

TABLE OF CONTENTS

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2019

 

 

 

 

Item

 

Page

 

PART I

 

 

 

 

1.

Business

2

 

 

 

1A.

Risk Factors

7

 

 

 

1B.

Unresolved Staff Comments

14

 

 

 

2.

Properties

15

 

 

 

3.

Legal Proceedings

15

 

 

 

4.

Mine Safety Disclosures

15

 

 

 

 

PART II

 

 

 

 

5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

 

 

 

6.

Selected Financial Data

19

 

 

 

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

7A.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

8.

Financial Statements and Supplementary Data

42

 

 

 

9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

42

 

 

 

9A.

Controls and Procedures

42

 

 

 

9B.

Other Information

47

 

 

 

 

PART III

 

 

 

 

10.

Directors, Executive Officers and Corporate Governance

48

 

 

 

11.

Executive Compensation

48

 

 

 

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

48

 

 

 

13.

Certain Relationships and Related Transactions, and Director Independence

48

 

 

 

14.

Principal Accounting Fees and Services

48

 

 

 

 

PART IV

 

 

 

 

15.

Exhibits and Financial Statement Schedules

49

 

 

 

16.

Form 10-K Summary

51

 

 

 


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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 Annual Report contains or may contain information that is forward-looking, within the meaning of the federal securities laws, including, without limitation, statements regarding: 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; 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;

 

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 the section entitled “Risk Factors” described in Item 1A of this Annual Report and the other documents we file from time to time with the Securities and Exchange Commission.

As used herein and except as the context otherwise requires, “we,” “our,” and “us” refer to Apartment Investment and Management Company (which we refer to as Aimco), AIMCO Properties, L.P. (which we refer to as the Aimco 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 in the 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.

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PART I

ITEM 1. BUSINESS

The Company

Aimco is a Maryland corporation incorporated on January 10, 1994. Aimco is a self-administered and self-managed real estate investment trust, or REIT, focused on the ownership, management, redevelopment, and some development of quality apartment communities located in several of the largest markets in the United States. Those markets include: Atlanta; the San Francisco Bay Area; Boston; Chicago; Denver; Greater New York City; Greater Washington, D.C.; Los Angeles; Miami/Dade County; Philadelphia; San Diego; and Seattle.

Aimco, through its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, owns a majority of the ownership interests in the Aimco Operating Partnership, a Delaware limited partnership formed on May 16, 1994. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership.

Please refer to Note 13 to the consolidated financial statements in Item 8 for discussion regarding our segments.

Business Overview

Our business activities are defined by a commitment to our core values of integrity, respect, collaboration, performance, and a focus on our customers. These values and our corporate mission, “to consistently provide quality apartment homes in a respectful environment delivered by a team of people who care,” shape our culture. In all of our interactions with residents, team members, business partners, lenders, and equity holders, we aim to be the best owner and operator of apartment communities and an outstanding corporate citizen.

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 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. Over the past five years as of December 31, 2019, we have generated Economic Income at a compounded annual return of 10%. Some investors focus on multiples of Adjusted Funds From Operations, or AFFO, and Funds From Operations as defined by Nareit, or Nareit FFO. Our disclosure of AFFO, a measure of current return, complements our focus on Economic Income. We also use Pro forma Funds From Operations, or Pro forma FFO, as a secondary measure of operational performance.

Our business plan to achieve our principal financial objective is to:

 

operate our portfolio of desirable apartment homes with a high level of focus on customer selection and customer satisfaction and in an efficient manner that produces predictable and growing Free Cash Flow, or FCF;

 

improve our portfolio of apartment communities, which is diversified both by geography and price point, by selling communities with lower projected FCF internal rates of return and investing the proceeds from such sales through capital enhancements, redevelopment, some development, and acquisitions with greater land value, higher expected rent growth, and projected FCF internal rates of return in excess of those expected from the communities sold;

 

use low levels of financial leverage primarily in the form of non-recourse, long-dated, fixed-rate property debt and perpetual preferred equity, a combination that reduces our refunding and re-pricing risk and provides a hedge against increases in interest rates; and

 

focus intentionally on a collaborative and productive culture based on respect for others and personal responsibility.

The results from the execution of our business plan are discussed in the Executive Overview in Item 7.

Our business is organized around five areas of strategic focus: operational excellence; redevelopment and development; portfolio management; balance sheet; and team and culture.

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Operational Excellence

We own and operate a portfolio of apartment communities, diversified by both geography and price point. As of December 31, 2019, our portfolio included 124 apartment communities with 32,839 apartment homes in which we held an average ownership of approximately 99%, and approximately 80% of the value of our portfolio, measured by gross asset value (the estimated fair value of our communities), was attributable to Same Store communities.

To manage our property operations efficiently and to increase the benefits from our local management expertise, we give direct responsibility for operations within each area to area operations leaders with regular oversight by senior management. To enable the area operations leaders to focus on sales and service, as well as to improve financial control and budgeting, we have dedicated area financial officers who support the operations leaders. Additionally, with the exception of routine maintenance and purchases and installation of equipment, we have specialized teams that manage capital spending related to larger and more complicated construction.

We seek to improve our property operations by: employing service-oriented, well-trained team members; taking advantage of advances in technology; increasing automation; centralizing operational tasks where efficient to do so; standardizing business processes, operational measurements, and internal reporting; and enhancing financial controls over field operations. We focus on the following areas:

 

Customer Satisfaction. Our operating culture is focused on our residents and providing them with a high level of service in a clean, safe, and respectful living environment. We regularly monitor and evaluate our performance by providing customers with numerous opportunities to grade our work. In 2019, we received 75,000 customer grades averaging 4.3 on a five-point scale. We use this customer feedback as a daily management tool. We also publish these customer evaluations online as important and credible information for prospective customers. We have automated certain aspects of our on-site operations to enable current and future residents to interact with us using methods that are efficient and effective for them, such as making online requests for service work, and executing leases and lease renewals. In addition, we emphasize the quality of our on-site team members through recruiting, training, and retention programs, which, with continuous and real-time customer feedback, contributes to improved customer service. We believe that greater customer satisfaction leads to higher resident retention and increased occupancy rates, which in turn leads to increased revenue and reduced costs.

 

Resident Selection and Retention. In our apartment communities, we believe that one’s neighbors are a meaningful part of the customer experience, together with the location of the community and the physical quality of the apartment homes. Part of our property operations strategy is to focus on attracting and retaining stable, credit-worthy residents who are also good neighbors and are likely to live with us longer. We have explicit criteria for resident selection, which we apply to new and renewal leases, including creditworthiness and behavior in accordance with our apartment community standards and our written “Good Neighbor Commitment.” Our focus on resident selection and retention led to 43% of our apartment homes turning over, an improvement (reduction) of approximately 150 basis points from 2018.

 

Revenue Management and Ancillary Services. We have a centralized revenue management system that leverages people, processes, and technology to work in partnership with our local property management teams to develop rental rate pricing. We seek to increase FCF, which we define as net operating income less Capital Replacements, by optimizing the balance between rental and occupancy rates, as well as taking into consideration costs such as preparing an apartment home for a new resident. We are focused on careful measurements of on-site operations, as we believe that timely and accurate collection of apartment community performance and resident profile data allows us to maximize FCF through better property management and leasing decisions. We seek to maximize profit by performing timely data analysis of new and renewal pricing for each apartment home, thereby enabling us to adjust rents quickly in response to changes in supply and demand and minimize vacancy time. We also generate incremental revenue by providing or facilitating the provision of services to our residents, including, at certain apartment communities, telecommunications services, parking options, package lockers, and storage space rental.

 

Controlling Expenses. Innovation is the foundation of our cost control efforts. Innovative activities we have undertaken include: moving administrative tasks to our shared service center, which reduces costs and allows site teams to focus on sales and service; taking advantage of economies of scale at the corporate level through electronic procurement, which reduces complexity and increases purchasing volume discounts; focusing on life cycle costs by investing in more durable, longer-lived materials, which reduce turn times and costs; and leveraging technology through such items as smart home capabilities, website design, and package lockers, which meet today’s customer preference for self-service. Additionally, our efforts to maximize resident retention through our resident selection process described above has resulted in reduced turn costs. These and other innovations contributed to a growth rate in controllable operating expense, which we define as property expenses less taxes, insurance, and utility expenses, compounding for the past 12 years at an annual rate of negative 0.2%.

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Improving and Maintaining Apartment Community Quality. We believe that the physical condition and amenities of our apartment communities are important factors in our ability to maintain and increase rental rates. We invest in the maintenance and improvement of our communities primarily through: Capital Replacements, which are capital additions made to replace the portion of an apartment community consumed during our ownership; Capital Improvements, which extend the useful life of a community from its condition at our date of purchase; Capital Enhancements, which may include kitchen and bath remodeling, energy conservation projects, and investments in longer-lived materials as described above, all of which are generally lesser in scope than is a redevelopment and do not significantly disrupt property operations; and Initial Capital Expenditures, which are capital additions contemplated in the underwriting of an acquired asset. During 2019, we invested $1,109 per apartment home in Capital Replacements, $374 per apartment home in Capital Improvements, and $2,686 per apartment home in Capital Enhancements. We also invested a total of $22.9 million in Initial Capital Expenditures, which were planned as part of our initial investment in communities acquired in 2019 and 2018.

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 apartment 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. Over the past five years, we have spent approximately $1.0 billion on redevelopment and development, targeting FCF internal rates of return of approximately 9% to 11% on these investments.

We undertake a range of redevelopments, including: those in which buildings or exteriors are renovated without the need to vacate a significant percentage of apartment homes, or short-cycle redevelopments; those in which significant renovation of apartment homes may be accomplished upon lease expiration and turnover; and those in which an entire building or community is vacated, or long-cycle redevelopments. We often execute redevelopment using a phased approach, in which we renovate an apartment community in stages. 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.

We invest to earn risk-adjusted returns in excess of those expected from the communities sold in paired trades to fund the redevelopment or development. Of these two activities, we generally favor redevelopment because it permits adjustment to the scope and timing of spending to align with changing market conditions and customer preferences.

Portfolio Management

Our portfolio management strategy involves the allocation of investment capital to enhance rent growth and increase long-term capital values through portfolio design, emphasizing land value as well as location and submarket. We target geographic diversification in our portfolio in order to reduce the volatility of our rental revenue and to reduce the risk of undue concentration in any particular market. Similarly, we seek price point diversification by owning apartment communities that offer apartment homes at rents below those asked by competitive new building supply.

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 in the United States. Please refer to the Executive Overview section in Item 7 for a description of our portfolio quality ratings. As of December 31, 2019, our portfolio was allocated about one-half to “A” rated properties, and about one-half to “B” and “C+” rated properties.

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. Through this disciplined approach to capital recycling, we increase the quality and expected growth rate of our portfolio.

Balance Sheet

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 as well as holding properties with substantial value unencumbered by property debt; and use 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 under our revolving credit facility, outstanding preferred equity, and redeemable noncontrolling interests in a consolidated real estate partnership.

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We target a ratio of Proportionate Debt and Preferred Equity to adjusted earnings before interest, taxes, depreciation, and amortization for real estate, or Adjusted EBITDAre, as defined by Nareit, below 7.0x and we target a ratio of Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends greater than 2.5x. 

Our ratios as of December 31, 2019, were 7.6x and 3.5x, respectively. We delayed approximately $300 million of sales originally planned for fourth quarter 2019 and January 2020, which increased Proportionate Debt to Adjusted EBITDAre and Proportionate Debt and Preferred Equity to Adjusted EBITDAre by 0.3x as of December 31, 2019. We expect a gradual decline in leverage to EBITDAre ratios throughout 2020, reaching approximately 6.4x and 6.5x, respectively, at year end. In future years, we expect earnings growth from completed redevelopments will increase EBITDAre and further reduce our leverage ratios.

Please refer to the Leverage Ratios subsection to the Non-GAAP Measures section in Item 7 for additional information regarding our leverage ratios.

Our liquidity consists of cash balances and available capacity on our revolving credit facility. As of December 31, 2019, we had cash and restricted cash of $177.7 million and had capacity to borrow $517.8 million under our revolving credit facility.

We manage our financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. As of December 31, 2019, we held unencumbered communities with an estimated fair market value of approximately $2.4 billion.

Please refer to the Executive Overview and Liquidity and Capital Resources sections in Item 7 for additional information regarding our balance sheet and liquidity.

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 becoming United 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 by the United States military. Out of hundreds of participating companies in 2019, Aimco was one of only seven recognized as a “Top Workplace” in Colorado for each of the past seven years. Aimco was also recognized as a Top Workplace in the Bay Area in 2019. Also in 2019, Aimco was the only real estate company to receive a BEST award from the Association for Talent Development in recognition of our company-wide success in talent development, marking our second consecutive year receiving this award.

Competition

In attracting and retaining residents to occupy our apartment communities we compete with numerous other housing providers. Our apartment communities compete directly with other rental apartments, as well as condominiums and single-family homes that are available for rent or purchase in the markets in which our apartment communities are located. Principal factors of competition include rent or price charged, attractiveness of the location and apartment community, and the quality and breadth of services. The number of competitive apartment communities relative to demand in a particular area has a material effect on our ability to lease apartment homes at our apartment communities and on the rents we charge. In certain markets, there exists an oversupply of newly-constructed apartment homes, single-family homes, and condominiums relative to consumer demand, which affects the pricing and occupancy of our rental apartments.

We also compete with other real estate investors, including other apartment REITs, pension and investment funds, partnerships, and investment companies in acquiring, redeveloping, managing, obtaining financing for, and disposing of apartment communities. This competition affects our ability to acquire apartment communities we want to add to our portfolio and the price that we pay in such acquisitions; our ability to finance or refinance communities in our portfolio and the cost of such financing; and our ability to dispose of communities we no longer desire to retain in our portfolio and the timing and price available to us when we seek to dispose of such communities.

Taxation

Aimco

Aimco has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, commencing with our taxable year ended December 31, 1994, and intends to continue to operate in such a manner. The Code imposes various requirements related to organizational structure, distribution levels, diversity of stock ownership, and

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certain restrictions with regard to owned assets and categories of income that must be met in order to continue to qualify as a REIT. If Aimco continues to qualify for taxation as a REIT, Aimco will generally not be subject to United States federal corporate income tax on its taxable income that is currently distributed to stockholders. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that generally results from an investment in a corporation.

Certain of Aimco’s operations, or a portion thereof, including property management and risk management are conducted through taxable REIT subsidiaries, each of which we refer to as a TRS. A TRS is a subsidiary C-corporation that has not elected REIT status and, as such, is subject to United States federal corporate income tax. We use TRS entities to facilitate our ability to offer certain services and activities to our residents and investment partners that cannot be offered directly by a REIT. We also use TRS entities to hold investments in certain apartment communities.

The Aimco Operating Partnership

The Aimco Operating Partnership is treated as a “pass-through” entity for United States federal income tax purposes and is not subject to United States federal income taxation. Partners in the Aimco Operating Partnership, however, are subject to tax on their allocable share of partnership income, gains, losses, deductions, and credits, regardless of whether the partners receive any actual distributions of cash or other property from the Aimco Operating Partnership during the taxable year. Generally, the characterization of any particular item is determined by the Aimco Operating Partnership, rather than at the partner level, and the amount of a partner’s allocable share of such item is governed by the terms of the Aimco Operating Partnership’s Partnership Agreement. The Aimco Operating Partnership is subject to tax in certain states.

Regulation

General

Apartment communities and their owners are subject to various laws, ordinances, and regulations, including those related to real estate broker licensing and regulations relating to recreational facilities such as swimming pools, activity centers, and other common areas. Changes in laws increasing the potential liability for environmental conditions existing on communities or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction, and safety requirements, may result in significant unanticipated expenditures, which would adversely affect our net income and cash flows from operating activities. In addition, existing rent control laws, as well as future enactment of rent control or rent stabilization laws, or other laws regulating multifamily housing, may reduce rental revenue or increase operating costs in particular markets.

Environmental

Various federal, state, and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present at an apartment community. These materials may include lead-based paint, asbestos, polychlorinated biphenyls, and petroleum-based fuels. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the release or presence of such materials. In connection with the ownership, operation, and management of apartment communities, we could potentially be liable for environmental liabilities or costs associated with our current communities, communities we acquire or manage in the future, or communities we previously owned or operated in the past. These and other risks related to environmental matters are described in more detail in Item 1A. Risk Factors.

Corporate Responsibility

At Aimco, corporate responsibility is an important part of our business. As with all other aspects of our business, our corporate responsibility program focuses on continuous improvement, to the benefit of our stockholders, our residents, our team members, our communities, and the environment. Highlights of our corporate responsibility program can be found in our proxy statement for Aimco’s 2020 annual meeting of stockholders and is incorporated herein by reference.

Insurance

Our primary lines of insurance coverage are property, general liability, and workers’ compensation. We believe that our insurance coverages adequately insure our apartment communities against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood, terrorism, and other perils, and adequately insure us against other risk. Our coverage includes deductibles, retentions, and limits that are customary in the industry. We have established loss prevention, loss mitigation, claims handling, and litigation management procedures to manage our exposure.

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Employees

As of December 31, 2019, we had approximately 950 team members, of whom about 600 were at the apartment community level performing on-site functions or at our shared service center performing tasks that have been centralized there, with the balance managing corporate and area functions, including investment and debt transactions, legal, finance and accounting, information systems, human resources, and other support functions. As of December 31, 2019, unions represented approximately 50 of our team members. We have never experienced a work stoppage and believe we maintain satisfactory relations with our team members.

Available Information

Our combined Annual Report on Form 10-K, our combined Quarterly Reports on Form 10-Q, Current Reports on Form 8-K filed by Aimco or the Aimco Operating Partnership, and any amendments to any of those reports that we file with the Securities and Exchange Commission are available free of charge as soon as reasonably practicable through Aimco’s website at www.aimco.com. The information contained on Aimco’s website is not incorporated into this Annual Report.

ITEM 1A. RISK FACTORS

The risk factors noted in this section, and other factors noted throughout this Annual Report, describe certain risks and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement.

Risks Related to Our Real Estate Investments and Our Operations

Redevelopment, development, and construction risks could affect our profitability.

We are currently redeveloping and developing certain of our apartment communities. During 2020, we expect to invest $250 million to $300 million in redevelopment and development activities. Redevelopment and development are subject to numerous risks, including the following:

 

we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy, or other required governmental or third-party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities;

 

we may incur costs that exceed our original estimates due to increased material, labor, or other costs, such as litigation;

 

we may be unable to complete construction and lease-up of an apartment community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues;

 

occupancy rates and rents at an apartment community may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development of competing communities;

 

we may be unable to obtain financing with favorable terms, or at all, which may cause us to delay or abandon an opportunity;

 

we may abandon opportunities that we have already begun to explore, or stop projects we have already commenced, for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover costs already incurred in exploring those opportunities;

 

we may incur liabilities to third parties during the redevelopment or development process;

 

unexpected events or circumstances may arise during the redevelopment or development process that affect the timing of completion and the cost and profitability of the redevelopment or development; and

 

loss of a key member of a redevelopment or development team could adversely affect our ability to deliver redevelopments and developments on time and within our budget.

Failure to generate sufficient net operating income may adversely affect our liquidity, limit our ability to fund necessary capital expenditures, or adversely affect our ability to pay dividends or distributions.

Our ability to fund necessary capital expenditures on our communities depends on, among other things, our ability to generate net operating income in excess of required debt payments. If we are unable to fund capital expenditures on our communities, we may not be able to preserve the competitiveness of our communities, which could adversely affect their net operating income and long-term value.

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Our ability to make payments to our investors depends on our ability to generate net operating income in excess of required debt payments and capital expenditure requirements. Our net operating income and liquidity may be adversely affected by events or conditions beyond our control, including:

 

the general economic climate;

 

an inflationary environment in which the costs to operate and maintain our communities increase at a rate greater than our ability to increase rents, which we can only do upon renewal of existing leases or at the inception of new leases;

 

competition from other apartment communities and other housing options;

 

local conditions, such as loss of jobs, unemployment rates, or an increase in the supply of apartments, that might adversely affect apartment occupancy or rental rates;

 

changes in governmental regulations and the related cost of compliance;

 

changes in tax laws and housing laws, including the enactment of rent control laws or other laws regulating multifamily housing; and

 

changes in interest rates and the availability of financing.

Competition could limit our ability to lease apartment homes or increase or maintain rents.

Our apartment communities compete for residents with other housing alternatives, including other rental apartments and condominiums, and, to a lesser degree, single-family homes that are available for rent, as well as new and existing condominiums and single-family homes for sale. Competitive residential housing, as well as household formation and job creation in a particular area, could adversely affect our ability to lease apartment homes and to increase or maintain rental rates.

Because real estate investments are relatively illiquid, we may not be able to sell apartment communities when appropriate.

Real estate investments are relatively illiquid and generally cannot be sold quickly. REIT tax rules also restrict our ability to sell apartment communities. Thus, we may not be able to change our portfolio promptly in response to changes in economic or other market conditions. Our ability to dispose of apartment communities in the future will depend on prevailing economic and market conditions, including the cost and availability of financing. This could have a material adverse effect on our financial condition or results of operations.

If we are not successful in our acquisition of apartment communities, our results of operations could be adversely affected.

The selective acquisition of apartment communities is a component of our strategy. However, we may not be able to complete transactions successfully in the future. Although we seek to acquire apartment communities when such acquisitions increase our FCF internal rates of return and are accretive to NAV, such transactions may fail to perform in accordance with our expectations. In particular, following acquisition, the value and operational performance of an apartment community may be diminished if obsolescence or neighborhood changes occur before we are able to redevelop or sell the apartment community. This could have an adverse effect on our financial condition or results of operations.

Potential liability or other expenditures associated with potential environmental contamination may be costly.

Various federal, state, and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Potentially hazardous materials may include polychlorinated biphenyls, petroleum-based fuels, lead-based paint, or asbestos, among other materials. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions, damages to natural resources and for potential fines or penalties in connection with such damage or with respect to the improper management of hazardous materials. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or personal injury, disease, disability, or other infirmities related to the alleged presence of hazardous materials at an apartment community. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate.

Laws benefiting disabled persons may result in our incurrence of unanticipated expenses.

Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988, or FHAA, requires apartment communities first occupied after March 13, 1991, to comply with design and construction

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requirements for disabled access. For those apartment communities receiving federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. These and other federal, state, and local laws may require structural modifications to our apartment communities or changes in policy/practice, or affect renovations of the communities. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our apartment communities are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA, the FHAA, and the Rehabilitation Act of 1973 in connection with the ongoing operation or redevelopment of our apartment communities.

Moisture infiltration and resulting mold remediation may be costly.

Although we are proactively engaged in managing moisture intrusion and preventing the presence of mold at our apartment communities, it is not unusual for periodic moisture intrusion to cause mold in isolated locations within an apartment community. We have implemented policies, procedures, and training, and include a detailed moisture intrusion and mold assessment during acquisition due diligence. We believe these measures will manage mold exposure at our apartment communities and will minimize the effects that mold may have on our residents. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. We have only limited insurance coverage for property damage claims arising from the presence of mold and for personal injury claims related to mold exposure.

Although we are insured for certain risks, the cost of insurance, increased claims activity, or losses resulting from casualty events may affect our operating results and financial condition.

We are insured for a portion of our consolidated apartment communities’ exposure to casualty losses resulting from fire, earthquake, hurricane, tornado, flood, and other perils, which insurance is subject to deductibles and self-insurance retention. We recognize casualty losses or gains based on the net book value of the affected apartment community and the amount of any related insurance proceeds. In many instances, the actual cost to repair or replace the apartment community may exceed its net book value and any insurance proceeds. We recognize the uninsured portion of losses as casualty losses in the periods in which they are incurred. In addition, we are self-insured for a portion of our exposure to third-party claims related to our employee health insurance plans, workers’ compensation coverage, and general liability exposure. With respect to our exposure to claims of third parties, we establish reserves at levels that reflect our known and estimated losses. The ultimate cost of losses and the impact of unforeseen events may vary materially from recorded reserves, and variances may adversely affect our operating results and financial condition. We purchase insurance to reduce our exposure to losses and limit our financial losses on large individual risks. The availability and cost of insurance are determined by market conditions outside our control. No assurance can be made that we will be able to obtain and maintain insurance at the same levels and on the same terms as we do today. If we are not able to obtain or maintain insurance in amounts we consider appropriate for our business, or if the cost of obtaining such insurance increases materially, we may have to retain a larger portion of the potential loss associated with our exposures to risks.

Natural disasters and severe weather may affect our operating results and financial condition.

Natural disasters such as earthquakes and severe weather such as hurricanes may result in significant damage to our apartment communities. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake) or destructive weather event (such as a hurricane) affecting a region may have a significant adverse effect on our financial condition and results of operations. We cannot accurately predict natural disasters or severe weather, or the number and type of such events that will affect us. As a result, our operating and financial results may vary significantly from one period to the next. Although we anticipate and plan for losses, there can be no assurance that our financial results will not be adversely affected by our exposure to losses arising from natural disasters or severe weather in the future that exceed our previous experience and assumptions.

We depend on our senior management.

Our success depends upon the retention of our senior management, including Terry Considine, our chief executive officer. We have a succession planning and talent development process that is designed to identify potential replacements and develop our team members to provide depth in the organization and a bench of talent on which to draw. However, there are no assurances that we would be able to find qualified replacements for the individuals who make up our senior management if their services were no longer available. The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain key-man life insurance for any of our employees.

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Our business and operations would suffer in the event of significant disruptions or cyber attacks of our information technology systems or our failure to comply with laws, rules and regulations related to privacy and data protection.

Information technology, communication networks, and related systems are essential to the operation of our business. We use these systems to manage our resident and vendor relationships, internal communications, accounting and record-keeping systems, and many other key aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks, which also depend on the strength of our procedures and the effectiveness of our internal controls. Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber attacks.

 

Despite system redundancy, risk transfer, insurance, indemnification, the implementation of security measures, required employee awareness training, and the existence of a disaster recovery plan for our internal information technology systems, our systems and systems maintained by third party vendors with which we do business are vulnerable to damage from any number of sources. We face risks associated with energy blackouts, natural disasters, terrorism, war, telecommunication failures, and cyber attacks and intrusions, such as computer viruses, malware, attachments to e-mails, intrusion, and unauthorized access, including from persons inside our organization or from persons outside our organization with access to our systems. We may also incur additional costs to remedy damages caused by such disruptions. Although we make efforts to maintain the security and integrity of our systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Any compromise of our security could also result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, loss or misuse of the information (which may be confidential, proprietary, and/or commercially sensitive in nature), and a loss of confidence in our security measures, which could harm our business.

 

We also are subject to laws, rules, and regulations in the United States, such as the California Consumer Protection Act, or CCPA (which will become effective on January 1, 2020), relating to the collection, use, and security of employee and other data. Evolving compliance and operational requirements under the CCPA and the privacy laws of other jurisdictions in which we operate impose significant costs that are likely to increase over time. Our failure to comply with laws, rules, and regulations related to privacy and data protection could harm our business or reputation.

Risks Related to Our Indebtedness and Financing

Our existing and future debt financing could result in foreclosure of our apartment communities, prevent us from making distributions on our equity, or otherwise adversely affect our liquidity.

We are subject to the risk that our cash flow from operations will be insufficient to make required payments of principal and interest, and the risk that existing indebtedness may not be refinanced or that the terms of any refinancing will not be as favorable as the terms of existing indebtedness. If we fail to make required payments of principal and interest on our non-recourse debt, our lenders could foreclose on the apartment communities and other collateral securing such debt, which would result in the loss to us of income and asset value. As of December 31, 2019, the majority of our apartment communities were encumbered by debt. Our organizational documents do not limit the amount of debt that we may incur, and we have significant amounts of debt outstanding. Payments of principal and interest may leave us with insufficient cash resources to operate our communities or pay distributions required to be paid in order to maintain Aimco’s qualification as a REIT.

Disruptions in the financial markets could affect our ability to obtain financing and the cost of available financing and could adversely affect our liquidity.

Our ability to obtain financing and the cost of such financing depends on the overall condition of the United States credit markets. During periods of economic uncertainty the United States credit markets may experience significant liquidity disruptions, which may cause the spreads on debt financings to widen considerably and make obtaining financing, both non-recourse property debt and corporate borrowings such as those under our revolving credit agreement, more difficult. In particular, apartment borrowers have benefited from the historic willingness of Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, to make substantial amounts of loans secured by multi-family properties, even in times of economic distress. These two lenders are federally chartered and subject to federal regulation, which is subject to change, making uncertain their prospects and ability to provide liquidity in a future downturn.

If our ability to obtain financing is adversely affected, we may be unable to satisfy scheduled maturities on existing financing through other sources of liquidity, which could result in lender foreclosure on the apartment communities securing such debt and loss of income and asset value, both of which would adversely affect our liquidity.

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Increases in interest rates would increase our interest expense and reduce our profitability.

As of December 31, 2019, we had approximately $445.1 million of variable-rate indebtedness outstanding. We estimate that an increase or decrease in 30-day LIBOR of 100 basis points with constant credit risk spreads would increase or reduce interest expense by approximately $4.5 million on an annual basis.

As of December 31, 2019, we had approximately $177.7 million in cash and cash equivalents and restricted cash, a portion of which bear interest at variable rates indexed to LIBOR-based rates, which may partially mitigate the effect of an increase in variable rates on our variable-rate indebtedness discussed above.

The potential phasing out of LIBOR after 2021 may affect our financial results.

In July 2017, the Financial Conduct Authority, which regulates LIBOR, announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In 2018, the Alternative Reference Rates Committee identified the Secured Overnight Financing Rate, or SOFR, as the alternative to LIBOR. Whether or not SOFR attains market traction as a LIBOR replacement remains a question, and the future of LIBOR at this time is uncertain. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere. Due to the broad use of LIBOR as a reference rate, all financial market participants, including us, are impacted by the risks associated with this transition. Any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition, operating results, and cash flows.

Covenant restrictions may limit our ability to make payments to our investors.

Some of our debt and other securities contain covenants that restrict our ability to make distributions or other payments to our investors unless certain financial tests or other criteria are satisfied. Our revolving credit agreement provides, among other things, that we may not make distributions to our investors during any four consecutive fiscal quarters in an aggregate amount greater than 95% of our Nareit FFO for such period, subject to certain non-cash adjustments, or such amount as may be necessary to maintain Aimco’s REIT status. Our outstanding preferred units prohibit the payment of dividends on our Common Stock or common partnership units if we fail to pay the dividends to which the holders of the preferred units are entitled.

 

Risks Related to Aimco’s Corporate Structure

The Aimco Operating Partnership and its subsidiaries may be prohibited from making distributions and other payments.

All of Aimco’s apartment communities are owned, and all of Aimco’s operations are conducted, by the Aimco Operating Partnership. Further, many of the Aimco Operating Partnership’s apartment communities are owned by subsidiaries of the Aimco Operating Partnership. As a result, Aimco depends on distributions and other payments from the Aimco Operating Partnership, and the Aimco Operating Partnership depends on distributions and payments from its subsidiaries in order to satisfy our financial obligations and make payments to our investors. The ability of the Aimco Operating Partnership and its subsidiaries to make such distributions and other payments depends on their earnings and cash flows and may be subject to statutory or contractual limitations. As an equity investor in the Aimco Operating Partnership and its subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of their debt or other obligations that are senior to our claims.

Limits on ownership of shares specified in Aimco’s charter may result in the loss of economic and voting rights by purchasers that violate those limits.

Aimco’s charter limits ownership of Common Stock by any single stockholder (applying certain “beneficial ownership” rules under the federal securities laws) to 8.7% (or up to 12.0% upon a waiver from Aimco’s Board of Directors) of outstanding shares of Common Stock, or 15% in the case of certain pension trusts, registered investment companies and Mr. Considine (or up to 20.0% for such pension trusts or registered investment companies upon a waiver from Aimco’s Board of Directors). Aimco’s charter also limits ownership of Aimco’s Common Stock and preferred stock by any single stockholder to 8.7% of the value of the outstanding Common Stock and preferred stock, or 15% in the case of certain pension trusts, registered investment companies, and Mr. Considine. The charter also prohibits anyone from buying shares of Aimco’s capital stock if the purchase would result in Aimco losing its REIT status. This could happen if a transaction results in fewer than 100 persons owning all of Aimco’s shares of capital stock or results in five or fewer persons (applying certain attribution rules of the Code) owning 50% or more of the value of all of Aimco’s shares of capital stock. If anyone acquires shares in excess of the ownership limit or in violation of the ownership requirements of the Code for REITs:

 

the transfer will be considered null and void;

 

we will not reflect the transaction on Aimco’s books;

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we may institute legal action to enjoin the transaction;

 

we may demand repayment of any dividends received by the affected person on those shares;

 

we may redeem the shares;

 

the affected person will not have any voting rights for those shares; and

 

the shares (and all voting and dividend rights of the shares) will be held in trust for the benefit of one or more charitable organizations designated by Aimco.

Aimco may purchase the shares of capital stock held in trust at a price equal to the lesser of the price paid by the transferee of the shares or the then current market price. If the trust transfers any of the shares of capital stock, the affected person will receive the lesser of the price paid for the shares or the then current market price. An individual who acquires shares of capital stock that violate the above rules bears the risk that the individual:

 

may lose control over the power to dispose of such shares;

 

may not recognize profit from the sale of such shares if the market price of the shares increases;

 

may be required to recognize a loss from the sale of such shares if the market price decreases; and

 

may be required to repay to us any dividends received from us as a result of his or her ownership of the shares.

Aimco’s charter may limit the ability of a third-party to acquire control of Aimco.

The 8.7% and other ownership limits discussed above may have the effect of delaying or precluding acquisition by a third-party of control of Aimco without the consent of Aimco’s Board of Directors. Aimco’s charter authorizes its Board of Directors to issue up to 510,587,500 shares of capital stock. As of December 31, 2019, 500,787,260 shares were classified as Common Stock, of which 148,885,197 were outstanding, and 9,800,240 shares were classified as preferred stock of which no shares were outstanding. Under Aimco’s charter, its Board of Directors has the authority to classify and reclassify any of Aimco’s unissued shares of capital stock into shares of capital stock with such preferences, conversion or other rights, voting power restrictions, limitations as to dividends, qualifications, or terms or conditions of redemptions as the Board of Directors may determine. The authorization and issuance of a new class of capital stock could have the effect of delaying or preventing someone from taking control of Aimco, where there is a difference of opinion between the Aimco Board of Directors and others as to what is in Aimco’s stockholders’ best interests.

The Maryland General Corporation Law may limit the ability of a third-party to acquire control of Aimco.

As a Maryland corporation, Aimco is subject to various Maryland laws that may have the effect of discouraging offers to acquire Aimco and increasing the difficulty of consummating any such offers, where there is a difference of opinion between the Aimco Board of Directors and others as to what is in Aimco’s stockholders’ best interests. The Maryland General Corporation Law, specifically the Maryland Business Combination Act, restricts mergers and other business combination transactions between Aimco and any person who acquires, directly or indirectly, beneficial ownership of shares of Aimco’s stock representing 10% or more of the voting power without Aimco’s Board of Directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 66-2/3% of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. The Maryland General Corporation Law, specifically the Maryland Control Share Acquisition Act, provides generally that a person who acquires shares of Aimco’s capital stock representing 10% or more of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote. Additionally, the Maryland General Corporation Law provides, among other things, that the Board of Directors has broad discretion in adopting stockholders’ rights plans and has the sole power to fix the record date, time, and place for special meetings of the stockholders. To date, Aimco has not adopted a stockholders’ rights plan. In addition, the Maryland General Corporation Law provides that a corporation that:

 

has at least three directors who are not officers or employees of the entity or related to an acquiring person; and

 

has a class of equity securities registered under the Securities Exchange Act of 1934, as amended, may elect in its charter or bylaws or by resolution of the board of directors to be subject to all or part of a special subtitle that provides that:

 

the corporation will have a staggered board of directors;

 

any director may be removed only for cause and by the vote of two-thirds of the votes entitled to be cast in the election of directors generally, even if a lesser proportion is provided in the charter or bylaws;

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the number of directors may only be set by the board of directors, even if the procedure is contrary to the charter or bylaws;

 

vacancies may only be filled by the remaining directors, even if the procedure is contrary to the charter or bylaws; and

 

the secretary of the corporation may call a special meeting of stockholders at the request of stockholders only on the written request of the stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting, even if the procedure is contrary to the charter or bylaws.

To date, Aimco has not made any of the elections described above.

Risks Related to Tax Laws and Regulations

Aimco may fail to qualify as a REIT.

If Aimco fails to qualify as a REIT, Aimco will not be allowed a deduction for dividends paid to its stockholders in computing its taxable income, and will be subject to United States federal income tax at regular corporate rates. This would substantially reduce our funds available for distribution to our investors. Unless entitled to relief under certain provisions of the Code, Aimco also would be disqualified from taxation as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT. In addition, Aimco’s failure to qualify as a REIT would place us in default under our revolving credit agreement.

We believe that Aimco operates, and has since its taxable year ended December 31, 1994, operated, in a manner that enables it to meet the requirements for qualification as a REIT for United States federal income tax purposes. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Moreover, even a technical or inadvertent mistake could jeopardize our REIT status. Aimco’s continued qualification as a REIT will depend on its satisfaction of certain asset, income, investment, organizational, distribution, stockholder ownership, and other requirements on a continuing basis. Aimco’s ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we do not obtain independent appraisals. Aimco’s compliance with the REIT annual income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt or equity for United States federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, there can be no assurance that the Internal Revenue Service, or the IRS, will not contend that our interests in subsidiaries or other issuers constitutes a violation of the REIT requirements. Moreover, future economic, market, legal, tax, or other considerations may cause Aimco to fail to qualify as a REIT, or Aimco’s Board of Directors may determine to revoke its REIT status.

REIT distribution requirements limit our available cash.

As a REIT, Aimco is subject to annual distribution requirements. The Aimco Operating Partnership pays distributions intended to enable Aimco to satisfy its distribution requirements. This limits the amount of cash available for other business purposes, including amounts to fund our growth. Aimco generally must distribute annually at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, in order for its distributed earnings not to be subject to United States federal corporate income tax. We intend to make distributions to Aimco’s stockholders to comply with the requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell apartment communities or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code.

Aimco may be subject to federal and state income taxes, in certain circumstances.

Even if Aimco qualifies as a REIT, Aimco may be subject to United States federal income and excise taxes in various situations, such as on its undistributed income. Aimco could also be required to pay a 100% tax on any net income on non-arm’s length transactions between Aimco and a taxable REIT subsidiary and on any net income from sales of apartment communities that were held for sale primarily in the ordinary course. State and local tax laws may not conform to the United States federal income tax treatment, and Aimco may be subject to state or local taxation in various state or local jurisdictions in which Aimco transacts business. Any taxes imposed on Aimco would reduce our operating cash flow and net income and could negatively impact our ability to pay dividends and distributions.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

REITs are entitled to a United States federal tax deduction for dividends paid to their stockholders. As compared to other taxable corporations, this ability to reduce or eliminate the REIT’s taxable income by paying dividends to stockholders is a principal benefit of maintaining REIT status, generally resulting in a lower combined tax liability of the REIT and its

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stockholders as compared to that of the combined tax liability of other taxable corporations and their stockholders. Notwithstanding this combined benefit, dividends payable by REITs may result in marginally higher taxes to the stockholder.

C-corporations are generally required to pay United States federal income tax on earnings. After tax earnings are then available for stockholder dividends. The maximum United States federal tax rate applicable to income from “qualified dividends” payable to United States stockholders that are individuals, trusts, and estates is currently 20%, plus the 3.8% investment tax surcharge. While dividends payable by REITs are generally not eligible for the qualified dividend reduced rates, stockholders that are individuals, trusts, or estates may deduct 20% of the aggregate amount of ordinary dividends from REITs. This deduction is available for taxable years beginning after December 31, 2017, and before January 1, 2026, and will generally cause the maximum tax rate for ordinary dividends from REITs to be 29.6%, plus the 3.8% investment tax surcharge. The more favorable tax rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts, and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporates that pay dividends, which could adversely affect the value of the shares of REITs, including Aimco Common Stock.

Complying with the REIT requirements may cause Aimco to forgo otherwise attractive business opportunities.

To qualify as a REIT for United States federal income tax purposes, Aimco must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts distributed to Aimco stockholders, and the ownership of Aimco stock. As a result of these tests, Aimco may be required to make distributions to stockholders at disadvantageous times or when Aimco does not have funds readily available for distribution, forgo otherwise attractive investment opportunities, liquidate assets in adverse market conditions, or contribute assets to a TRS that is subject to regular corporate federal income tax.

Changes to United States federal income tax laws could materially and adversely affect Aimco and Aimco’s stockholders.

The present United States federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial, or administrative action at any time, which could affect the United States federal income tax treatment of an investment in Aimco Common Stock. The United States federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS, and the United States Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. We cannot predict how changes in the tax laws might affect Aimco or Aimco’s stockholders. Revisions in federal tax laws and interpretations thereof could significantly and negatively affect Aimco’s ability to qualify as a REIT and the tax considerations relevant to an investment in Aimco Common Stock, or could cause Aimco to change its investments and commitments.

Government housing regulations may limit the opportunities at some of our apartment communities and failure to comply with resident qualification requirements may result in financial penalties and/or loss of benefits, such as rental revenues paid by government agencies. Additionally, the government may cease to operate or reduce funding for government housing programs which would result in a loss of benefits from those programs.

We own equity interests in entities that own certain apartment communities that benefit from governmental programs intended to provide housing to people with low or moderate incomes. These programs, which are usually administered by the United States Department of Housing and Urban Development, or HUD, or state housing finance agencies, typically provide one or more of the following: mortgage insurance; favorable financing terms; tax-exempt interest; historic or low-income housing tax credits; or rental assistance payments to the apartment community owners. As a condition of the receipt of assistance under these programs, the apartment communities must comply with various requirements, which typically limit rents to pre-approved amounts and limit our choice of residents to those with incomes at or below certain levels. Failure to comply with these requirements may result in financial penalties or loss of benefits. We are usually required to obtain the approval of HUD in order to acquire or dispose of a significant interest in or manage a HUD-assisted apartment community. We may not always receive such approval.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Additional information about our consolidated real estate, including property debt, is contained in “Schedule III - Real Estate and Accumulated Depreciation” in this Annual Report on Form 10-K.

Our portfolio is diversified by both price point and geography and consists of market rate apartment communities in which we own a substantial interest. Our portfolio includes garden style, mid-rise, and high-rise apartment communities located in 17 states and the District of Columbia. Our portfolio strategy seeks predictable rent growth from a portfolio of apartment communities diversified among some of the largest markets in the United States, and that is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality. As of December 31, 2019, our portfolio consisted of roughly one-half “A” quality communities and one-half “B” and “C+” quality communities. Please refer to the Executive Overview section in Item 7 for a description of our portfolio quality ratings. The following table sets forth information on the apartment communities in our portfolio as of December 31, 2019:

 

 

Number of

Apartment

Communities

 

 

Number of

Apartment

Homes

 

 

Average

Economic

Ownership

 

 

Average

Quality

Rating (1)

Atlanta

 

 

4

 

 

 

505

 

 

 

100

%

 

A

Bay Area

 

 

12

 

 

 

2,632

 

 

 

100

%

 

B

Boston

 

 

15

 

 

 

4,689

 

 

 

100

%

 

C+

Chicago

 

 

7

 

 

 

1,671

 

 

 

100

%

 

B

Denver

 

 

8

 

 

 

2,151

 

 

 

98

%

 

B

Greater New York

 

 

18

 

 

 

1,039

 

 

 

100

%

 

B

Greater Washington, D.C.

 

 

12

 

 

 

5,457

 

 

 

100

%

 

C+

Los Angeles

 

 

13

 

 

 

4,347

 

 

 

100

%

 

A

Miami

 

 

5

 

 

 

2,448

 

 

 

100

%

 

A

Philadelphia

 

 

9

 

 

 

2,748

 

 

 

97

%

 

A

San Diego

 

 

12

 

 

 

2,423

 

 

 

97

%

 

B

Seattle

 

 

2

 

 

 

239

 

 

 

100

%

 

B

Other markets

 

 

7

 

 

 

2,490

 

 

 

99

%

 

B

   Total portfolio (2)

 

 

124

 

 

 

32,839

 

 

 

99

%

 

B/B+

(1)

Average quality rating is based on REIS market data as of September 30, 2019.

(2)

Total portfolio represents the number of apartment communities we owned an equity interest in. Of our total portfolio, we consolidate 120 apartment communities with 32,697 apartment homes.

Our consolidated apartment communities contained, on average, 272 apartment homes, with the largest community containing 2,113 apartment homes. These apartment communities offer residents a range of amenities, including resort pools with cabanas, grills, clubhouses, spas, fitness centers, package lockers, dog parks, and large open spaces. Many of the apartment homes offer features such as granite countertops, wood flooring, stainless steel appliances, fireplaces, spacious closets, washer and dryer connections, balconies, and patios.

The majority of our consolidated apartment communities are encumbered by property debt. As of December 31, 2019, apartment communities in our portfolio were encumbered by, in aggregate, $4.3 billion of property debt with a weighted-average interest rate of 3.89% and a weighted-average maturity of 7.5 years. The apartment communities collateralizing this non-recourse property debt have an estimated aggregate fair value of $10.9 billion. As of December 31, 2019, we held unencumbered apartment communities with an estimated fair value of approximately $2.4 billion.

On July 2, 2019, we acquired a 95% interest in 1001 Brickell Bay Drive, a 1.8-acre waterfront parcel in Miami, Florida, currently improved with an office building. 1001 Brickell Bay Drive is excluded from our apartment communities table above.

As further discussed in Note 6 to the consolidated financial statements in Item 8, we are engaged in discussions with regulatory agencies regarding environmental matters at two apartment communities we, or other entities, previously owned. Although the outcome of these matters is uncertain, we do not expect the resolution to have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Aimco

Aimco’s Common Stock has been listed and traded on the NYSE under the symbol “AIV” since July 22, 1994.

On February 21, 2020, there were 148,930,402 shares of Common Stock outstanding, held by 815 stockholders of record. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.

Unregistered Sales of Equity Securities

From time to time, Aimco may issue shares of Common Stock in exchange for OP Units, defined under The Aimco Operating Partnership heading below. Such shares are issued based on an exchange ratio of one share for each common OP Unit. Please refer to Note 8 to the consolidated financial statements in Item 8 for further discussion of such exchanges. Aimco may also issue shares of Common Stock in exchange for limited partnership interests in consolidated real estate partnerships. During the three months ended December 31, 2019, Aimco did not issue any shares of Common Stock in exchange for OP Units or limited partnership interests in consolidated real estate partnerships.

Repurchases of Equity Securities

There were no repurchases by Aimco of its common equity securities during the three months ended December 31, 2019. Aimco’s Board of Directors has, from time to time, authorized Aimco to repurchase shares of its outstanding Common Stock. As of December 31, 2019, Aimco was authorized to repurchase approximately 10.6 million shares. This authorization has no expiration date. These repurchases may be made from time to time in the open market or in privately negotiated transactions.

The Aimco Operating Partnership

Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are referred to as OP Units. OP Units include common partnership units, which we refer to as common OP Units, as well as partnership preferred units, or preferred OP Units. There is no public market for the Aimco Operating Partnership’s common partnership units, including common OP Units, and we have no intention of listing the common partnership units on any securities exchange. In addition, the Aimco Operating Partnership’s Partnership Agreement restricts the transferability of common partnership units, including common OP Units.

On February 21, 2020, there were 159,442,294 common partnership units and equivalents outstanding (148,930,402 of which were held by Aimco) that were held by 2,394 unitholders of record.

Unregistered Sales of Equity Securities

The Aimco Operating Partnership did not issue any unregistered OP units during the three months ended December 31, 2019.

Repurchases of Equity Securities

The Aimco Operating Partnership’s Partnership Agreement generally provides that after holding common OP Units for one year, limited partners other than Aimco have the right to redeem their common OP Units for cash or, at our election, shares of Aimco Common Stock on a one-for-one basis (subject to customary antidilution adjustments). No common OP Units or preferred OP Units held by Limited Partners were redeemed for shares of Aimco Common Stock during the three months ended December 31, 2019.

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The following table summarizes the Aimco Operating Partnership’s repurchases, or redemptions in exchange for cash, of common OP Units for the three months ended December 31, 2019:

Fiscal period

 

Total

Number of

Units

Purchased

 

 

Average

Price Paid

per Unit

 

 

Total Number of

Units Purchased as Part

of Publicly Announced

Plans or Programs

 

Maximum Number

of Units that May Yet

Be Purchased Under

Plans or Programs

October 1 - October 31, 2019

 

 

13,676

 

 

$

51.46

 

 

N/A

 

N/A

November 1 - November 30, 2019

 

 

9,575

 

 

 

54.32

 

 

N/A

 

N/A

December 1 - December 31, 2019

 

 

5,484

 

 

 

53.62

 

 

N/A

 

N/A

   Total

 

 

28,735

 

 

$

52.83

 

 

 

 

 

 

Dividend and Distribution Payments

As a REIT, Aimco is required to distribute annually to holders of its Common Stock at least 90% of its “real estate investment trust taxable income,” which, as defined by the Code and United States Department of Treasury regulations, is generally equivalent to net taxable ordinary income. Aimco’s Board of Directors determines and declares its dividends. In making a dividend determination, Aimco’s Board of Directors considers a variety of factors, including: REIT distribution requirements; current market conditions; liquidity needs; and other uses of cash, such as for deleveraging and accretive investment activities. Aimco’s Board of Directors targets a dividend payout ratio between 65% and 70% of Adjusted Funds From Operations.

Stockholders receiving such dividend and any future dividend payable in cash and shares of Aimco Common Stock will be required to include the full amount of such dividends as ordinary income to the extent of Aimco’s current and accumulated earnings and profits, as determined for United States federal income tax purposes for the year of such dividends, and may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. With respect to certain non-United States stockholders, Aimco may be required to withhold United States tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in Common Stock.

The Board of Directors of the Aimco Operating Partnership’s general partner determines and declares distributions on OP Units. Aimco, through wholly-owned subsidiaries, is the general and special limited partner of and, as of December 31, 2019, owned a 94.0% ownership interest in the common partnership units of the Aimco Operating Partnership. The Aimco Operating Partnership holds all of Aimco’s assets and manages the daily operations of Aimco’s business. The distributions paid by the Aimco Operating Partnership to Aimco are used by Aimco to fund the dividends paid to its stockholders. Accordingly, the per share dividends Aimco pays to its stockholders generally equal the per unit distributions paid by the Aimco Operating Partnership to holders of its common partnership units.

Our revolving credit agreement includes customary covenants, including a restriction on dividends and other restricted payments, but permits dividends and distributions during any four consecutive fiscal quarters in an aggregate amount of up to 95% of Aimco’s Funds From Operations for such period, subject to certain non-cash adjustments, or such amount as may be necessary to maintain Aimco’s REIT status.

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Performance Graph

The following graph compares cumulative total returns for Aimco’s Common Stock, the MSCI US REIT Index, the Nareit Equity Apartment Index, and the Standard & Poor’s 500 Total Return Index, or S&P 500 Index. The MSCI US REIT Index is published by Morgan Stanley Capital International Inc., a provider of equity indices. The Nareit Equity Apartment Index is published by The National Association of Real Estate Investment Trusts, or Nareit, a representative of real estate investment trusts and publicly traded real estate companies with interests in United States real estate and capital markets. The MSCI US REIT Index reflects total shareholder return for a broad range of REITs and the Nareit Equity Apartment Index provides a more direct multifamily peer comparison of total shareholder return. The indices are weighted for all companies that fit the definitional criteria of the particular index and are calculated to exclude companies as they are acquired and to add companies to the index calculation as they become publicly traded companies. All companies that fit the definitional criteria and existed at the point in time presented are included in the index calculations. The graph assumes the investment of $100 in Aimco’s Common Stock and in each index on December 31, 2014, and that all dividends paid have been reinvested. The historical information set forth below is not necessarily indicative of future performance.

 

 

 

For the years ended December 31,

 

Index (1)

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

Aimco

 

 

100.00

 

 

 

111.15

 

 

 

130.36

 

 

 

129.48

 

 

 

134.83

 

 

 

163.89

 

MSCI US REIT Index

 

 

100.00

 

 

 

102.52

 

 

 

111.34

 

 

 

116.98

 

 

 

111.64

 

 

 

140.48

 

Nareit Equity Apartment Index

 

 

100.00

 

 

 

116.45

 

 

 

119.78

 

 

 

124.24

 

 

 

128.83

 

 

 

162.74

 

S&P 500 Index

 

 

100.00

 

 

 

101.38

 

 

 

113.51

 

 

 

138.29

 

 

 

132.23

 

 

 

173.86

 

 

(1)

Source: S&P Global Market Intelligence © 2020

The Performance Graph will not be deemed to be incorporated by reference into any filing by Aimco under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that Aimco specifically incorporates the same by reference.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is based on audited historical financial statements of Aimco and the Aimco Operating Partnership, unless otherwise noted. This information should be read in conjunction with such financial statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein or in previous filings with the Securities and Exchange Commission.

(dollar amounts in thousands, except per share data)

 

Years Ended December 31,

 

 

 

2019

 

 

2018 (1)

 

 

2017

 

 

2016

 

 

2015

 

OPERATING DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

914,294

 

 

$

972,410

 

 

$

1,005,437

 

 

$

995,854

 

 

$

981,310

 

Net income

 

 

508,027

 

 

 

716,603

 

 

 

347,079

 

 

 

483,273

 

 

 

271,983

 

Net income attributable to Aimco/the Aimco Operating

   Partnership per common share/unit – diluted (2)

 

$

3.15

 

 

$

4.34

 

 

$

2.02

 

 

$

2.75

 

 

$

1.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,828,739

 

 

$

6,190,004

 

 

$

6,079,040

 

 

$

6,232,818

 

 

$

6,118,681

 

Total indebtedness

 

 

4,505,590

 

 

 

4,075,665

 

 

 

3,861,770

 

 

 

3,648,206

 

 

 

3,599,648

 

Non-recourse property debt of partnerships served by

   Asset Management business

 

 

 

 

 

 

 

 

227,141

 

 

 

236,426

 

 

 

249,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends/distributions declared per common

   share/unit

 

$

1.56

 

 

$

1.52

 

 

$

1.44

 

 

$

1.32

 

 

$

1.18

 

(1)

In July 2018, we sold our Asset Management business and our four affordable apartment communities located in the Hunters Point area of San Francisco.

(2)

On February 20, 2019, we completed a reverse stock split whereby every 1.03119 Aimco common share and Aimco Operating Partnership common partnership unit was combined into one Aimco common share and Aimco Operating Partnership common partnership unit, respectively. We have revised the outstanding share and unit counts, presentation of share and unit activity, and earnings per share and unit, as if the reverse split occurred on December 31, 2014.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

We are focused on the ownership, management, redevelopment, and some development of quality apartment communities located in several of the largest markets in the 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 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, avoiding disparity that can result from application of GAAP to investment properties and various ownership structures. Some investors focus on multiples of AFFO and 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. Over the last five years as of December 31, 2019, our Economic Income grew at a compounded annual return of 10%, comprised of a 6.9% compounded annual growth in NAV per share and $7.08 in cash dividends per share paid over the period. In 2019, AFFO per share grew $0.04, to $2.20 per share.

Year-over-year as of December 31, 2019, our NAV per share increased by about 3.9%, which, with our cash dividend, provided Economic Income of 6.8%.

Financial Highlights

Net income attributable to common stockholders per common share, on a dilutive basis, decreased by $1.19 during the year ended December 31, 2019 compared to 2018, primarily due to lower gains from dispositions.

We sold our Asset Management business in July 2018, accepting near-term earnings dilution as the price of an increased long-term growth rate. In 2019, we overcame these earnings headwinds and Pro forma FFO per share increased by $0.05, or 2.0%, for the year ended December 31, 2019 compared to 2018. For the three months ended December 31, 2019 compared to 2018, the first comparative period without the Asset Management business, our Pro forma FFO and AFFO per share increased 5% and 12%, respectively.

The year-over-year increase in Pro Forma FFO was due primarily to contribution from Same Store property net operating income growth of 4.3%, driven by a 3.8% increase in revenue, partially offset by a 2.4% increase in expenses. The increase in Same Store net operating income was offset partially by earnings dilution from the sale of the Asset Management business and lower tax benefit. AFFO per share also increased by $0.04, or 1.9%, for the year ended December 31, 2019 compared to 2018 due to the $0.05 increase in Pro forma FFO per share, partially offset by a $0.01 per share increase in capital replacement spending.

Our business is organized around five areas of strategic focus: operational excellence; redevelopment and development; portfolio management; balance sheet; and team and culture. The results from the execution of our business plan in 2019 are further described in the sections that follow.

Operational Excellence

We own and operate a portfolio of apartment communities, diversified by both geography and price point. As of December 31, 2019, our portfolio included 124 apartment communities with 32,839 apartment homes in which we held an average ownership of approximately 99%, and approximately 80% of the value of our portfolio, measured by gross asset value (the estimated fair value of our communities), was attributable to Same Store communities.

Our property operations team produced solid results for our portfolio for the year ended December 31, 2019. Same Store highlights include:

 

Average daily occupancy of 97.1%, 60 basis points higher than the year ended 2018;

 

Net operating income increased 4.3% with a 73.7% net operating income margin, 40 basis points higher than the margin for the year ended 2018; and

 

Rent increases on renewals and new leases averaged 4.9% and 1.9%, respectively, for a weighted-average increase of 3.4%, 40 basis points higher than the year ended 2018.

Our focus on efficient operations through productivity initiatives such as centralization of administrative tasks, optimization of economies of scale at the corporate level, increased automation, and investment in more durable, longer-lived materials has

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helped us control operating expenses. These and other innovations contributed to limiting growth in Same Store controllable operating expense, defined as property expenses less taxes, insurance, and utility expenses, compounding for the past 12 years at an annual rate of negative 0.2%. Our 2019 controllable operating expenses were flat compared to 2018.

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 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. Over the past five years, we have spent approximately $1.0 billion on redevelopment and development, targeting FCF internal rates of return of approximately 9% to 11% on these investments.

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 to the scope and timing of spending to align with changing market conditions and customer preferences.

During the year ended December 31, 2019, we invested $229.8 million in redevelopment and development, an increase of approximately 30% compared to 2018. We continued redevelopment activities at Bay Parc and the ground-up construction at Parc Mosaic and The Fremont on the Anschutz Medical Campus. We also began the redevelopment of the North Tower at Flamingo Point and 707 Leahy, and ground-up construction at Eldridge Townhomes adjacent to our Elm Creek apartment community.

The following table summarizes our significant redevelopment and development communities (dollars in millions):

 

Location

 

Apartment Homes

Approved for

Redevelopment

 

 

Apartment Homes Completed

 

 

Percentage of Completed Homes Leased

 

 

Estimated Net Redevelopment Investment

 

 

Expected Initial Occupancy

Short-cycle redevelopments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Bay Parc

Miami, FL

 

 

105

 

 

 

60

 

 

 

97

%

 

$

28.3

 

 

N/A

Long-cycle redevelopments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   707 Leahy (1)

Redwood City, CA

 

 

110

 

 

 

 

 

 

%

 

 

23.7

 

 

1Q 2020

   Eldridge (formerly Elm

      Creek) Townhomes

Elmhurst, IL

 

 

58

 

 

 

 

 

 

%

 

 

35.1

 

 

2Q 2020

   Flamingo Point (2)

Miami Beach, FL

 

 

886

 

 

 

 

 

 

%

 

 

280.0

 

 

3Q 2021

   The Fremont

Denver, CO (MSA)

 

 

253

 

 

 

 

 

 

%

 

 

87.0

 

 

3Q 2020

   Parc Mosaic (3)

Boulder, CO

 

 

226

 

 

 

185

 

 

 

59

%

 

 

123.4

 

 

3Q 2019

      Total

 

 

 

1,638

 

 

 

245

 

 

 

 

 

 

$

577.5

 

 

 

(1)

At 707 Leahy, we completed construction on the first building, containing 12 apartment homes, in January. Construction on the remaining homes is on schedule to be complete during the three months ending June 30, 2020.

(2)

At Flamingo Point, we completed construction on the entryway, retail, and amenities during the three months ended December 31, 2019, and continued the full renovation of the North Tower.

(3)

At Parc Mosaic, we completed three buildings in 2019, the first in August, the second in October, and the third in late December. As of December 31, 2019, the first two buildings were 81% leased and in January, we welcomed the first residents of the third building. The fourth, and final, building was delayed slightly and is now expected to be finished during the three months ending March 31, 2020. Notwithstanding this delay, we expect to achieve stabilized occupancy during the three months ending December 31, 2020, consistent with prior projections.

As of December 31, 2019, our total estimated net investment at redevelopment and development communities is $577.5 million, with a projected weighted-average net operating income yield on these investments of 5.3%, assuming untrended rents. As of December 31, 2019, $309.2 million of this total has been funded. The remaining estimated net investment of $268.3 million on these communities is expected to be funded in 2020 and future years, on a leverage-neutral basis, with proceeds from sales of apartment communities with lower forecasted FCF internal rates of return.

When possible, we prefer redevelopments that 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. We currently have six short-cycle projects, including Bay Parc, ongoing in our portfolio. During the year ended December 31, 2019, we completed 150 apartment homes, with another 21 homes under construction as of December 31, 2019.

During the year ended December 31, 2019, we leased 251 redeveloped or newly developed apartment homes. As of December 31, 2019, our exposure to lease-up at active redevelopment and developments was 866 apartment homes, or less than 3% of our homes.

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Please refer to the Redevelopment and Development subsection to the Liquidity and Capital Resources section for additional information regarding our redevelopment and development investment during the year ended December 31, 2019.

Portfolio Management

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 in the 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 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 December 31, 2019:

Average revenue per Aimco apartment home (1)

 

$

2,272

 

Portfolio average rents as a percentage of local market average rents

 

 

113

%

Percentage A (4Q 2019 average revenue per Aimco apartment home $2,943)

 

 

54

%

Percentage B (4Q 2019 average revenue per Aimco apartment home $2,006)

 

 

29

%

Percentage C+ (4Q 2019 average revenue per Aimco apartment home $1,782)

 

 

17

%

(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 revenue per apartment home was $2,272 for the three months ended December 31, 2019, representing an increase of 7% compared to the same period in 2018, and a 7.2% compounded annual growth rate over the past five years. This increase is due to growth in Same Store revenue as well as our acquisition activities, lease-up of redevelopment and acquisition communities, and the sale of communities with average monthly revenues per apartment home lower than those of the retained portfolio.

During the year ended December 31, 2019, we reallocated capital from slower-growth markets such as Chicago and reinvested the proceeds in higher-growth markets such as Miami, Denver, and Boston.

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. 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.

Acquisitions

We follow a disciplined paired trade policy in making investments. We evaluate potential acquisitions seeking FCF internal rates of returns higher than those of 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.

During the year ended December 31, 2019, we acquired three properties: One Ardmore in Ardmore, Pennsylvania; Prism (50 Rogers), a community under construction in Cambridge, Massachusetts; and 1001 Brickell Bay Drive in Miami, Florida. Together, these acquisitions have an expected weighted-average FCF internal rate of return of 9%, approximately 300 basis points better than expected from the properties being sold, or to be sold, in paired trades to fund the acquisitions.

Mezzanine Investment

On November 26, 2019, we made a five-year, $275.0 million mezzanine loan at a 10% annual rate to the partnership owning Parkmerced Apartments. The loan is secured by a second-priority deed of trust. We simultaneously received a ten-year

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option to acquire a 30% interest in the partnership at an exercise price of $1.0 million, increased by 30% of future capital spending to progress development and redevelopment of Parkmerced Apartments.

Parkmerced Apartments is a 152-acre site in the southwest corner of San Francisco, currently improved with 3,221 apartment homes completed shortly before and after World War II. These apartment homes are subject to City of San Francisco rent control. The development of the site is governed by a development agreement that allows for 8,900 total residential units, with the new units exempt from City of San Francisco rent control. The partnership, which is the borrower and in which we have the option to acquire 30% ownership, owns 3,165 of the existing rent-controlled apartment homes, which excludes apartment homes transferred as part of an earlier phase of development to which we are not a party, as well as the vested right to develop 4,093 of the new market-rate homes.

The mezzanine loan provides us with current income with minimal expected downside risk. The option is expected to provide us with an opportunity to participate in substantial value creation from the vested development rights.

Dispositions

During the year ended December 31, 2019, we sold 12 apartment communities, generating net proceeds of $619.4 million used to fund acquisitions, redevelopment, development, the repurchase of Aimco shares in the fourth quarter of 2018, and other capital investments. We delayed approximately $300 million of planned fourth quarter 2019 and January 2020 sales. While this delay temporarily increased leverage, we expect a better execution as the transaction market remains deep, liquid, and attractively priced.

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 as well as holding properties with substantial value unencumbered by property debt; and use 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, outstanding preferred equity and redeemable noncontrolling interests in a consolidated real estate partnership. Please refer to the Liquidity and Capital Resources section for additional information regarding our leverage.

Our target leverage ratios are Proportionate Debt and Preferred Equity to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends greater than 2.5x. Our leverage ratios for the three months ended December 31, 2019, are presented below:

Proportionate Debt to Adjusted EBITDAre

 

7.4x

Proportionate Debt and Preferred Equity to Adjusted EBITDAre

 

7.6x

Adjusted EBITDAre to Adjusted Interest Expense

 

3.7x

Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends

 

3.5x

We calculate Adjusted EBITDAre and Adjusted Interest Expense used in our leverage ratios based on the most recent three month amounts, annualized. The sales delay mentioned above increased Proportionate Debt to Adjusted EBITDAre and Proportionate Debt and Preferred Equity to Adjusted EBITDAre by 0.3x as of December 31, 2019. We expect a gradual decline in leverage to EBITDAre ratios throughout 2020, reaching approximately 6.4x and 6.5x, respectively, at year end. In future years, we expect earnings growth from completed redevelopments will increase EBITDAre and further reduce our leverage ratios.

Please refer to the Leverage Ratios subsection of the Non-GAAP Measures section for further information about the calculation of our leverage ratios.

Refinancing Activity

During the year ended December 31, 2019, we financed $772.6 million of new non-recourse, fixed-rate property debt. These loans have a weighted-average interest rate of 3.32%, a weighted-average term to maturity of 11.4 years, and contributed an approximately 29 basis point decrease in our annual cost of leverage compared to 2018.

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Liquidity

Our liquidity consists of cash balances and available capacity on our revolving credit facility. As of December 31, 2019, we had cash and restricted cash of $177.7 million and had the capacity to borrow up to $517.8 million on our revolving credit facility, after consideration of $7.2 million letters of credit backed by the facility. We use our credit facility primarily for working capital and other short-term purposes and to secure letters of credit.

We manage our financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. As of December 31, 2019, we held unencumbered apartment communities with an estimated fair market value of approximately $2.4 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.

Equity Capital Activities

On February 3, 2019, Aimco’s Board of Directors declared a special dividend on the common stock that consisted of $67.1 million in cash and 4.5 million shares of Common Stock. The special dividend also included the regular quarterly cash dividend of $0.39 per share. Simultaneously, Aimco’s Board of Directors authorized a reverse stock split, effective on February 20, 2019, in which every 1.03119 Aimco common share was combined into one Aimco common share, which was effective at the close of business on February 20, 2019. Taken together, the total number of shares outstanding after the stock dividend and reverse split was unchanged from the number of shares outstanding immediately prior to the two actions. Please refer to Notes 7 and 8 to the consolidated financial statements in Item 8 for further information regarding these transactions and the corresponding impact to the Aimco Operating Partnership’s common unitholders.

On January 28, 2020, our Board of Directors declared a quarterly cash dividend of $0.41 per share of Common Stock, representing an increase of 5% compared to the regular quarterly dividends paid in 2019. This amount is payable on February 28, 2020, to stockholders of record on February 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 becoming United 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 by the United States military. Out of hundreds of participating companies in 2019, Aimco was one of only seven recognized as a “Top Workplace” in Colorado for each of the past seven years. Aimco was also recognized as a Top Workplace in the Bay Area in 2019. Also in 2019, Aimco was the only real estate company to receive a BEST award from the Association for Talent Development in recognition of our company-wide success in talent development, marking our second 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 consolidated financial statements in Item 8. 

Year Ended December 31, 2019, Compared to December 31, 2018

Net income attributable to Aimco and net income attributable to the Aimco Operating Partnership decreased by $192.1 million and $200.5 million, respectively, for the year ended December 31, 2019 compared to 2018, as described more fully below.

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Property Operations

We have four segments: Same Store, Redevelopment and Development, Acquisition, and Other 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 that have not achieved a stabilized level of operations, 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 segment includes those communities that we have acquired since the beginning of a two-year comparable period. Our Other Real Estate segment primarily includes apartment communities that are subject to limitations on rent increases, apartment communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale, certain retail spaces, and 1001 Brickell Bay Drive.

As of December 31, 2019, our Same Store segment included 91 apartment communities with 26,649 apartment homes.

From December 31, 2018 to December 31, 2019, on a net basis, our Same Store segment decreased by two apartment communities and increased by 744 apartment homes. These changes consisted of:

 

the addition of eight redeveloped and developed apartment communities with 3,008 apartment homes previously classified in the Redevelopment and Development segment, now classified as Same Store upon maintaining stabilized operations for the entirety of the periods presented;

 

the addition of one apartment community with 463 apartment homes, previously classified in the Acquisition segment, now classified as Same Store because we have now owned it for the entirety of both periods presented;

 

the addition of one apartment community with 246 apartment homes, previously classified in the Other Real Estate segment, which maintained stabilized operations for the entirety of the periods presented following a casualty event;

 

the addition of one apartment community with 72 apartment homes that we separated into a newly branded stand-alone community from an existing community that was previously classified in the Redevelopment and Development segment, resulting in an increase of one community with no change in the total number of apartment homes;

 

the reduction of two apartment communities with 153 apartment homes for which we commenced redevelopment during the period and were reclassified to the Redevelopment and Development segment;

 

the reduction of one apartment community with 78 apartment homes that we expect to sell within 12 months that is now classified in the Other Real Estate segment; and

 

the reduction of 10 apartment communities with 2,814 apartment homes that were sold as of December 31, 2019.

As of December 31, 2019: our Redevelopment and Development segment included seven apartment communities with 3,143 apartment homes; our Acquisition segment included seven apartment communities with 1,590 apartment homes; and our Other Real Estate segment included 15 apartment communities with 1,315 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 resident utility reimbursement, less direct property operating expenses, net of resident utility reimbursement, 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 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 13 to the consolidated financial statements in Item 8 for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues attributable to real estate and property operating expenses attributable to real estate.

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Proportionate Property Net Operating Income

The results of our segments for the years ended December 31, 2019 and 2018, as presented below, are based on the apartment community classifications as of December 31, 2019.

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Rental and other property revenues, before utility reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Same Store

$

691,379

 

 

$

665,835

 

 

$

25,544

 

 

 

3.8

%

   Redevelopment and Development

 

75,522

 

 

 

76,687

 

 

 

(1,165

)

 

 

(1.5

%)

   Acquisition

 

42,038

 

 

 

27,923

 

 

 

14,115

 

 

 

50.5

%

   Other Real Estate

 

45,105

 

 

 

37,647

 

 

 

7,458

 

 

 

19.8

%

      Total

 

854,044

 

 

 

808,092

 

 

 

45,952

 

 

 

5.7

%

Property operating expenses, net of utility reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Same Store

 

181,802

 

 

 

177,466

 

 

 

4,336

 

 

 

2.4

%

   Redevelopment and Development

 

27,919

 

 

 

27,836

 

 

 

83

 

 

 

0.3

%

   Acquisition

 

11,715

 

 

 

7,689

 

 

 

4,026

 

 

 

52.4

%

   Other Real Estate

 

17,717

 

 

 

14,910

 

 

 

2,807

 

 

 

18.8

%

      Total

 

239,153

 

 

 

227,901

 

 

 

11,252

 

 

 

4.9

%

Proportionate property net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Same Store

 

509,577

 

 

 

488,369

 

 

 

21,208

 

 

 

4.3

%

   Redevelopment and Development

 

47,603

 

 

 

48,851

 

 

 

(1,248

)

 

 

(2.6

%)

   Acquisition

 

30,323

 

 

 

20,234

 

 

 

10,089

 

 

 

49.9

%

   Other Real Estate

 

27,388

 

 

 

22,737

 

 

 

4,651

 

 

 

20.5

%

      Total

$

614,891

 

 

$

580,191

 

 

$

34,700

 

 

 

6.0

%

For the year ended December 31, 2019, compared to 2018, our Same Store proportionate property net operating income increased by $21.2 million, or 4.3%. This increase was attributable primarily to a $25.5 million, or 3.8%, increase in rental and other property revenues due to higher average revenues of $69 per apartment home comprised of increases in rental rates and a 60 basis point increase in average daily occupancy. Renewal rents increased by 4.9% and new lease rents increased by 1.9%, resulting in a weighted-average increase of 3.4%. The increase in Same Store rental and other property revenues was offset partially by a $4.3 million, or 2.4%, increase in property operating expenses due primarily to higher real estate taxes. Controllable operating expenses, which exclude utility costs, real estate taxes, and insurance, were flat for the year ended December 31, 2019, compared to 2018.

Redevelopment and Development proportionate property net operating income decreased by $1.2 million, or 2.6%, for the year ended December 31, 2019, compared to 2018. This decrease was attributable primarily to de-leasing at Flamingo Point and 707 Leahy in preparation for redevelopment, offset partially by increased occupancy driven by the lease-up of Park Towne Place.

Acquisition proportionate property net operating income increased by $10.1 million, or 49.9%, for the year ended December 31, 2019, compared to 2018. This increase was attributable primarily to the 2019 acquisition of One Ardmore and a full period of operating activity at the four Philadelphia communities acquired in 2018, compared to eight months of operations during the year ended December 31, 2018.

Other Real Estate proportionate property net operating income increased by $4.7 million, or 20.5%, for the year ended December 31, 2019, compared to 2018 due primarily to the acquisition of 1001 Brickell Bay Drive in 2019.  

Year Ended December 31, 2018, Compared to December 31, 2017

Net income attributable to Aimco and net income attributable to the Aimco Operating Partnership increased by $350.5 million and $370.4 million, respectively, for the year ended December 31, 2018, as compared to 2017, as described more fully below.

Proportionate Property Net Operating Income

As of December 31, 2018, excluding apartment communities sold during 2019: our Same Store segment consisted of 83 Same Store apartment communities with 23,091 apartment homes; our Redevelopment and Development segment included 13 apartment communities with 6,294 apartment homes; our Acquisition segment included seven apartment communities with 1,943 apartment homes; and our Other Real Estate segment included 15 apartment communities with 1,483 apartment homes.

The results of our segments for the years ended December 31, 2018 and 2017, as presented below, are based on the apartment community classifications as of December 31, 2018, and exclude amounts related to apartment communities sold

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during 2019. Based on the nature of our apartment community classifications, there is no comparison of the years ended December 31, 2018 and 2017. The results of operations for these communities are reflected in the table below.

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

(in thousands)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Rental and other property revenues, before utility reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Same Store

$

534,389

 

 

$

517,429

 

 

$

16,960

 

 

 

3.3

%

   Redevelopment and Development

 

182,662

 

 

 

160,045

 

 

 

22,617

 

 

 

14.1

%

   Acquisition

 

48,474

 

 

 

17,475

 

 

 

30,999

 

 

 

177.4

%

   Other Real Estate

 

42,567

 

 

 

41,226

 

 

 

1,341

 

 

 

3.3

%

      Total

 

808,092

 

 

 

736,175

 

 

 

71,917

 

 

 

9.8

%

Property operating expenses, net of utility reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Same Store

 

138,187

 

 

 

133,517

 

 

 

4,670

 

 

 

3.5

%

   Redevelopment and Development

 

60,277

 

 

 

56,475

 

 

 

3,802

 

 

 

6.7

%

   Acquisition

 

14,031

 

 

 

7,040

 

 

 

6,991

 

 

 

99.3

%

   Other Real Estate

 

15,406

 

 

 

14,727

 

 

 

679

 

 

 

4.6

%

      Total

 

227,901

 

 

 

211,759

 

 

 

16,142

 

 

 

7.6

%

Proportionate property net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Same Store

 

396,202

 

 

 

383,912

 

 

 

12,290

 

 

 

3.2

%

   Redevelopment and Development

 

122,385

 

 

 

103,570

 

 

 

18,815

 

 

 

18.2

%

   Acquisition

 

34,443

 

 

 

10,435

 

 

 

24,008

 

 

 

230.1

%

   Other Real Estate

 

27,161

 

 

 

26,499

 

 

 

662

 

 

 

2.5

%

Total

$

580,191

 

 

$

524,416

 

 

$

55,775

 

 

 

10.6

%

For the year ended December 31, 2018, compared to 2017, Same Store proportionate property net operating income increased by $12.3 million, or 3.2%. This increase was attributable primarily to a $17.0 million, or 3.3%, increase in rental and other property revenues due to higher average revenues of $53 per apartment home comprised of increases in rental rates and a 60 basis point increase in average daily occupancy. Renewal rents increased by 4.9% and new lease rents increased by 1.9%, resulting in a weighted-average increase of 3.4%. The increase in Same Store and other property revenues was offset partially by a $4.7 million, or 3.5%, increase in property operating expenses due primarily to increases in real estate taxes and repairs and maintenance costs. During the year ended December 31, 2018, compared to 2017, controllable operating expenses increased by $1.0 million, or 1.5%.

Redevelopment and Development proportionate property net operating income increased by $18.8 million, or 18.2%, for the year ended December 31, 2018, compared to 2017 due to leasing activities at communities, offset partially by decreases due to apartment homes taken out of service for redevelopment.

Acquisition proportionate property net operating income increased by $24.0 million, or 230.1%, for the year ended December 31, 2018, compared to 2017 due to the 2018 acquisitions of Bent Tree Apartments, Avery Row, and four apartment communities in Philadelphia.

Non-Segment Real Estate Operations

Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, 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.

For the years ended December 31, 2019, 2018, and 2017, casualty losses totaled $9.0 million, $4.0 million, and $8.2 million, respectively. Casualty losses during the year ended December 31, 2019, included one major claim due to storm-related flooding at our One Canal apartment community and several other claims due to fire damage. Casualty losses for the year ended December 31, 2018, included several claims due primarily to storm and fire damage, offset partially by recovery from insurance carriers for insured losses in excess of policy limits. Casualty losses were elevated during the year ended December 31, 2017, due primarily to hurricane damage.

For the years ended December 31, 2019, 2018, and 2017, apartment communities that were sold or classified as held for sale generated net operating income of $16.6 million, $54.6 million, and $91.1 million, respectively.

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Asset Management Results

For the year ended December 31, 2019, there was no net operating income attributable to the Asset Management business, which we sold in July 2018.

For the years ended December 31, 2018 and 2017, net operating income attributable to the Asset Management business was $28.9 million and $51.8 million, respectively.

Depreciation and Amortization

For the year ended December 31, 2019, compared to 2018 and the year ended December 31, 2018, compared to 2017, depreciation and amortization expense increased by $2.4 million and $11.6 million, respectively, due primarily to apartment communities acquired in 2019 and 2018 and renovated apartment homes placed in service after their completion. This increase was offset partially by decreases in depreciation associated with apartment communities sold and with communities owned by partnerships served by our Asset Management business, which we sold in 2018.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2019, were relatively flat compared to the year ended December 31, 2018.

For the year ended December 31, 2018, compared to 2017, general and administrative expenses increased $2.6 million, due primarily to higher variable incentive compensation cost.

Other Expenses, Net

Other expenses, net, includes costs associated with our risk management activities, partnership administration expenses, and certain non-recurring items.

For the year ended December 31, 2019, compared to 2018, other expenses, net, increased by $15.3 million, related primarily to the resolution of our litigation against Airbnb in 2018 and an increase in rent expense associated with our ground leases.

For the year ended December 31, 2018, compared to 2017, other expenses, net, decreased by $7.4 million, due primarily to the resolution of our litigation against Airbnb and settlement of litigation related to the challenge to the title of the La Jolla Cove property, which we acquired in 2014.

Provision for Real Estate Impairment Loss

We recognized no provisions for impairment losses during the years ended December 31, 2019 or 2018.

In January 2018, we agreed to sell our interests in the entities owning the La Jolla Cove property in settlement of legal actions filed in 2014 by a group of disappointed buyers who had hoped to acquire the property. As a result of the settlement, we recognized in our 2017 results a gross impairment loss of $35.8 million, $25.6 million of which related to the establishment of a deferred tax liability assumed in connection with our acquisition of the business entities. The tax liability was assumed by the buyer, resulting in no economic loss to us. The remaining $10.2 million loss was offset by cash distributions paid to us during our ownership and avoided legal costs for continued litigation. On an economic basis, we agreed to sell these entities at roughly our purchase price, adjusted for retained cash distributions and avoided legal costs.

Interest Income

Interest income for the year ended December 31, 2019, was relatively flat compared to the year ended December 31, 2018.

For the year ended December 31, 2018, compared to 2017, interest income increased $2.6 million, due primarily to interest earned on the seller financing notes received as consideration in the sale of the La Jolla Cove property.

Interest Expense

For the year ended December 31, 2019, compared to 2018, interest expense, which includes the amortization of debt issuance costs, decreased by $31.8 million due primarily to lower interest on property-level debt following refinancing and debt payoff activity, including the 2018 repayment of our term loan, a decrease in property-level debt attributable to sold communities and an increase in capitalized interest attributable to redevelopment and development communities. This decrease was offset partially by interest on property-level debt assumed in connection with our acquisitions and a $9.9 million decrease in prepayment penalties.

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For the year ended December 31, 2018, compared to 2017, interest expense increased by $6.0 million. The increase was due primarily to debt prepayment penalties of $14.9 million incurred in connection with 2018 refinancing of property-level debt that was scheduled to mature in 2019, 2020, and 2021, offset partially by a decrease in mortgage interest expense for communities sold and the sale of the Asset Management business in July 2018, and lower corporate-level interest.

Gain on Dispositions of Real Estate and the Asset Management Business

The table below summarizes dispositions of apartment communities from our portfolio during the years ended December 31, 2019, 2018, and 2017 (dollars in millions):

 

Year Ended December 31,

 

 

2019

 

 

2018 (1)

 

 

2017

 

Number of apartment communities sold

 

12

 

 

 

4

 

 

 

5

 

Gross proceeds

$

696.2

 

 

$

242.3

 

 

$

397.0

 

Net proceeds (2)

$

619.4

 

 

$

235.7

 

 

$

385.3

 

Gain on dispositions

$

503.2

 

 

$

175.2

 

 

$

297.9

 

(1)

During the year ended December 31, 2018, we sold for $590 million our Asset Management business and our four Hunters Point communities, which are excluded from the table above.

(2)

Net proceeds are after repayment of debt, if any, net working capital settlements, payment of transaction costs, and debt prepayment penalties, if applicable.

The apartment communities sold from our portfolio during 2019, 2018, and 2017 were primarily located outside of our primary markets or in lower-rated locations within our primary markets and had average revenues per apartment home significantly below those of our retained portfolio.

Income from Unconsolidated Real Estate Partnerships

Income from unconsolidated real estate partnerships for the year ended December 31, 2019, was relatively flat compared to the year ended December 31, 2018.

For the year ended December 31, 2018, compared to 2017, income from unconsolidated real estate partnerships decreased by $7.6 million, due primarily to the derecognition of the final NAPICO property in 2017, which resulted in a gain.

Income Tax Benefit

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 and 1001 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 consolidated statements of operations.

For the year ended December 31, 2019, compared to 2018, income tax benefit decreased $9.9 million. The decrease is due primarily to lower tax benefit recognized in connection with the intercompany transfer of assets and release of a valuation allowance in 2018 related to sale of our Asset Management business, as well as lower tax benefit from historic tax credits. This decrease is offset partially by a lower tax provision on gains on dispositions.

For the year ended December 31, 2018, compared to 2017, income tax benefit decreased by $17.8 million. The decrease is due primarily to the reversal of a $19.3 million net tax benefit we recognized as a result of the December 2017 tax reform legislation in 2017 and higher tax expense related to gains on sale of real estate for communities held through TRS entities.

Non-GAAP Measures

Various 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 annual report, we provide reconciliations of the non-GAAP measures to the most comparable financial measure computed in accordance with GAAP.

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Free Cash Flow, as calculated for our retained portfolio, represents an apartment community’s 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). 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.

Economic Income

Economic Income represents stockholder value creation as measured by the change in estimated NAV per share plus cash dividends per share. We believe Economic Income is important to investors as it represents a measure of the total return we have earned for our stockholders. NAV, as used in our calculation of Economic Income, is a non-GAAP measure and represents the estimated fair value of assets net of liabilities attributable to Aimco’s common stockholders and the Aimco Operating Partnership’s common unitholders on a diluted basis. We believe NAV is considered useful by some investors in real estate companies 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. We believe it enhances comparability among companies that have differences in their accounting. Although, NAV is not identical to liquidation value in that some costs and benefits are disregarded, it is often considered a floor with upside for value ascribed to the operating platform. NAV also provides an objective basis for the perceived quality and predictability of future cash flows as well as their expected growth as these are factors considered by real estate investors.

Our estimated NAV per share and the quoted share price of Aimco Common Stock are not necessarily equal. Although we use Economic Income and NAV for comparability in assessing our value creation compared to other REITs, not all REITs publish these measures and those who do may not compute them in the same manner. Accordingly, there can be no assurance that our basis for computing these measures is comparable with that of other REITs.

We report NAV on a semiannual basis, as of the end of the first and third quarters. Economic Income for 2019 was calculated using the change in NAV per share between September 30, 2018 and 2019. NAV will fluctuate over time. This NAV information should not be relied upon as representative of the amount a stockholder could expect to receive in a liquidation event, now or in the future. Certain assets are excluded as are certain liabilities, such as taxes and transaction costs associated with a liquidation. In addition, NAV is based on management’s subjective judgments, assumptions and opinions as of the date of determination. We assume no obligation to revise or update NAV to reflect subsequent or future events or circumstances. Our NAV estimate is subject to a variety of risks and uncertainties, many of which are beyond our control, including, without limitation, those described in Item 1A. Risk Factors.

Economic Income does not represent the change in stockholder’s equity in accordance with GAAP. Additionally, NAV does not represent stockholder’s equity in accordance with GAAP and should not be considered an alternative to Aimco’s total equity, which we believe is the most directly comparable GAAP measure. A reconciliation of NAV to Aimco’s total equity, as of September 30, 2019, is provided below (in millions, except per share data):

Total equity

 

$

1,786

 

Fair value adjustment for portfolio

 

 

 

 

   Consolidated real estate, at depreciated cost

 

 

(6,051

)

   Fair value of real estate (1)

 

 

 

 

      Stabilized portfolio fair value (2)

 

 

11,592

 

      Non-stabilized portfolio fair value (3)

 

 

1,706

 

Fair value adjustment for non-recourse property debt

 

 

 

 

   Non-recourse property debt, net

 

 

4,255

 

   Fair value of non-recourse property debt (4)

 

 

(4,329

)

Adjustments to present other tangible assets, liabilities and preferred equity at fair value (5)

 

 

91

 

Estimated NAV

 

$

9,050

 

Total shares, units and dilutive share equivalents (6)

 

 

157

 

Estimated NAV per weighted-average common share and unit – diluted

 

$

58

 

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(1)

We compute NAV by estimating the value of our communities, using methods we believe are appropriate based on the characteristics of the communities. For purposes of estimating NAV, real estate at fair value disclosed above includes wholly owned apartment communities and 1001 Brickell Bay Drive, plus our proportionate share of communities held by non-wholly owned entities (both consolidated and unconsolidated). A reconciliation of our consolidated apartment communities to those communities included in total real estate at fair value in the table above is as follows:

Consolidated apartment communities as of September 30, 2019

 

 

128

 

Plus: Unconsolidated apartment communities

 

 

4

 

   Apartment communities in total real estate at fair value for NAV

 

 

132

 

For valuation purposes at September 30, 2019, we segregated these 132 properties into the following categories: stabilized portfolio and non-stabilized portfolio.

(2)

As of September 30, 2019, our stabilized portfolio includes 121 communities that had reached stabilized operations and were not expected to be sold within 12 months. We value this portfolio using a direct capitalization rate method based on the annualized proportionate property net operating income, for the three months ended September 30, 2019, less a 2% management fee. Market property management fees range between 2.0% and 3.0% with larger, higher quality portfolios at the lower end of that range. The weighted-average estimated capitalization rate as applied to the annualized proportionate property net operating income was 4.9%, which we calculate on a property-by-property basis, based primarily on information published by a third party. Community characteristics that we use to determine comparable market capitalization rates include: the market in which the community is located; infill or suburban location within the market; property quality grade; and whether the community is stabilized or value-add. We used this valuation method for approximately 87% of real estate fair value at September 30, 2019.

(3)

The non-stabilized portfolio includes three communities under development and four communities under redevelopment as of September 30, 2019. We valued these communities by discounting projected future cash flows. Key assumptions used to estimate the value of these communities include: revenues, which are based on in-place rents, projected submarket rent growth to community stabilization based on projections published by third parties and adjusted for the impacts of redevelopment; expenses, which are based on estimated operating costs adjusted for inflation and a management fee equal to 2% of projected revenue; estimated remaining costs to complete construction; and a terminal value based on current market capitalization rates plus five basis points per year from September 30, 2019, to community stabilization. Discount rates applied to estimated future cash flows of these communities ranged between 5.10% and 6.30%, depending on construction and lease-up progress as of September 30, 2019. We used this valuation method for approximately 11% of the real estate fair value at September 30, 2019. The non-stabilized portfolio also included three recently acquired apartment communities, 1001 Brickell Bay Drive, and certain land investments valued at our cost plus incremental investment subsequent to acquisition. We used this valuation method for approximately 2% of real estate fair value at September 30, 2019. Our calculation of NAV does not include such future values as air rights, the potential for increased density, nor the potential for completion of future phases of redevelopments.

(4)

We calculate the fair value of indebtedness related to real estate as the carrying value of our non-recourse property debt adjusted for the mark-to-market asset on our fixed-rate property debt as of September 30, 2019, plus the outstanding balance on the revolving credit facility, which approximates its fair value as of September 30, 2019. The fair value of debt takes into account the duration of the existing property debt, as well as the quality of property pledged as its security, its loan to value ratio, and debt service coverage. For purposes of estimating NAV, the fair value of debt includes our proportionate share of debt related to non-wholly owned entities (both consolidated and unconsolidated).

(5)

Other tangible assets consist of cash, restricted cash, accounts receivable, and other assets for which we reasonably expect to receive cash through the normal course of operations or another future event. Other tangible liabilities consist of accounts payable, accrued liabilities, and other tangible liabilities we reasonably expect to settle in cash through the normal course of operations or another future event. Other tangible assets and liabilities were generally valued at their carrying amounts and reduced by the noncontrolling interests’ portion of these amounts and exclude intangible assets and liabilities reflected on our consolidated balance sheet. For purposes of this NAV calculation, we have assigned no realizable value to right of use assets, goodwill, or other intangible assets. We also exclude deferred income and right of use related lease liabilities from the NAV calculation. We exclude from this NAV calculation deferred income, which includes below market lease liabilities, recognized in accordance with GAAP in connection with the purchase of the related apartment communities, and cash received in prior periods and required to be deferred under GAAP. We also adjust other tangible liabilities to reflect removal of the deferred tax liability associated with 1001 Brickell Bay Drive, which is not expected to be paid during our ownership of the property. We include the value of our deferred tax asset, as the value of the asset is expected to be realized in the normal course of business.

(6)

Total shares, units, and dilutive share equivalents represents Common Stock, OP Units, participating unvested restricted shares, and the dilutive effect of common stock equivalents outstanding as of September 30, 2019.

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

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FFO. We calculate Nareit FFO attributable to Aimco common stockholders (diluted) by subtracting dividends on preferred stock and 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 2019 Pro forma FFO, we made the following adjustments to Nareit FFO:

 

Prepayment penalties: as a result of refinancing activity in 2019, we incurred debt extinguishment costs. We excluded such 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 with scheduled 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 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 consolidated statements of operations.

 

Preferred equity redemption-related amounts: on May 16, 2019, we redeemed our Class A Perpetual Preferred Stock. We excluded the redemption-related costs from Pro forma FFO because we believe these costs are not representative of operating performance.

 

Casualty losses: in 2019, we incurred casualty losses due to storm-related flooding in downtown Boston that caused damage to our One Canal apartment community. We excluded these costs from Pro forma FFO because of the unusual nature of the weather event that caused the loss.

 

Severance and restructuring costs: in 2019, we incurred severance and restructuring costs in connection with the closure and relocation of administrative functions from our Greenville and Indianapolis offices to our Denver office. We excluded such costs from Pro forma FFO because we believe these costs are not representative of operating performance.

In computing 2018 Pro forma FFO, we made the following adjustments to Nareit FFO:

 

Prepayment penalties: in 2018, we addressed approximately half of our property loans maturing in 2019, 2020, and 2021. In connection with this activity, we incurred debt extinguishment costs, which we have excluded from Pro forma FFO because we believe these costs are not representative of operating performance.

 

Severance and restructuring costs: in connection with the sale of our Asset Management business in 2018, we incurred severance and restructuring costs. We excluded such costs from Pro forma FFO because we believe these costs are not representative of operating performance.

 

Litigation: during 2018, we were engaged in litigation with Airbnb, which was resolved in December 2018. Due to the unpredictable nature of these proceedings, we excluded from Pro Forma FFO related amounts recognized, net of income tax effect. We include these costs in other expenses, net, in our consolidated statements of operations.

 

Tax benefit due to valuation allowance release: due to the sale of the Asset Management business in 2018, we determined that a valuation allowance was no longer necessary. We excluded the effect of the establishment of the valuation allowance from Pro forma FFO and, as such, excluded the benefit from its release.

 

Change in lease accounting: effective January 1, 2019, we adopted accounting guidance that changed how we recognize costs incurred to obtain resident leases. For comparability of Pro forma FFO between periods, we have recast 2018 as if the new standard was effective as of January 1, 2018. AFFO is unchanged by the new standard.

 

Tax provision related to tax reform legislation: in connection with the Tax Cuts and Jobs Act signed into law in December 2017, we recognized income tax benefit in 2017 and adjusted the estimated impact of tax reform upon the conclusion of our analysis of the effects during 2018. We excluded such amounts from Pro forma FFO as 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

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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.

For the years ended December 31, 2019 and 2018, Aimco’s Nareit FFO, Pro forma FFO, and AFFO are calculated as follows (in thousands, except per share data):

 

 

2019

 

 

2018

 

Net income attributable to Aimco common stockholders (1)

 

$

466,144

 

 

$

656,597

 

Adjustments:

 

 

 

 

 

 

 

 

Real estate depreciation and amortization, net of noncontrolling partners’ interest

 

 

370,746

 

 

 

368,961

 

Gain on dispositions and other, net of noncontrolling partners’ interest

 

 

(503,168

)

 

 

(669,450

)

Income tax adjustments related to gain on dispositions and other tax-related items (2)

 

 

10,107

 

 

 

27,310

 

Common noncontrolling interests in Aimco Operating Partnership’s share of above

   adjustments

 

 

6,448

 

 

 

14,063

 

Amounts allocable to participating securities

 

 

163

 

 

 

402

 

Nareit FFO attributable to Aimco common stockholders

 

$

350,440

 

 

$

397,883

 

Adjustments, all net of common noncontrolling interests in Aimco Operating Partnership,

   participating securities and tax effect:

 

 

 

 

 

 

 

 

Prepayment penalties, net

 

 

6,367

 

 

 

14,089

 

Straight-line rent

 

 

4,472

 

 

 

 

Preferred equity redemption-related amounts

 

 

3,864

 

 

 

 

Casualty losses

 

 

2,913

 

 

 

 

Severance and restructuring costs

 

 

2,499

 

 

 

1,282

 

Litigation, net

 

 

147

 

 

 

(8,558

)

Tax benefit due to valuation allowance release

 

 

 

 

 

(19,349

)

Change in lease accounting

 

 

 

 

 

(2,922

)

Tax provision (benefit) related to tax reform legislation

 

 

 

 

 

273

 

Pro forma FFO attributable to Aimco common stockholders

 

$

370,702

 

 

$

382,698

 

Capital Replacements, net of common noncontrolling interests in Aimco Operating Partnership

   and participating securities

 

 

(43,837

)

 

 

(45,560

)

AFFO attributable to Aimco common stockholders

 

$

326,865

 

 

$

337,138

 

 

 

 

 

 

 

 

 

 

Total share and dilutive share equivalents used to calculate Net income and Nareit FFO

   per share (3)

 

 

147,944

 

 

 

151,334

 

      Adjustment to weight reverse stock split (4)

 

 

621

 

 

 

4,719

 

Pro forma shares and dilutive share equivalents used to calculate Pro forma FFO and AFFO

   per share

 

 

148,565

 

 

 

156,053

 

 

 

 

 

 

 

 

 

 

Net income attributable to Aimco per common share – diluted

 

$

3.15

 

 

$

4.34

 

Nareit FFO per share – diluted

 

$

2.37

 

 

$

2.63

 

Pro Forma FFO per share – diluted

 

$

2.50

 

 

$

2.45

 

AFFO per share – diluted

 

$

2.20

 

 

$

2.16

 

(1)

Represents the numerator for calculating Aimco’s earnings per common share in accordance with GAAP (please refer to Note 11 to the consolidated financial statements in Item 8).

(2)

For the year ended December 31, 2019, income taxes related to gain on dispositions and other items primarily included tax on the gain on sale of apartment communities. For the year ended December 31, 2018, income taxes related to gain on dispositions and other items includes tax on the gain on the sale of the Asset Management business, as well as tax on the gain on the sale of apartment communities during the year ended December 31, 2018.

(3)

Represents the denominator for Aimco’s earnings per common share – diluted, calculated in accordance with GAAP.

(4)

During the three months ended March 31, 2019, we completed a reverse stock 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 the years ended December 31, 2019 and 2018, 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 the Results of Operations section for discussion of our Pro forma FFO and AFFO results for 2019, as compared to 2018.

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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 the Aimco Operating Partnership, as well as limited differences between the amounts of net income attributable to Aimco’s common stockholders and the Aimco Operating Partnership’s unit holders during the periods presented, Nareit FFO, Pro forma FFO, and AFFO amounts on a per unit basis for the Aimco Operating Partnership would be expected to be substantially the same as the corresponding per share amounts for Aimco.

Leverage Ratios

As discussed under the Balance Sheet heading, our leverage strategy targets the ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDAre to be below 7.0x and the ratio of Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends 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 and outstanding borrowings under our revolving credit facility. 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, assuming these amounts 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 Equity, as used in our leverage ratios, represents the redemption amounts for the Aimco Operating Partnership’s preferred OP Units. Preferred Equity, although perpetual in nature, is another component of our overall leverage.

The reconciliation of total indebtedness to Proportionate Debt and Preferred Equity, as used in our leverage ratios as of December 31, 2019, is as follows (in thousands):

 

 

December 31, 2019

 

Total indebtedness

 

$

4,505,590

 

Adjustments:

 

 

 

 

      Debt issuance costs related to non-recourse property debt

 

 

20,749

 

      Proportionate share adjustments related to debt obligations of consolidated

         and unconsolidated partnerships

 

 

(7,722

)

      Cash and restricted cash

 

 

(177,702

)

      Proportionate share adjustments related to cash and restricted cash held by

         consolidated and unconsolidated partnerships

 

 

1,107

 

Securitization trust investment and other

 

 

(94,251

)

   Proportionate Debt

 

$

4,247,771

 

Preferred Equity

 

 

97,064

 

Redeemable noncontrolling interests in consolidated real estate partnership

 

 

4,716

 

   Proportionate Debt and Preferred Equity

 

$

4,349,551

 

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

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adjustments to reflect Aimco’s share of EBITDAre of investments in unconsolidated entities.

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.

EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. The reconciliation of net income to EBITDAre and Adjusted EBITDAre for the three months ended December 31, 2019, as used in our leverage ratios, is as follows (in thousands):

 

 

Three Months Ended

 

 

 

December 31, 2019

 

Net income

 

$

142,766

 

Adjustments:

 

 

 

 

      Interest expense

 

 

45,846

 

      Income tax benefit

 

 

(1,193

)

      Depreciation and amortization

 

 

97,144

 

      Gain on dispositions of real estate

 

 

(146,239

)

      Adjustment related to EBITDAre of unconsolidated partnerships

 

 

211

 

   EBITDAre

 

$

138,535

 

Net income attributable to noncontrolling interests in Aimco Operating Partnership

 

 

(84

)

EBITDAre adjustments attributable to noncontrolling interests

 

 

(615

)

Interest income received on securitization investment

 

 

(2,127

)

Straight-line rent

 

 

657

 

Severance and restructuring costs (1)

 

 

800

 

Casualty losses (2)

 

 

2,913

 

Pro forma adjustment, net (3)

 

 

2,656

 

   Adjusted EBITDAre

 

$

142,735

 

   Annualized Adjusted EBITDAre

 

$

570,940

 

(1)

In 2019, we incurred severance and restructuring costs in connection with office closures and relocation of administrative functions from our Greenville and Indianapolis offices to our Denver office. We excluded such costs from Adjusted EBITDAre because we believe these costs are not representative of operating performance.

(2)

We incurred casualty losses due to storm-related flooding in downtown Boston that caused damage to our One Canal apartment community. We excluded such costs from Adjusted EBITDAre because of the unusual nature of the weather event that caused the loss.

(3)

We calculated Adjusted EBITDAre on a pro forma basis to reflect the dispositions of four apartment communities during the period and the Parkmerced mezzanine loan investment, including related transaction costs, as if the transactions had closed on October 1, 2019.

We calculate Adjusted Interest Expense, as used in our leverage ratios, based on the most recent three months, 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. 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.

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Preferred Dividends represents the distributions paid on the Aimco Operating Partnership’s preferred OP Units. We add Preferred Dividends to Adjusted Interest Expense for a more complete picture of the interest and dividend requirements of our leverage.

The reconciliation of interest expense to Adjusted Interest Expense and Preferred Dividends for the three months ended December 31, 2019, as used in our leverage ratios, is as follows (in thousands):

 

 

Three Months Ended

 

 

 

December 31, 2019

 

Interest expense

 

$

45,846

 

Adjustments:

 

 

 

 

Proportionate share adjustments related to interest of consolidated and

   unconsolidated partnerships

 

 

(77

)

Debt prepayment penalties and other non-interest items

 

 

(5,034

)

Interest income earned on securitization trust investment

 

 

(2,127

)

   Adjusted Interest Expense

 

$

38,608

 

Preferred dividends

 

 

1,908

 

   Adjusted Interest Expense and Preferred Dividends

 

$

40,516

 

Annualized Adjusted Interest Expense

 

$

154,432

 

Annualized Adjusted Interest Expense and Preferred Dividends

 

$

162,064

 

 

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 December 31, 2019, our primary sources of liquidity were as follows:

 

$142.9 million in cash and cash equivalents;

 

$34.8 million of restricted cash, which consists primarily of escrows related to resident security deposits and reserves and escrows held by lenders for capital additions, property taxes, and insurance; and

 

$517.8 million of available capacity to borrow under our revolving credit facility after consideration of $7.2 million of letters of credit backed by the facility.

Our principal 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, such as debt maturities, 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.

As of December 31, 2019, we also held unencumbered apartment communities with an estimated fair market value of approximately $2.4 billion.

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 and many lenders are active in the market. However, 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.

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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 of December 31, 2019, approximately 91.8% of our leverage consisted of property-level, non-recourse, long-dated, amortizing debt. Approximately 96.0% 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 7.5 years. On average, 7.4% of our unpaid principal balances will mature each year from 2020 through 2022.

During 2019, we financed $772.6 million of new non-recourse, fixed-rate property debt. These loans have a weighted-average interest rate of 3.32%, a weighted-average remaining term to maturity of 11.4 years, and contributed to an approximately 29 basis point decrease in our annual cost of leverage compared to 2018.

While our primary source of leverage is property-level, non-recourse, long-dated, fixed-rate, amortizing debt, we also have a revolving credit facility with a syndicate of financial institutions. As of December 31, 2019, we had $275.0 million of outstanding borrowings under our revolving credit facility, which represented 6.0% of our total leverage.

As of December 31, 2019, our outstanding preferred OP units represented approximately 2.1% 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, 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 of December 31, 2019.

Under the revolving credit facility, 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 year ended December 31, 2019, our Fixed Charge Coverage ratio was 2.06x, compared to ratio of 2.05x for the year ended December 31, 2018. 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 consolidated statements of cash flows in Item 8 of this report.

Operating Activities

For the year ended December 31, 2019, our net cash provided by operating activities was $374.5 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 year ended December 31, 2019, decreased by $21.9 million compared to 2018, due to lower net operating income associated with communities sold and the Asset Management business sold in 2018, offset partially by improved operating results of our Same Store communities and increased contribution from our Acquisition and Other Real Estate communities.

Investing Activities

For the year ended December 31, 2019, net cash used in investing activities of $205.4 million consisted primarily of the cash payment for the mezzanine loan and related transaction costs, the acquisitions of 1001 Brickell Bay Drive, One Ardmore, and Prism, and capital expenditures, offset partially by proceeds from the disposition of 12 apartment communities.

Capital additions for our segments totaled $396.0 million, $329.3 million, and $310.5 million during the years ended December 31, 2019, 2018, and 2017, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.

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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.

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 consolidated statements of cash flows for the years ended December 31, 2019, 2018, and 2017, are presented below (dollars in thousands):

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Capital replacements

 

$

36,245

 

 

$

33,613

 

 

$

30,714

 

Capital improvements

 

 

12,240

 

 

 

13,722

 

 

 

16,392

 

Capital enhancements

 

 

87,824

 

 

 

95,595

 

 

 

86,405

 

Redevelopment

 

 

110,996

 

 

 

112,630

 

 

 

154,724

 

Development

 

 

118,781

 

 

 

61,185

 

 

 

14,249

 

Initial capital expenditures

 

 

22,913

 

 

 

6,406

 

 

 

 

Casualty

 

 

7,017

 

 

 

6,118

 

 

 

7,974

 

   Total capital additions

 

$

396,016

 

 

$

329,269

 

 

$

310,458

 

Plus: additions related to commercial spaces

 

 

5,559

 

 

 

1,245

 

 

 

1,428

 

Plus: additions related to apartment communities sold or held for sale

   and Asset Management business

 

 

3,321

 

 

 

18,203

 

 

 

42,343

 

   Consolidated capital additions

 

$

404,896

 

 

$

348,717

 

 

$

354,229

 

Plus: net change in accrued capital spending

 

 

(11,435

)

 

 

(8,228

)

 

 

3,875

 

   Capital expenditures per consolidated statement of cash flows

 

$

393,461

 

 

$

340,489

 

 

$

358,104

 

For the years ended December 31, 2019, 2018, and 2017, we capitalized $11.8 million, $7.6 million, and $7.6 million of interest costs, respectively, and $37.8 million, $36.8 million, and $36.0 million of other direct and indirect costs, respectively.

Redevelopment and Development

As of December 31, 2019, our total estimated net investment in approved and active redevelopment and development is $577.5 million, with a projected weighted-average net operating income yield on these investments of 5.3%, assuming untrended rents. Of this total, we have funded $309.2 million as of December 31, 2019. We expect to fund the remaining estimated net investment of $268.3 million on these communities in 2020 and future years, on a leverage-neutral basis, with proceeds from sales of apartment communities with lower forecasted FCF internal rates of return.

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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. Shorter cycles provide us the flexibility to maintain current earnings while aligning the timing of the completed apartment homes with market demand. We currently have six short-cycle projects, including Bay Parc, ongoing in our portfolio. During 2019, we completed 150 apartment homes, with another 21 homes under construction as of December 31, 2019.

When short-cycle redevelopments are not possible, we may engage in redevelopment activities where an entire building or community is vacated. Additionally, we undertake some ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the redevelopment of an existing apartment community. The following table summarizes our investments related to these long-cycle developments and redevelopments as of December 31, 2019 (dollars in millions):

 

Location

 

Apartment Homes

Approved for

Redevelopment

or Development

 

 

Estimated Net Redevelopment Investment (1)

 

 

Inception-to-

Date Net

Investment

 

 

Expected

Stabilized

Occupancy (2)

 

Expected

NOI

Stabilization (3)

707 Leahy

Redwood City, CA

 

 

110

 

 

$

23.7

 

 

$

10.7

 

 

3Q 2020

 

4Q 2021

Eldridge (formerly Elm

Creek) Townhomes

Elmhurst, IL

 

 

58

 

 

 

35.1

 

 

 

15.8

 

 

2Q 2021

 

3Q 2022

Flamingo Point

Miami Beach, FL

 

 

886

 

 

 

280.0

 

 

 

74.4

 

 

4Q 2022

 

1Q 2024

The Fremont

Denver, CO (MSA)

 

 

253

 

 

 

87.0

 

 

 

61.4

 

 

3Q 2021

 

4Q 2022

Parc Mosaic

Boulder, CO

 

 

226

 

 

 

123.4

 

 

 

122.3

 

 

4Q 2020

 

1Q 2022

Total

 

 

 

1,533

 

 

$

549.2

 

 

$

284.6

 

 

 

 

 

(1)

Estimated net redevelopment investment represents the total actual or estimated investment, net of tax and other credits earned as a direct result of our redevelopment or development of the community.

(2)

Expected stabilized occupancy represents the period in which we expect to achieve stabilized occupancy, generally greater than 90%.

(3)

Expected net operating income, NOI, stabilization represents the period in which we expect the communities to achieve stabilized rents and operating costs, generally five quarters after occupancy stabilization.

During the year ended December 31, 2019, we invested $229.8 million in redevelopment and development. Further details regarding our redevelopment and development activities, including apartment communities constructed and delivered during the year ended December 31, 2019, is discussed in the Executive Overview section above.

We expect our total development and redevelopment spending to range from $250 million to $300 million for the year ending December 31, 2020.

Financing Activities

For the year ended December 31, 2019, our net cash used in financing activities of $64.0 million was attributed to the items discussed below.

Net borrowings on our revolving credit facility of $114.6 million primarily relate to the timing of short-term working capital needs.

Principal payments on property loans during the period totaled $520.0 million, consisting of scheduled principal amortization of $79.7 million and repayments of $440.3 million.

Proceeds from non-recourse property debt borrowings during the period consisted of the closing of 10 fixed-rate, amortizing, non-recourse property loans totaling $774.6 million.

Repurchases of Preferred Stock of $125.0 million represents the cash paid upon redemption of our Class A Perpetual Preferred Stock during the 2019.

Net cash used in financing activities also includes $266.2 million of payments to equity holders, as further detailed in the table below.

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Equity and Partners’ Capital Transactions

The following table presents the Aimco Operating Partnership’s distribution activity (including distributions paid to Aimco) during the year ended December 31, 2019 (in thousands):

Cash distributions paid by the Aimco Operating Partnership to preferred unitholders (1)

 

$

10,954

 

Cash distributions paid by the Aimco Operating Partnership to common unitholders (2)

 

 

254,687

 

Cash distributions paid to holders of noncontrolling interests in consolidated real estate partnerships

 

 

513

 

   Total cash distributions paid by the Aimco Operating Partnership

 

$

266,154

 

(1)

$3.2 million represented distributions to Aimco, and $7.7 million represented distributions paid to holders of OP Units.

(2)

$241.3 million represented distributions to Aimco, and $13.4 million represented distributions paid to holders of OP Units.

The following table presents Aimco’s dividend activity during the year ended December 31, 2019 (in thousands):

Cash distributions paid to holders of OP Units

 

$

21,107

 

Cash distributions paid to holders of noncontrolling interests in consolidated real estate partnerships

 

 

513

 

Cash dividends paid by Aimco to preferred stockholders

 

 

3,246

 

Cash dividends paid by Aimco to common stockholders

 

 

241,288

 

   Total cash dividends and distributions paid by Aimco

 

$

266,154

 

Contractual Obligations

This table summarizes information contained elsewhere in this Annual Report on Form 10-K regarding payments due under contractual obligations and commitments as of December 31, 2019 (in thousands):

 

 

Total

 

 

Less than

One Year

(2020)

 

 

2-3 Years

(2021-2022)

 

 

4-5 Years

(2023-2024)

 

 

More than Five Years (2025 and Thereafter)

 

Non-recourse property debt (1)

 

$

4,251,339

 

 

$

171,107

 

 

$

1,021,270

 

 

$

673,661

 

 

$

2,385,301

 

Revolving credit facility borrowings (2)

 

 

275,000

 

 

 

 

 

 

275,000

 

 

 

 

 

 

 

Interest related to debt (3)

 

 

1,021,589

 

 

 

174,275

 

 

 

269,600

 

 

 

200,503

 

 

 

377,211

 

Operating lease obligations (4)

 

 

452,042

 

 

 

5,156

 

 

 

10,196

 

 

 

8,755

 

 

 

427,935

 

Construction obligations (5)

 

 

254,462

 

 

 

187,546

 

 

 

66,916

 

 

 

 

 

 

 

   Total

 

$

6,254,432

 

 

$

538,084

 

 

$

1,642,982

 

 

$

882,919

 

 

$

3,190,447

 

(1)

Includes scheduled principal amortization and maturity payments.

(2)

Includes outstanding borrowings on our revolving credit facility assuming repayment at the contractual maturity date. Our revolving credit facility is subject to an annual commitment fee (0.25% of aggregate commitments), which is not included in the amounts above.

(3)

Includes interest related to both fixed-rate and variable-rate non-recourse property debt, and our variable-rate revolving credit facility borrowings. Interest related to variable-rate debt is estimated based on the rate effective as of December 31, 2019. Please refer to Note 5 to the consolidated financial statements in Item 8 for a description of average interest rates associated with our debt.

(4)

Operating lease obligations include both ground and office leases. Our ground leases expire in years ranging from 2070 to 2117.

(5)

Represents estimated obligations pursuant to construction contracts related to our redevelopment, development and other capital spending. Please refer to Note 6 to the consolidated financial statements in Item 8 for additional information regarding these obligations.

In addition to the amounts presented in the table above, as of December 31, 2019, we had $97.1 million (liquidation value) of redeemable preferred OP Units of the Aimco Operating Partnership outstanding with annual distribution yields ranging from 1.92% to 8.75%. The distributions that accrue on the redeemable preferred OP Units are cumulative and are paid quarterly.

Additionally, we may enter into commitments to purchase goods and services in connection with the operations of our apartment communities. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to our historical expenditures.

Future Capital Needs

In addition to the items set forth in “Contractual Obligations” above, 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.

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Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Capitalized Costs

We capitalize costs, including certain indirect costs, incurred in connection with our capital additions activities, including redevelopments and developments, other tangible apartment community improvements, and replacements of existing community components. Included in these capitalized costs are payroll costs associated with time spent by employees in connection with the planning, execution, and control of all capital addition activities at the community level. We characterize as “indirect costs” an allocation of certain department costs, including payroll, at the area operations and corporate levels that clearly relate to capital addition activities. We also capitalize interest, property taxes, and insurance during periods in which redevelopments and developments are in progress. We commence capitalization of costs, including certain indirect costs, incurred in connection with our capital addition activities, at the point in time when activities necessary to get communities ready for their intended use begin. These activities include when communities or apartment homes are undergoing physical construction, as well as when homes are held vacant in advance of planned construction, provided that other activities such as permitting, planning, and design are in progress. We cease the capitalization of costs when the communities or components thereof are substantially complete and ready for their intended use, which is typically when construction has been completed and homes are available for occupancy. We charge costs including ordinary repairs, maintenance and resident turnover costs to property operating expense, as incurred. Please refer to the Investing Activities subsection to the Liquidity and Capital Resources section for a summary of costs capitalized during the periods presented.

Impairment of Long-Lived Assets

Real estate and other long-lived assets to be held and used are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of an apartment community may not be recoverable, we make an assessment of its recoverability by comparing the carrying amount to our estimate of the undiscounted future cash flows, excluding interest charges, of the community. If the carrying amount exceeds the estimated aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the community.

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, occasional developments, and selective acquisitions with projected FCF internal rates of return higher than expected from the communities being sold. As we execute this strategy, we evaluate alternatives to sell or reduce our interest in apartment communities that do not align with our long-term investment strategy, although there is no assurance that we will sell or reduce our investment in such communities during the desired time frame. For any communities that are sold or meet the criteria to be classified as held for sale during the next 12 months, the reduction in the estimated holding period for these communities may result in impairment losses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our chief market risks are refunding risk, that is the availability of property debt or other cash sources to refund maturing property debt, and repricing risk, that is the possibility of increases in base interest rates and credit risk spreads. We use predominantly long-dated, fixed-rate, amortizing, non-recourse property debt in order to avoid the refunding and repricing risks of short-term borrowings. We use short-term debt financing and working capital primarily to fund short-term uses and generally expect to refinance such borrowings with cash from operating activities, proceeds from apartment community sales, long-term debt, or equity financings. We make limited use of derivative financial instruments and we do not use them for trading or other speculative purposes.

Market Risk Associated with Loans Secured by Our Portfolio

As of December 31, 2019, on a consolidated basis, we had approximately $170.1 million of variable-rate property-level debt outstanding and $275.0 million of variable-rate borrowings under our revolving credit facility. We estimate that a change in 30-day LIBOR of 100 basis points with constant credit risk spreads would reduce or increase interest expense by approximately $4.5 million on an annual basis.

As of December 31, 2019, we had approximately $177.7 million in cash and cash equivalents and restricted cash, a portion of which bears interest at variable rates, which may offset somewhat a change in rates on our variable-rate debt discussed above.

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We estimate the fair value of debt instruments as described in Note 12 to the consolidated financial statements in Item 8. The estimated fair value of total indebtedness, including our revolving credit facility, was approximately $4.6 billion as of December 31, 2019, inclusive of a $47.3 million mark-to-market liability. The mark-to-market liability as of December 31, 2018 was approximately $43.8 million.

If market rates for consolidated fixed-rate debt in our portfolio were higher by 100 basis points with constant credit risk spreads, the estimated fair value of consolidated debt discussed above would decrease from $4.6 billion in the aggregate to $4.4 billion. If market rates for consolidated debt discussed above were lower by 100 basis points with constant credit risk spreads, the estimated fair value of consolidated fixed-rate debt would increase from $4.6 billion in the aggregate to $4.8 billion.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The independent registered public accounting firm’s reports, consolidated financial statements and schedule listed in the “Index to Financial Statements” on page F-1 of this Annual Report are filed as part of this report and incorporated herein by this reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Aimco

Disclosure Controls and Procedures

Aimco’s management, with the participation of Aimco’s chief executive officer and chief financial officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, Aimco’s chief executive officer and chief financial officer have concluded that, as of the end of such period, Aimco’s disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

Aimco’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of Aimco’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 Framework).

Based on their assessment, management concluded that, as of December 31, 2019, Aimco’s internal control over financial reporting is effective.

Aimco’s independent registered public accounting firm has issued an attestation report on Aimco’s internal control over financial reporting.

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Changes in Internal Control Over Financial Reporting

There has been no change in Aimco’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, Aimco’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Apartment Investment and Management Company

Opinion on Internal Control over Financial Reporting

We have audited Apartment Investment and Management Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Apartment Investment and Management Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the index at Item 15(a) and our report dated February 24, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 24, 2020

 

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The Aimco Operating Partnership

Disclosure Controls and Procedures

The Aimco Operating Partnership’s management, with the participation of the chief executive officer and chief financial officer of Aimco, who are the equivalent of the Aimco Operating Partnership’s chief executive officer and chief financial officer, respectively, has evaluated the effectiveness of the Aimco Operating Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the chief executive officer and chief financial officer of Aimco have concluded that, as of the end of such period, the Aimco Operating Partnership’s disclosure controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

Management of the Aimco Operating Partnership is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Aimco Operating Partnership’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 Framework).

Based on their assessment, management concluded that, as of December 31, 2019, the Aimco Operating Partnership’s internal control over financial reporting is effective.

The Aimco Operating Partnership’s independent registered public accounting firm has issued an attestation report on the Aimco Operating Partnership’s internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There has been no change in the Aimco Operating Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, the Aimco Operating Partnership’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

To the Partners and the Board of Directors of

AIMCO Properties, L.P.

Opinion on Internal Control over Financial Reporting

We have audited AIMCO Properties, L.P.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, AIMCO Properties, L.P. (the Partnership) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, partners’ capital and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the index at Item 15(a) and our report dated February 24, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ ERNST & YOUNG LLP

Denver, Colorado

February 24, 2020

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ITEM 9B. OTHER INFORMATION

Reclassification of Unissued Preferred Stock

On February 24, 2020, pursuant to Maryland law and our Charter, our Board of Directors reclassified into Common Stock, all of the authorized and unissued shares of each of the following classes of preferred stock: Class Z Cumulative Preferred Stock, Class A Cumulative Preferred Stock, and Series A Community Reinvestment Act Preferred Stock. The reclassification increases the number of authorized shares classified as Common Stock by 9,800,240 shares, from 500,787,260 shares immediately prior to the reclassification to 510,587,500 shares immediately after the reclassification. The reclassification does not impact any of our issued and outstanding shares of preferred stock.

Restatement of Charter

On February 24, 2020, pursuant to Maryland law and our Charter, we restated our Charter to reflect the reclassification of the preferred stock and the currently operative provisions of the Charter. A copy of the Charter as restated is attached to this Annual Report on Form 10-K as Exhibit 3.1.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Each member of the Board of Directors of Aimco also is a director of the general partner of the Aimco Operating Partnership. The officers of Aimco are also the officers of the general partner of the Aimco Operating Partnership and hold the same titles. The information required by this item for both Aimco and the Aimco Operating Partnership is presented jointly under the captions “Board of Directors and Executive Officers,” “Corporate Governance Matters - Code of Ethics,” “Other Matters - Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Matters - Meetings and Committees: Nominating and Corporate Governance Committee,” “Corporate Governance Matters - Meetings and Committees: Audit Committee” and “Corporate Governance Matters - Meetings and Committees: Audit Committee Financial Expert” in the proxy statement for Aimco’s 2020 annual meeting of stockholders and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is presented under the captions “Compensation Discussion & Analysis,” “Compensation and Human Resources Committee Report to Stockholders,” “Summary Compensation Table,” “Grants of Plan-Based Awards in 2019,” “Outstanding Equity Awards at Fiscal Year-End 2019,” “Option Exercises and Stock Vested in 2019,” “Potential Payments Upon Termination or Change in Control” and “Corporate Governance Matters - Director Compensation” in the proxy statement for Aimco’s 2020 annual meeting of stockholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item, for both Aimco and the Aimco Operating Partnership, is presented under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the proxy statement for Aimco’s 2020 annual meeting of stockholders and is incorporated herein by reference. In addition, as of February 21, 2020, Aimco, through its consolidated subsidiaries, held 93.4% of the Aimco Operating Partnership’s common partnership units outstanding.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is presented under the caption “Certain Relationships and Related Transactions” and “Corporate Governance Matters - Independence of Directors” in the proxy statement for Aimco’s 2020 annual meeting of stockholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is presented under the caption “Principal Accountant Fees and Services” in the proxy statement for Aimco’s 2020 annual meeting of stockholders and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)

The financial statements listed in the Index to Financial Statements on Page F-1 of this report are filed as part of this report and incorporated herein by reference.

 

(a)(2)

The financial statement schedule listed in the Index to Financial Statements on Page F-1 of this report is filed as part of this report and incorporated herein by reference.

 

(a)(3)

The Exhibit Index is incorporated herein by reference.

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INDEX TO EXHIBITS (1) (2)

 

EXHIBIT NO.

DESCRIPTION

 

 

3.1

Charter – Articles of Restatement

 

 

3.2

Amended and Restated Bylaws (Exhibit 3.1 to Aimco’s Current Report on Form 8-K dated January 26, 2016, is incorporated herein by this reference)

 

 

4.1

Description of Aimco’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.

 

 

10.1

Fifth Amended and Restated Agreement of Limited Partnership of the Aimco Operating Partnership, dated as of July 29, 1994, as amended and restated as of April 8, 2019 (Exhibit 10.1 to Aimco’s Current Report on Form 8-K dated April 5, 2019, is incorporated herein by this reference)

 

 

10.2

Second Amended and Restated Senior Secured Credit Agreement, dated as of June 30, 2017, among Aimco, the Aimco Operating Partnership, AIMCO/Bethesda Holdings, Inc., the lenders party thereto, KeyBank N.A., as administrative agent, swing line lender and a letter of credit issuer (Exhibit 10.1 to Aimco’s Current Report on Form 8-K, dated June 30, 2017, is incorporated herein by this reference)

 

 

10.3

Master Indemnification Agreement, dated December 3, 2001, by and among Aimco, the Aimco Operating Partnership., XYZ Holdings LLC, and the other parties signatory thereto (Exhibit 10.2 to Aimco’s Current Report on Form 8-K, dated December 6, 2001, is incorporated herein by this reference)

 

 

10.4

Tax Indemnification and Contest Agreement, dated December 3, 2001, by and among Aimco, National Partnership Investments, Corp., and XYZ Holdings LLC and the other parties signatory thereto (Exhibit 10.3 to Aimco’s Current Report on Form 8-K, dated December 6, 2001, is incorporated herein by this reference)

 

 

10.5

Employment Contract renewed on December 19, 2019, by and between the Aimco Operating Partnership and Terry Considine (Exhibit 10.1 to Aimco’s Current Report on Form 8-K, dated December 21, 2017, is incorporated herein by this reference)*

 

 

10.6

Aimco Severance Policy (Exhibit 99.1 to Aimco’s Current Report on Form 8-K dated February 22, 2018, is incorporated herein by reference)*

 

 

10.7

2007 Stock Award and Incentive Plan (Appendix A to Aimco’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 20, 2007 is incorporated herein by this reference)*

 

 

10.8

Form of Restricted Stock Agreement (2007 Stock Award and Incentive Plan) (Exhibit 10.2 to Aimco’s Current Report on Form 8-K, dated April 30, 2007, is incorporated herein by this reference)*

 

 

10.9

Form of Non-Qualified Stock Option Agreement (2007 Stock Award and Incentive Plan) (Exhibit 10.3 to Aimco’s Current Report on Form 8-K, dated April 30, 2007, is incorporated herein by this reference)*

 

 

10.10

2007 Employee Stock Purchase Plan (Appendix B to Aimco’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 20, 2007, is incorporated herein by this reference)*

 

 

10.11

Aimco 2015 Stock Award and Incentive Plan (as amended and restated January 31, 2017) (Exhibit 10.2 to Aimco’s Current Report on Form 8-K, dated January 31, 2017, is incorporated herein by this reference)*

 

 

10.12

Aimco Second Amended and Restated 2015 Stock Award and Incentive Plan (as amended and restated effective February 22, 2018) (Exhibit A to Aimco’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 8, 2018, is incorporated herein by reference)*

 

 

10.13

Form of Performance Restricted Stock Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.24 to Aimco’s Annual Report on Form 10-K for the year ended December 31, 2015, is incorporated herein by this reference)*

 

 

10.14

Form of Restricted Stock Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.25 to Aimco’s Annual Report on Form 10-K for the year ended December 31, 2015, is incorporated herein by this reference)*

 

 

10.15

Form of Non-Qualified Stock Option Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.26 to Aimco’s Annual Report on Form 10-K for the year ended December 31, 2015, is incorporated herein by this reference)*

 

 

10.16

Form of LTIP Unit Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.3 to Aimco’s Current Report on Form 8-K, dated January 31, 2017, is incorporated herein by this reference)*

 

 

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10.17

Form of Performance Vesting LTIP Unit Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.4 to Aimco’s Current Report on Form 8-K, dated January 31, 2017, is incorporated herein by this reference)*

 

 

10.18

Form of Non-Qualified Stock Option Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.26 to Aimco’s Annual Report on Form 10-K for the year ended December 31, 2016, is incorporated herein by this reference)*

 

 

10.19

Form of Performance Vesting LTIP II Unit Agreement (2015 Stock Award and Incentive Plan) (Exhibit 10.15 to Aimco’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, is incorporated herein by this reference)*

 

 

21.1

List of Subsidiaries

 

 

23.1

Consent of Independent Registered Public Accounting Firm - Aimco

 

 

23.2

Consent of Independent Registered Public Accounting Firm - Aimco Operating Partnership

 

 

31.1

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Aimco

 

 

31.2

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Aimco

 

 

31.3

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Aimco Operating Partnership

 

 

31.4

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Aimco Operating Partnership

 

 

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Aimco

 

 

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Aimco

 

 

32.3

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Aimco Operating Partnership

 

 

32.4

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Aimco Operating Partnership

 

 

99.1

Agreement regarding disclosure of long-term debt instruments - Aimco

 

 

99.2

Agreement regarding disclosure of long-term debt instruments - Aimco Operating Partnership

 

 

101

The following materials from Aimco’s and the Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) consolidated balance sheets; (ii) consolidated statements of operations; (iii) consolidated statements of comprehensive income; (iv) consolidated statements of equity and consolidated statements of partners’ capital; (v) consolidated statements of cash flows; (vi) notes to the consolidated financial statements; and (vii) financial statement schedule (3)

 

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

 

(1)

Schedule and supplemental materials to the exhibits have been omitted but will be provided to the Securities and Exchange Commission upon request.

 

(2)

The Commission file numbers for exhibits is 001-13232 (Aimco) and 0-24497 (the Aimco Operating Partnership), and all such exhibits remain available pursuant to the Records Control Schedule of the Securities and Exchange Commission.

 

(3)

As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

*

Management contract or compensatory plan or arrangement

ITEM 16. FORM 10-K SUMMARY

None.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

APARTMENT INVESTMENT AND

 

MANAGEMENT COMPANY

 

 

 

 

 

By:

 

/s/ TERRY CONSIDINE

 

 

 

Terry Considine

 

 

 

Chairman of the Board and Chief Executive Officer

 

Date:

 

February 24, 2020

 

 

AIMCO PROPERTIES, L.P.

 

 

 

 

 

By:

 

AIMCO-GP, Inc., its General Partner

 

 

 

 

 

By:

 

/s/ TERRY CONSIDINE

 

 

 

Terry Considine

 

 

 

Chairman of the Board and Chief Executive Officer

 

Date:

 

February 24, 2020

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of each registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

 

 

 

 

 

 

 

AIMCO PROPERTIES, L.P.

 

 

 

 

By: AIMCO-GP, Inc., its General Partner

 

 

 

 

 

 

 

 

 

/s/ TERRY CONSIDINE

 

Chairman of the Board and

 

February 24, 2020

Terry Considine

 

Chief Executive Officer

(principal executive officer)

 

 

 

 

 

 

 

/s/ PAUL BELDIN

 

Executive Vice President and

 

February 24, 2020

Paul Beldin

 

Chief Financial Officer

(principal financial officer)

 

 

 

 

 

 

 

/s/ THOMAS L. KELTNER

 

Director

 

February 24, 2020

Thomas L. Keltner

 

 

 

 

 

 

 

 

 

/s/ J. LANDIS MARTIN

 

Director

 

February 24, 2020

J. Landis Martin

 

 

 

 

 

 

 

 

 

/s/ ROBERT A. MILLER

 

Director

 

February 24, 2020

Robert A. Miller

 

 

 

 

 

 

 

 

 

/s/ KATHLEEN M. NELSON

 

Director

 

February 24, 2020

Kathleen M. Nelson

 

 

 

 

 

 

 

 

 

/s/ ANN SPERLING

 

Director

 

February 24, 2020

Ann Sperling

 

 

 

 

 

 

 

 

 

/s/ MICHAEL A. STEIN

 

Director

 

February 24, 2020

 

 

 

 

 

Michael A. Stein

 

 

 

 

 

 

 

 

 

/s/ NINA A. TRAN

 

Director

 

February 24, 2020

Nina A. Tran

 

 

 

 

 

 

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

AIMCO PROPERTIES, L.P.

 

INDEX TO FINANCIAL STATEMENTS

 

 

Page

Financial Statements:

 

Apartment Investment and Management Company:

 

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets

F-4

Consolidated Statements of Operations

F-5

Consolidated Statements of Comprehensive Income

F-6

Consolidated Statements of Equity

F-7

Consolidated Statements of Cash Flows

F-8

 

 

AIMCO Properties, L.P.:

 

Report of Independent Registered Public Accounting Firm

F-10

Consolidated Balance Sheets

F-11

Consolidated Statements of Operations

F-12

Consolidated Statements of Comprehensive Income

F-13

Consolidated Statements of Partners’ Capital

F-14

Consolidated Statements of Cash Flows

F-15

 

 

Notes to the Consolidated Financial Statements of Apartment Investment and Management Company and AIMCO Properties, L.P.

F-17

 

 

Financial Statement Schedule:

 

Schedule III - Real Estate and Accumulated Depreciation

F-39

 

 

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 

 

 

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Apartment Investment and Management Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Apartment Investment and Management Company (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 10 to the consolidated financial statements, the Company changed its accounting for the income tax consequences of intercompany transfers of assets effective January 1, 2017.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

 

Accounting for Acquisitions of Real Estate

Description of the Matter

 

 

 

 

 

During 2019 the Company acquired real estate for total consideration of $242 million, (including assumption of liabilities). As more fully described in Note 2 and summarized in Note 3 to the consolidated financial statements, the total consideration for these asset acquisitions was allocated to land, buildings and improvements, intangible assets, and intangible liabilities, based upon their relative fair values.

Auditing management’s accounting for acquisitions involves a higher degree of judgment due to the subjective nature of the assumptions that are inherent in the determination of the relative fair values of the assets acquired and liabilities assumed.  The significant assumptions used to estimate the fair value of these acquired tangible and intangible assets includes market comparable prices for similar land parcels, estimated replacement costs for buildings and improvements, market rental rates, and assumptions regarding the time it would take to lease commercial space assuming it were vacant at acquisition.

F-2


Table of Contents

 

How We Addressed the Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for acquisitions of real estate and the allocation of consideration on a relative fair value basis. This included testing controls over management’s identification of the assets acquired and liabilities assumed and evaluating the methods and significant assumptions used by the Company and its valuation specialists, where applicable, to develop such estimates.

To test the significant assumptions discussed above, our audit procedures included, among others, comparing the significant assumptions to observable market data and published industry resources. For example, we compared management’s land value assumptions and estimated building replacement costs to observable market transactions for similar properties.  For lease intangibles we compared management’s assumptions regarding market rental rates and the amount of time if would take to lease a commercial space if the building were vacant at acquisition to published market data for comparable leases. Our internal valuation specialists assisted with the identification of observable market data used in evaluating the aforementioned assumptions.

/s/ ERNST & YOUNG LLP

We have served as the Company’s auditor since 1994.

Denver, Colorado

February 24, 2020

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED BALANCE SHEETS

As of December 31, 2019 and 2018

(In thousands, except share data)

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Buildings and improvements

 

$

6,868,543

 

 

$

6,552,065

 

Land

 

 

1,869,048

 

 

 

1,756,525

 

   Total real estate

 

 

8,737,591

 

 

 

8,308,590

 

Accumulated depreciation

 

 

(2,718,284

)

 

 

(2,585,115

)

   Net real estate

 

 

6,019,307

 

 

 

5,723,475

 

Cash and cash equivalents

 

 

142,902

 

 

 

36,858

 

Restricted cash

 

 

34,800

 

 

 

35,737

 

Mezzanine investment

 

 

280,258

 

 

 

 

Other assets

 

 

351,472

 

 

 

351,541

 

Assets held for sale

 

 

 

 

 

42,393

 

   Total assets

 

$

6,828,739

 

 

$

6,190,004

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Non-recourse property debt, net

 

$

4,230,590

 

 

$

3,915,305

 

Revolving credit facility borrowings

 

 

275,000

 

 

 

160,360

 

   Total indebtedness

 

 

4,505,590

 

 

 

4,075,665

 

Accrued liabilities and other

 

 

360,574

��

 

 

226,230

 

Liabilities related to assets held for sale

 

 

 

 

 

23,177

 

   Total liabilities

 

 

4,866,164

 

 

 

4,325,072

 

Preferred noncontrolling interests in Aimco Operating Partnership (Note 8)

 

 

97,064

 

 

 

101,291

 

Redeemable noncontrolling interests in consolidated real estate partnership

 

 

4,716

 

 

 

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

      Perpetual preferred stock (Note 7)

 

 

 

 

 

125,000

 

      Common Stock, $0.01 par value, 500,787,260 shares authorized, 148,885,197 and

         144,623,034 shares issued/outstanding at December 31, 2019 and 2018, respectively

 

 

1,489

 

 

 

1,446

 

      Additional paid-in capital

 

 

3,497,367

 

 

 

3,515,686

 

      Accumulated other comprehensive income

 

 

4,195

 

 

 

4,794

 

      Distributions in excess of earnings

 

 

(1,722,402

)

 

 

(1,947,507

)

   Total Aimco equity

 

 

1,780,649

 

 

 

1,699,419

 

Noncontrolling interests in consolidated real estate partnerships

 

 

(3,296

)

 

 

(2,967

)

Common noncontrolling interests in Aimco Operating Partnership

 

 

83,442

 

 

 

67,189

 

   Total equity

 

 

1,860,795

 

 

 

1,763,641

 

   Total liabilities and equity

 

$

6,828,739

 

 

$

6,190,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

F-4


Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands, except per share data)

 

 

 

2019

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Rental and other property revenues attributable to real estate

 

$

914,294

 

 

$

922,593

 

 

$

918,148

 

Asset Management business rental and tax credit revenues

 

 

 

 

 

49,817

 

 

 

87,289

 

   Total revenues

 

 

914,294

 

 

 

972,410

 

 

 

1,005,437

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses attributable to real estate

 

 

311,221

 

 

 

307,901

 

 

 

319,126

 

Property operating expenses of partnerships served by Asset

    Management business

 

 

 

 

 

20,921

 

 

 

35,458

 

Depreciation and amortization

 

 

380,171

 

 

 

377,786

 

 

 

366,184

 

General and administrative expenses

 

 

47,037

 

 

 

46,268

 

 

 

43,657

 

Other expenses, net

 

 

19,092

 

 

 

3,778

 

 

 

11,148

 

Provision for real estate impairment loss

 

 

 

 

 

 

 

��

35,881

 

   Total operating expenses

 

 

757,521

 

 

 

756,654

 

 

 

811,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11,424

 

 

 

10,914

 

 

 

8,332

 

Interest expense

 

 

(168,807

)

 

 

(200,634

)

 

 

(194,615

)

Gain on dispositions of real estate and the Asset Management business

 

 

503,168

 

 

 

677,463

 

 

 

300,849

 

Mezzanine investment income, net

 

 

1,531

 

 

 

 

 

 

 

Income from unconsolidated real estate partnerships

 

 

803

 

 

 

77

 

 

 

7,694

 

   Income before income tax benefit

 

 

504,892

 

 

 

703,576

 

 

 

316,243

 

Income tax benefit (Note 10)

 

 

3,135

 

 

 

13,027

 

 

 

30,836

 

   Net income

 

 

508,027

 

 

 

716,603

 

 

 

347,079

 

Noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

   Net income attributable to noncontrolling interests in consolidated real

      estate partnerships

 

 

(187

)

 

 

(8,220

)

 

 

(9,084

)

   Net income attributable to preferred noncontrolling interests in Aimco

      Operating Partnership

 

 

(7,708

)

 

 

(7,739

)

 

 

(7,764

)

   Net income attributable to common noncontrolling interests in Aimco

      Operating Partnership

 

 

(26,049

)

 

 

(34,417

)

 

 

(14,457

)

   Net income attributable to noncontrolling interests

 

 

(33,944

)

 

 

(50,376

)

 

 

(31,305

)

   Net income attributable to Aimco

 

 

474,083

 

 

 

666,227

 

 

 

315,774

 

Net income attributable to Aimco preferred stockholders

 

 

(7,335

)

 

 

(8,593

)

 

 

(8,594

)

Net income attributable to participating securities

 

 

(604

)

 

 

(1,037

)

 

 

(319

)

   Net income attributable to Aimco common stockholders

 

$

466,144

 

 

$

656,597

 

 

$

306,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income attributable to Aimco per common share – basic

 

$

3.16

 

 

$

4.34

 

 

$

2.02

 

   Net income attributable to Aimco per common share – diluted

 

$

3.15

 

 

$

4.34

 

 

$

2.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Weighted-average common shares outstanding – basic

 

 

147,718

 

 

 

151,152

 

 

 

151,595

 

   Weighted-average common shares outstanding – diluted

 

 

147,944

 

 

 

151,334

 

 

 

152,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

F-5


Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

 

2019

 

 

2018

 

 

2017

 

Net income

 

$

508,027

 

 

$

716,603

 

 

$

347,079

 

Other comprehensive (loss) gain:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale debt securities

 

 

(637

)

 

 

(131

)

 

 

1,507

 

Realized and unrealized losses on interest rate swaps

 

 

 

 

 

 

 

 

(173

)

Losses on interest rate swaps reclassified into earnings from

   accumulated other comprehensive loss

 

 

 

 

 

1,391

 

 

 

1,480

 

Other comprehensive (loss) gain

 

 

(637

)

 

 

1,260

 

 

 

2,814

 

Comprehensive income

 

 

507,390

 

 

 

717,863

 

 

 

349,893

 

Comprehensive income attributable to noncontrolling interests

 

 

(33,906

)

 

 

(50,445

)

 

 

(31,527

)

Comprehensive income attributable to Aimco

 

$

473,484

 

 

$

667,418

 

 

$

318,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

 

F-6


Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Noncontrolling

Interests in

 

 

Common

Noncontrolling

Interests in

 

 

 

 

 

 

 

Shares

Issued

 

 

Amount

 

 

Shares

Issued

 

 

Amount

 

 

Additional

Paid-

in Capital

 

 

Other

Comprehensive

Income (Loss)

 

 

Distributions

in Excess

of Earnings

 

 

Total Aimco

Equity

 

 

Consolidated

Real Estate

Partnerships

 

 

Aimco

Operating

Partnerships

 

 

Total

Equity

 

Balances at December 31, 2016

 

 

5,000

 

 

$

125,000

 

 

 

152,143

 

 

$

1,521

 

 

$

4,051,770

 

 

$

1,011

 

 

$

(2,385,399

)

 

$

1,793,903

 

 

$

151,121

 

 

$

(58

)

 

$

1,944,966

 

Redemption of Aimco Operating Partnership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,882

)

 

 

(11,882

)

Amortization of share-based compensation cost

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

8,638

 

 

 

 

 

 

 

 

 

8,638

 

 

 

 

 

 

613

 

 

 

9,251

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,401

 

 

 

 

 

 

3,401

 

Effect of changes in ownership for consolidated entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(160,586

)

 

 

 

 

 

 

 

 

(160,586

)

 

 

(157,056

)

 

 

4,867

 

 

 

(312,775

)

Cumulative effect of a change in accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,682

)

 

 

(62,682

)

 

 

 

 

 

(3,028

)

 

 

(65,710

)

Change in accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,592

 

 

 

 

 

 

2,592

 

 

 

101

 

 

 

121

 

 

 

2,814

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

315,774

 

 

 

315,774

 

 

 

9,084

 

 

 

14,457

 

 

 

339,315

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,367

)

 

 

(10,765

)

 

 

(19,132

)

Common Stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(226,172

)

 

 

(226,172

)

 

 

 

 

 

 

 

 

(226,172

)

Preferred Stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,594

)

 

 

(8,594

)

 

 

 

 

 

 

 

 

(8,594

)

Other, net

 

 

 

 

 

 

 

 

275

 

 

 

3

 

 

 

268

 

 

 

 

 

 

 

 

 

271

 

 

 

 

 

 

 

 

 

271

 

Balances at December 31, 2017

 

 

5,000

 

 

 

125,000

 

 

 

152,435

 

 

 

1,524

 

 

 

3,900,090

 

 

 

3,603

 

 

 

(2,367,073

)

 

 

1,663,144

 

 

 

(1,716

)

 

 

(5,675

)

 

 

1,655,753

 

Repurchases of Common Stock

 

 

 

 

 

 

 

 

(7,970

)

 

 

(80

)

 

 

(373,513

)

 

 

 

 

 

 

 

 

(373,593

)

 

 

 

 

 

 

 

 

(373,593

)

Issuance of Aimco Operating Partnership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,151

 

 

 

50,151

 

Redemption of Aimco Operating Partnership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,639

)

 

 

(9,639

)

Amortization of share-based compensation cost

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

8,074

 

 

 

 

 

 

 

 

 

8,074

 

 

 

 

 

 

1,691

 

 

 

9,765

 

Effect of changes in ownership for consolidated entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,115

)

 

 

 

 

 

 

 

 

(19,115

)

 

 

 

 

 

9,014

 

 

 

(10,101

)

Change in accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,191

 

 

 

 

 

 

1,191

 

 

 

 

 

 

69

 

 

 

1,260

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

666,227

 

 

 

666,227

 

 

 

8,220

 

 

 

34,417

 

 

 

708,864

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,471

)

 

 

(12,839

)

 

 

(22,310

)

Common Stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(238,067

)

 

 

(238,067

)

 

 

 

 

 

 

 

 

(238,067

)

Preferred Stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,594

)

 

 

(8,594

)

 

 

 

 

 

 

 

 

(8,594

)

Other, net

 

 

 

 

 

 

 

 

137

 

 

 

2

 

 

 

150

 

 

 

 

 

 

 

 

 

152

 

 

 

 

 

 

 

 

 

152

 

Balances at December 31, 2018

 

 

5,000

 

 

 

125,000

 

 

 

144,623

 

 

 

1,446

 

 

 

3,515,686

 

 

 

4,794

 

 

 

(1,947,507

)

 

 

1,699,419

 

 

 

(2,967

)

 

 

67,189

 

 

 

1,763,641

 

Repurchases of Common Stock

 

 

 

 

 

 

 

 

(461

)

 

 

(5

)

 

 

(20,677

)

 

 

 

 

 

 

 

 

(20,682

)

 

 

 

 

 

 

 

 

(20,682

)

Redemption of Preferred Stock

 

 

(5,000

)

 

 

(125,000

)

 

 

 

 

 

 

 

 

4,089

 

 

 

 

 

 

(4,089

)

 

 

(125,000

)

 

 

 

 

 

 

 

 

(125,000

)

Issuance of Aimco Operating Partnership units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,034

 

 

 

3,034

 

Redemption of Aimco Operating Partnership units

 

 

 

 

 

 

 

 

127

 

 

 

2

 

 

 

6,242

 

 

 

 

 

 

 

 

 

6,244

 

 

 

 

 

 

(12,710

)

 

 

(6,466

)

Amortization of share-based compensation cost

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

5,924

 

 

 

 

 

 

 

 

 

5,924

 

 

 

 

 

 

3,184

 

 

 

9,108

 

Effect of changes in ownership of consolidated entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,243

)

 

 

 

 

 

 

 

 

(13,243

)

 

 

3,422

 

 

 

9,821

 

 

 

 

Purchase of noncontrolling interest in consolidated real estate

   partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,844

)

 

 

 

 

 

(3,844

)

Change in accumulated other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(599

)

 

 

 

 

 

(599

)

 

 

 

 

 

(38

)

 

 

(637

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

474,083

 

 

 

474,083

 

 

 

382

 

 

 

26,049

 

 

 

500,514

 

Common Stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(241,643

)

 

 

(241,643

)

 

 

 

 

 

 

 

 

(241,643

)

Common Stock issued to Common Stockholders in special

   dividend

 

 

 

 

 

 

 

 

4,492

 

 

 

45

 

 

 

(786

)

 

 

 

 

 

 

 

 

(741

)

 

 

 

 

 

 

 

 

(741

)

Preferred Stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,246

)

 

 

(3,246

)

 

 

 

 

 

 

 

 

(3,246

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(308

)

 

 

(13,087

)

 

 

(13,395

)

Other, net

 

 

 

 

 

 

 

 

82

 

 

 

1

 

 

 

132

 

 

 

 

 

 

 

 

 

133

 

 

 

19

 

 

 

 

 

 

152

 

Balances at December 31, 2019

 

 

 

 

$

 

 

 

148,885

 

 

$

1,489

 

 

$

3,497,367

 

 

$

4,195

 

 

$

(1,722,402

)

 

$

1,780,649

 

 

$

(3,296

)

 

$

83,442

 

 

$

1,860,795

 

 

 

 

 

See notes to the consolidated financial statements.

 

F-7


Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

2019

 

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income

$

508,027

 

$

716,603

 

$

347,079

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

   Depreciation and amortization

 

380,171

 

 

377,786

 

 

366,184

 

   Provision for real estate impairment loss

 

 

 

 

 

35,881

 

   Gain on dispositions of real estate and the Asset Management business

 

(503,168

)

 

(677,463

)

 

(300,849

)

   Income tax benefit

 

(3,135

)

 

(13,027

)

 

(30,836

)

   Share-based compensation expense

 

8,146

 

 

8,550

 

 

7,877

 

   Amortization of debt issuance costs and other

 

7,629

 

 

9,023

 

 

5,666

 

   Other, net

 

25

 

 

1,065

 

 

(7,694

)

Changes in operating assets and operating liabilities:

 

 

 

 

 

 

 

 

 

   Accounts receivable and other assets

 

(26,021

)

 

(27,830

)

 

(15,841

)

   Accounts payable, accrued liabilities and other

 

2,798

 

 

1,681

 

 

(15,395

)

      Total adjustments

 

(133,555

)

 

(320,215

)

 

44,993

 

   Net cash provided by operating activities

 

374,472

 

 

396,388

 

 

392,072

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchases of real estate and deposits related to purchases of real estate

 

(138,311

)

 

(242,297

)

 

(20,372

)

Capital expenditures

 

(393,461

)

 

(340,489

)

 

(358,104

)

Proceeds from dispositions of real estate and the Asset Management Business

 

628,771

 

 

708,848

 

 

401,983

 

Payment for mezzanine investment and related transaction costs

 

(277,627

)

 

 

 

 

Purchases of corporate assets

 

(17,584

)

 

(7,718

)

 

(8,899

)

Proceeds from repayments on notes receivable

 

147

 

 

5,010

 

 

430

 

Other investing activities

 

(7,348

)

 

(1,508

)

 

(2,019

)

   Net cash (used in) provided by investing activities

 

(205,413

)

 

121,846

 

 

13,019

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from non-recourse property debt

 

774,623

 

 

1,228,027

 

 

312,434

 

Principal repayments on non-recourse property debt

 

(520,027

)

 

(976,087

)

 

(409,167

)

(Repayment of) proceeds from term loan

 

 

 

(250,000

)

 

250,000

 

Net borrowings on revolving credit facility

 

114,640

 

 

93,200

 

 

49,230

 

Payment of debt issuance costs

 

(4,861

)

 

(11,961

)

 

(4,751

)

Payment of debt extinguishment costs

 

(4,491

)

 

(14,241

)

 

(399

)

Repurchases of Common Stock

 

(20,682

)

 

(373,593

)

 

 

Repurchases of Preferred Stock

 

(125,000

)

 

 

 

 

Payment of dividends to holders of Preferred Stock

 

(3,246

)

 

(8,594

)

 

(8,594

)

Payment of dividends to holders of Common Stock

 

(241,288

)

 

(237,504

)

 

(225,377

)

Payment of distributions to noncontrolling interests

 

(21,620

)

 

(29,196

)

 

(26,799

)

Redemptions of noncontrolling interests in the Aimco Operating Partnership

 

(10,694

)

 

(9,885

)

 

(13,546

)

Contribution from noncontrolling interests in consolidated real estate partnerships

 

4,911

 

 

 

 

 

Purchases of noncontrolling interests in consolidated real estate partnerships

 

(3,780

)

 

(3,579

)

 

(314,269

)

Other financing activities

 

(2,437

)

 

5,233

 

 

(2,462

)

   Net cash used in financing activities

 

(63,952

)

 

(588,180

)

 

(393,700

)

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND

   RESTRICTED CASH

 

105,107

 

 

(69,946

)

 

11,391

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF

   PERIOD

 

72,595

 

 

142,541

 

 

131,150

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF

   PERIOD

$

177,702

 

$

72,595

 

$

142,541

 

 

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

F-8


Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

 

2019

 

 

2018

 

 

2017

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

160,961

 

 

$

199,996

 

 

$

196,438

 

Cash paid for income taxes

 

 

12,238

 

 

 

11,522

 

 

 

7,401

 

Non-cash transactions associated with the acquisition or disposition of

   real estate:

 

 

 

 

 

 

 

 

 

 

 

 

   Non-recourse property debt assumed in connection with the acquisition of

      real estate

 

 

97,565

 

 

 

208,885

 

 

 

 

   Deferred tax liability assumed in connection with the acquisition of real estate

 

 

148,809

 

 

 

 

 

 

 

   Issuance of common OP Units in connection with acquisition of real estate

 

 

3,034

 

 

 

50,151

 

 

 

 

   Non-recourse property debt assumed by buyer in connection with the

      disposition of the Asset Management business

 

 

 

 

 

227,708

 

 

 

 

Other non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

   Recognition of right of use lease assets

 

 

54,626

 

 

 

 

 

 

 

   Recognition of lease liabilities

 

 

59,251

 

 

 

 

 

 

 

   Accrued capital expenditures (at end of period)

 

 

54,358

 

 

 

40,185

 

 

 

31,719

 

   Accrued dividends on TSR restricted stock and LTIP awards (at end of

      period) (Note 9)

 

 

1,420

 

 

 

1,266

 

 

 

1,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

F-9


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Partners and the Board of Directors of

AIMCO Properties, L.P.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of AIMCO Properties, L.P. (the Partnership) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 10 to the consolidated financial statements, the Partnership changed its accounting for the income tax consequences of intercompany transfers of assets effective January 1, 2017.

Basis for Opinion

These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ ERNST & YOUNG LLP

We have served as the Partnership’s auditor since 1994.

Denver, Colorado

February 24, 2020

 

F-10


Table of Contents

AIMCO PROPERTIES, L.P.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2019 and 2018

(In thousands)

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Buildings and improvements

 

$

6,868,543

 

 

$

6,552,065

 

Land

 

 

1,869,048

 

 

 

1,756,525

 

   Total real estate

 

 

8,737,591

 

 

 

8,308,590

 

Accumulated depreciation

 

 

(2,718,284

)

 

 

(2,585,115

)

   Net real estate

 

 

6,019,307

 

 

 

5,723,475

 

Cash and cash equivalents

 

 

142,902

 

 

 

36,858

 

Restricted cash

 

 

34,800

 

 

 

35,737

 

Mezzanine investment

 

 

280,258

 

 

 

 

Other assets

 

 

351,472

 

 

 

351,541

 

Assets held for sale

 

 

 

 

 

42,393

 

   Total assets

 

$

6,828,739

 

 

$

6,190,004

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Non-recourse property debt, net

 

$

4,230,590

 

 

$

3,915,305

 

Revolving credit facility borrowings

 

 

275,000

 

 

 

160,360

 

   Total indebtedness

 

 

4,505,590

 

 

 

4,075,665

 

Accrued liabilities and other

 

 

360,574

 

 

 

226,230

 

Liabilities related to assets held for sale

 

 

 

 

 

23,177

 

   Total liabilities

 

 

4,866,164

 

 

 

4,325,072

 

Redeemable preferred units (Note 8)

 

 

97,064

 

 

 

101,291

 

Redeemable noncontrolling interests in consolidated real estate partnership

 

 

4,716

 

 

 

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

 

      Preferred units (Note 7)

 

 

 

 

 

125,000

 

      General Partner and Special Limited Partner

 

 

1,780,649

 

 

 

1,574,419

 

      Limited Partners

 

 

83,442

 

 

 

67,189

 

   Partners’ capital attributable to the Aimco Operating Partnership

 

 

1,864,091

 

 

 

1,766,608

 

Noncontrolling interests in consolidated real estate partnerships

 

 

(3,296

)

 

 

(2,967

)

   Total partners’ capital

 

 

1,860,795

 

 

 

1,763,641

 

   Total liabilities and partners’ capital

 

$

6,828,739

 

 

$

6,190,004

 

See notes to the consolidated financial statements.

F-11


Table of Contents

AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands, except per unit data)

 

 

 

2019

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Rental and other property revenues attributable to real estate

 

$

914,294

 

 

$

922,593

 

 

$

918,148

 

Asset Management business rental and tax credit revenues

 

 

 

 

 

49,817

 

 

 

87,289

 

   Total revenues

 

 

914,294

 

 

 

972,410

 

 

 

1,005,437

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses attributable to real estate

 

 

311,221

 

 

 

307,901

 

 

 

319,126

 

Property operating expenses of partnerships served by Asset Management

   business

 

 

 

 

 

20,921

 

 

 

35,458

 

Depreciation and amortization

 

 

380,171

 

 

 

377,786

 

 

 

366,184

 

General and administrative expenses

 

 

47,037

 

 

 

46,268

 

 

 

43,657

 

Other expenses, net

 

 

19,092

 

 

 

3,778

 

 

 

11,148

 

Provision for real estate impairment loss

 

 

 

 

 

 

 

 

35,881

 

   Total operating expenses

 

 

757,521

 

 

 

756,654

 

 

 

811,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11,424

 

 

 

10,914

 

 

 

8,332

 

Interest expense

 

 

(168,807

)

 

 

(200,634

)

 

 

(194,615

)

Gain on dispositions of real estate and the Asset Management business

 

 

503,168

 

 

 

677,463

 

 

 

300,849

 

Mezzanine investment income, net

 

 

1,531

 

 

 

 

 

 

 

Income from unconsolidated real estate partnerships

 

 

803

 

 

 

77

 

 

 

7,694

 

   Income before income tax benefit

 

 

504,892

 

 

 

703,576

 

 

 

316,243

 

Income tax benefit (Note 10)

 

 

3,135

 

 

 

13,027

 

 

 

30,836

 

   Net income

 

 

508,027

 

 

 

716,603

 

 

 

347,079

 

Net income attributable to noncontrolling interests in consolidated

   real estate partnerships

 

 

(187

)

 

 

(8,220

)

 

 

(9,084

)

   Net income attributable to the Aimco Operating Partnership

 

 

507,840

 

 

 

708,383

 

 

 

337,995

 

Net income attributable to the Aimco Operating Partnership’s preferred

   unitholders

 

 

(15,043

)

 

 

(16,332

)

 

 

(16,358

)

Net income attributable to participating securities

 

 

(620

)

 

 

(1,177

)

 

 

(337

)

   Net income attributable to the Aimco Operating Partnership’s

      common unitholders

 

$

492,177

 

 

$

690,874

 

 

$

321,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income attributable to the Aimco Operating Partnership per

      common unit – basic

 

$

3.16

 

 

$

4.35

 

 

$

2.02

 

   Net income attributable to the Aimco Operating Partnership per

      common unit – diluted

 

$

3.15

 

 

$

4.34

 

 

$

2.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Weighted-average common units outstanding – basic

 

 

155,882

 

 

 

158,890

 

 

 

158,793

 

   Weighted-average common units outstanding – diluted

 

 

156,217

 

 

 

159,073

 

 

 

159,257

 

See notes to the consolidated financial statements.

F-12


Table of Contents

AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

 

2019

 

 

2018

 

 

2017

 

Net income

 

$

508,027

 

 

$

716,603

 

 

$

347,079

 

Other comprehensive (loss) gain:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale debt securities

 

 

(637

)

 

 

(131

)

 

 

1,507

 

Realized and unrealized losses on interest rate swaps

 

 

 

 

 

 

 

 

(173

)

Losses on interest rate swaps reclassified into earnings from

   accumulated other comprehensive loss

 

 

 

 

 

1,391

 

 

 

1,480

 

Other comprehensive (loss) gain

 

 

(637

)

 

 

1,260

 

 

 

2,814

 

Comprehensive income

 

 

507,390

 

 

 

717,863

 

 

 

349,893

 

Comprehensive income attributable to noncontrolling interests

 

 

(187

)

 

 

(8,220

)

 

 

(9,185

)

Comprehensive income attributable to the Aimco Operating

   Partnership

 

$

507,203

 

 

$

709,643

 

 

$

340,708

 

See notes to the consolidated financial statements.

 

F-13


Table of Contents

AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

Preferred

Units

 

 

General Partner

and Special

Limited Partner

 

 

Limited

Partners

 

 

Partners’ Capital

Attributable to the

Aimco Operating

Partnership

 

 

Noncontrolling

Interests

in Consolidated Real

Estate Partnerships

 

 

Total

Partners’

Capital

 

Balances at December 31, 2016

 

$

125,000

 

 

$

1,668,903

 

 

$

(58

)

 

$

1,793,845

 

 

$

151,121

 

 

$

1,944,966

 

Redemption of partnership units held by non-Aimco partners

 

 

 

 

 

 

 

 

(11,882

)

 

 

(11,882

)

 

 

 

 

 

(11,882

)

Amortization of Aimco share-based compensation cost

 

 

 

 

 

8,638

 

 

 

613

 

 

 

9,251

 

 

 

 

 

 

9,251

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,401

 

 

 

3,401

 

Effect of changes in ownership for consolidated entities

 

 

 

 

 

(160,586

)

 

 

4,867

 

 

 

(155,719

)

 

 

(157,056

)

 

 

(312,775

)

Cumulative effect of a change in accounting principle

 

 

 

 

 

(62,682

)

 

 

(3,028

)

 

 

(65,710

)

 

 

 

 

 

(65,710

)

Change in accumulated other comprehensive income

 

 

 

 

 

2,592

 

 

 

121

 

 

 

2,713

 

 

 

101

 

 

 

2,814

 

Net income

 

 

 

 

 

315,774

 

 

 

14,457

 

 

 

330,231

 

 

 

9,084

 

 

 

339,315

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,367

)

 

 

(8,367

)

Distributions to common unitholders

 

 

 

 

 

(226,172

)

 

 

(10,765

)

 

 

(236,937

)

 

 

 

 

 

(236,937

)

Distributions to preferred unitholders

 

 

 

 

 

(8,594

)

 

 

 

 

 

(8,594

)

 

 

 

 

 

(8,594

)

Other, net

 

 

 

 

 

271

 

 

 

 

 

 

271

 

 

 

 

 

 

271

 

Balances at December 31, 2017

 

 

125,000

 

 

 

1,538,144

 

 

 

(5,675

)

 

 

1,657,469

 

 

 

(1,716

)

 

 

1,655,753

 

Repurchases of common partnership units

 

 

 

 

 

(373,593

)

 

 

 

 

 

(373,593

)

 

 

 

 

 

(373,593

)

Issuance of common partnership units

 

 

 

 

 

 

 

 

50,151

 

 

 

50,151

 

 

 

 

 

 

50,151

 

Redemption of partnership units held by non-Aimco partners

 

 

 

 

 

 

 

 

(9,639

)

 

 

(9,639

)

 

 

 

 

 

(9,639

)

Amortization of Aimco share-based compensation cost

 

 

 

 

 

8,074

 

 

 

1,691

 

 

 

9,765

 

 

 

 

 

 

9,765

 

Effect of changes in ownership for consolidated entities

 

 

 

 

 

(19,115

)

 

 

9,014

 

 

 

(10,101

)

 

 

 

 

 

(10,101

)

Change in accumulated other comprehensive income

 

 

 

 

 

1,191

 

 

 

69

 

 

 

1,260

 

 

 

 

 

 

1,260

 

Net income

 

 

 

 

 

666,227

 

 

 

34,417

 

 

 

700,644

 

 

 

8,220

 

 

 

708,864

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(12,839

)

 

 

(12,839

)

 

 

(9,471

)

 

 

(22,310

)

Distributions to common unitholders

 

 

 

 

 

(238,067

)

 

 

 

 

 

(238,067

)

 

 

 

 

 

(238,067

)

Distributions to preferred unitholders

 

 

 

 

 

(8,594

)

 

 

 

 

 

(8,594

)

 

 

 

 

 

(8,594

)

Other, net

 

 

 

 

 

152

 

 

 

 

 

 

152

 

 

 

 

 

 

152

 

Balances at December 31, 2018

 

 

125,000

 

 

 

1,574,419

 

 

 

67,189

 

 

 

1,766,608

 

 

 

(2,967

)

 

 

1,763,641

 

Repurchases of common partnership units held by Aimco

 

 

 

 

 

(20,682

)

 

 

 

 

 

(20,682

)

 

 

 

 

 

(20,682

)

Redemption of preferred units held by Aimco

 

 

(125,000

)

 

 

 

 

 

 

 

 

(125,000

)

 

 

 

 

 

(125,000

)

Issuance of Aimco Operating Partnership units

 

 

 

 

 

 

 

 

3,034

 

 

 

3,034

 

 

 

 

 

 

3,034

 

Redemption of Aimco Operating Partnership Units

 

 

 

 

 

6,244

 

 

 

(12,710

)

 

 

(6,466

)

 

 

 

 

 

(6,466

)

Amortization of share-based compensation cost

 

 

 

 

 

5,924

 

 

 

3,184

 

 

 

9,108

 

 

 

 

 

 

9,108

 

Effect of changes in ownership of consolidated entities

 

 

 

 

 

(13,243

)

 

 

9,821

 

 

 

(3,422

)

 

 

3,422

 

 

 

 

Purchase of noncontrolling interest in consolidated real

   estate partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,844

)

 

 

(3,844

)

Change in accumulated other comprehensive income

 

 

 

 

 

(599

)

 

 

(38

)

 

 

(637

)

 

 

 

 

 

(637

)

Net income

 

 

 

 

 

474,083

 

 

 

26,049

 

 

 

500,132

 

 

 

382

 

 

 

500,514

 

Distributions to common unitholders

 

 

 

 

 

(241,643

)

 

 

 

 

 

(241,643

)

 

 

 

 

 

(241,643

)

Common partnership units issued to common unitholders in special

   distribution

 

 

 

 

 

(741

)

 

 

 

 

 

(741

)

 

 

 

 

 

(741

)

Distributions to preferred unitholders

 

 

 

 

 

(3,246

)

 

 

 

 

 

(3,246

)

 

 

 

 

 

(3,246

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(13,087

)

 

 

(13,087

)

 

 

(308

)

 

 

(13,395

)

Other, net

 

 

 

 

 

133

 

 

 

 

 

 

133

 

 

 

19

 

 

 

152

 

Balances at December 31, 2019

 

$

 

 

$

1,780,649

 

 

$

83,442

 

 

$

1,864,091

 

 

$

(3,296

)

 

$

1,860,795

 

 

See notes to the consolidated financial statements.

 

F-14


Table of Contents

AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

2019

 

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income

$

508,027

 

$

716,603

 

$

347,079

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

   Depreciation and amortization

 

380,171

 

 

377,786

 

 

366,184

 

   Provision for real estate impairment loss

 

 

 

 

 

35,881

 

   Gain on dispositions of real estate and the Asset Management business

 

(503,168

)

 

(677,463

)

 

(300,849

)

   Income tax benefit

 

(3,135

)

 

(13,027

)

 

(30,836

)

   Share-based compensation expense

 

8,146

 

 

8,550

 

 

7,877

 

   Amortization of debt issuance costs and other

 

7,629

 

 

9,023

 

 

5,666

 

   Other, net

 

25

 

 

1,065

 

 

(7,694

)

Changes in operating assets and operating liabilities:

 

 

 

 

 

 

 

 

 

   Accounts receivable and other assets

 

(26,021

)

 

(27,830

)

 

(15,841

)

   Accounts payable, accrued liabilities and other

 

2,798

 

 

1,681

 

 

(15,395

)

      Total adjustments

 

(133,555

)

 

(320,215

)

 

44,993

 

   Net cash provided by operating activities

 

374,472

 

 

396,388

 

 

392,072

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchases of real estate and deposits related to purchases of real estate

 

(138,311

)

 

(242,297

)

 

(20,372

)

Capital expenditures

 

(393,461

)

 

(340,489

)

 

(358,104

)

Proceeds from dispositions of real estate and the Asset Management Business

 

628,771

 

 

708,848

 

 

401,983

 

Payment for mezzanine investment and related transaction costs

 

(277,627

)

 

 

 

 

Purchases of corporate assets

 

(17,584

)

 

(7,718

)

 

(8,899

)

Proceeds from repayments on notes receivable

 

147

 

 

5,010

 

 

430

 

Other investing activities

 

(7,348

)

 

(1,508

)

 

(2,019

)

   Net cash (used in) provided by investing activities

 

(205,413

)

 

121,846

 

 

13,019

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from non-recourse property debt

 

774,623

 

 

1,228,027

 

 

312,434

 

Principal repayments on non-recourse property debt

 

(520,027

)

 

(976,087

)

 

(409,167

)

(Repayment of) proceeds from term loan

 

 

 

(250,000

)

 

250,000

 

Net borrowings on revolving credit facility

 

114,640

 

 

93,200

 

 

49,230

 

Payment of debt issuance costs

 

(4,861

)

 

(11,961

)

 

(4,751

)

Payment of debt extinguishment costs

 

(4,491

)

 

(14,241

)

 

(399

)

Repurchases of common partnership units held by General Partner and Special

   Limited Partner

 

(20,682

)

 

(373,593

)

 

 

Redemption of preferred units from Aimco

 

(125,000

)

 

 

 

 

Payment of distributions to preferred units

 

(10,954

)

 

(16,334

)

 

(16,358

)

Payment of distributions General Partner and Special Limited Partner

 

(241,288

)

 

(237,504

)

 

(225,377

)

Payment of distributions to Limited Partners

 

(13,399

)

 

(11,987

)

 

(10,668

)

Payment of distributions to noncontrolling interests

 

(513

)

 

(9,469

)

 

(8,367

)

Redemption of common and preferred units

 

(10,694

)

 

(9,885

)

 

(13,546

)

Contribution from noncontrolling interests in consolidated real estate partnerships

 

4,911

 

 

 

 

 

Purchases of noncontrolling interests in consolidated real estate partnerships

 

(3,780

)

 

(3,579

)

 

(314,269

)

Other financing activities

 

(2,437

)

 

5,233

 

 

(2,462

)

   Net cash used in financing activities

 

(63,952

)

 

(588,180

)

 

(393,700

)

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND

   RESTRICTED CASH

 

105,107

 

 

(69,946

)

 

11,391

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF

   PERIOD

 

72,595

 

 

142,541

 

 

131,150

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF

   PERIOD

$

177,702

 

$

72,595

 

$

142,541

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

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AIMCO PROPERTIES, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2019, 2018, and 2017

(In thousands)

 

 

 

2019

 

 

2018

 

 

2017

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

160,961

 

 

$

199,996

 

 

$

196,438

 

Cash paid for income taxes

 

 

12,238

 

 

 

11,522

 

 

 

7,401

 

Non-cash transactions associated with the acquisition or disposition of

   real estate:

 

 

 

 

 

 

 

 

 

 

 

 

   Non-recourse property debt assumed in connection with the acquisition of

      real estate

 

 

97,565

 

 

 

208,885

 

 

 

 

   Deferred tax liability assumed in connection with the acquisition of real estate

 

 

148,809

 

 

 

 

 

 

 

   Issuance of common OP Units in connection with acquisition of real estate

 

 

3,034

 

 

 

50,151

 

 

 

 

   Non-recourse property debt assumed by buyer in connection with the

      disposition of the Asset Management business

 

 

 

 

 

227,708

 

 

 

 

Other non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

   Recognition of right of use lease assets

 

 

54,626

 

 

 

 

 

 

 

   Recognition of lease liabilities

 

 

59,251

 

 

 

 

 

 

 

   Accrued capital expenditures (at end of period)

 

 

54,358

 

 

 

40,185

 

 

 

31,719

 

   Accrued dividends on TSR restricted stock and LTIP awards (at end of

      period) (Note 9)

 

 

1,420

 

 

 

1,266

 

 

 

1,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to the consolidated financial statements.

 

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

AIMCO PROPERTIES, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

Note 1 — Organization

Apartment Investment and Management Company, or Aimco, is a Maryland corporation incorporated on January 10, 1994. Aimco is a self-administered and self-managed real estate investment trust, or REIT. AIMCO Properties, L.P., or the Aimco Operating Partnership, is a Delaware limited partnership formed on May 16, 1994, to conduct our business, which is focused on the ownership, management, redevelopment and some development of quality apartment communities located in several of the largest markets in the United States.

Aimco, through its wholly-owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, holds a majority of the ownership interests in the Aimco Operating Partnership. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership. Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are referred to as OP Units. OP Units include common partnership units, which we refer to as common OP Units, as well as preferred partnership units, which we refer to as preferred OP Units. As of December 31, 2019, after elimination of units held by consolidated subsidiaries, the Aimco Operating Partnership had 158,419,051 common OP Units outstanding. As of December 31, 2019, Aimco owned 148,885,197, or 94.0%, of the common OP Units of the Aimco Operating Partnership and Aimco had an equal number of shares of its Class A Common Stock outstanding, which we refer to as Common Stock.

Except as the context otherwise requires, “we,” “our” and “us” refer to Aimco, the Aimco Operating Partnership and their consolidated subsidiaries, collectively.

We own and operate a portfolio of apartment communities, diversified by both geography and price point, in 17 states and the District of Columbia. As of December 31, 2019, our portfolio included 124 apartment communities with 32,839 apartment homes in which we held an average ownership of approximately 99%. We consolidated 120 of these apartment communities with 32,697 apartment homes.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

Aimco’s accompanying consolidated financial statements include the accounts of Aimco, the Aimco Operating Partnership and their consolidated subsidiaries. The Aimco Operating Partnership’s consolidated financial statements include the accounts of the Aimco Operating Partnership and its consolidated subsidiaries. All significant intercompany balances have been eliminated in consolidation.

We consolidate a variable interest entity, or VIE, in which we are considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. As of December 31, 2019 and 2018, Aimco consolidated 6 and 9 VIEs, respectively, including the Aimco Operating Partnership.

As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a partner in a limited partnership or a member of a limited liability company.

Noncontrolling Interests in the Aimco Operating Partnership

Noncontrolling interests in Aimco Operating Partnership consist of common OP Units and preferred OP Units and are reflected in Aimco’s accompanying consolidated balance sheets as noncontrolling interests in Aimco Operating Partnership. Holders of preferred OP Units participate in the Aimco Operating Partnership’s income or loss only to the extent of their preferred distributions. Within Aimco’s consolidated financial statements, after provision for preferred OP Unit distributions, the Aimco Operating Partnership’s income or loss is allocated to the holders of common OP Units based on the weighted-average number of common OP Units (including those held by Aimco) outstanding during the period. During the years ended December 31, 2019, 2018, and 2017, the holders of common OP Units had a weighted-average ownership interest in the Aimco Operating Partnership of 6.0%, 4.9%, and 4.5%, respectively. Please refer to Note 8 for further information regarding the items comprising noncontrolling interests in the Aimco Operating Partnership. Substantially all of the assets and liabilities of Aimco are those of the Aimco Operating Partnership.  

Noncontrolling Interests in Consolidated Real Estate Partnerships

We generally report the unaffiliated partners’ interests in the net assets of our consolidated real estate partnerships as noncontrolling interests in consolidated real estate partnerships within consolidated equity and partners’ capital. If a real estate partnership includes redemption rights that are not within Aimco and the Aimco Operating Partnership’s control, the

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noncontrolling interest is included as temporary equity or temporary capital. If the redemption right is not currently redeemable but probable of being redeemable in the future, changes in redemption value are recognized each quarter with the change in value being reflected in additional paid-in-capital.

The assets of real estate partnerships consolidated by the Aimco Operating Partnership must first be used to settle the liabilities of such consolidated real estate partnerships. These consolidated real estate partnerships’ creditors do not have recourse to the general credit of the Aimco Operating Partnership.

Noncontrolling interests in consolidated real estate partnerships consist primarily of equity interests held by limited partners in consolidated real estate partnerships that have finite lives. We generally attribute to noncontrolling interests their share of income or loss of consolidated partnerships based on their proportionate interest in the results of operations of the partnerships, including their share of losses even if such attribution results in a deficit noncontrolling interest balance within our equity and partners’ capital accounts.

The terms of the related partnership agreements generally require the partnerships to be liquidated following the sale of the underlying real estate. As the general partner in these partnerships, we ordinarily control the execution of real estate sales and other events that could lead to the liquidation, redemption or other settlement of noncontrolling interests.

Changes in our ownership interest in consolidated real estate partnerships generally consist of our purchase of an additional interest in or the sale of our entire interest in a consolidated real estate partnership. The effect on our equity and partners’ capital of our purchase of additional interests in consolidated real estate partnerships during the years ended December 31, 2019, 2018, and 2017, is shown in our consolidated statements of equity and partners’ capital. The effect on our equity and partners’ capital of sales of consolidated real estate or sales of our entire interest in consolidated real estate partnerships is reflected in our consolidated financial statements as gains or losses on dispositions of real estate and accordingly the effect on our equity and partners’ capital is reflected within the amount of net income allocated to us and to noncontrolling interests. Upon our deconsolidation of a real estate partnership following the sale of our partnership interests or liquidation of the partnership following sale of the related apartment community, we derecognize any remaining noncontrolling interest of the associated partnership previously recorded in our consolidated balance sheets.

Investments in Unconsolidated Real Estate Partnerships

We own general and limited partner interests in partnerships that either directly, or through interests in other real estate partnerships, own apartment communities. We generally account for investments in real estate partnerships that we do not consolidate under the equity method. Under the equity method, we recognize our share of the earnings or losses of the entity for the periods presented, inclusive of our share of any impairments and disposition gains or losses recognized by and related to such entities, and we present such amounts within income from unconsolidated real estate partnerships in our consolidated statements of operations.

The excess of our cost of the acquired partnership interests over our share of the partners’ equity or deficit is generally ascribed to the fair values of land and buildings owned by the partnerships. We amortize the excess cost ascribed to the buildings over the related estimated useful lives. Such amortization is recorded as an adjustment of the amounts of earnings or losses we recognize from such unconsolidated real estate partnerships.

We may also originate loans for real estate acquisitions or developments where we either expect, or have the opportunity, to participate in the residual profits from such projects. When the risks and rewards of these arrangements are similar to an equity investor or joint venture partner, we account for these arrangements as real estate investments using the equity method of accounting. We recognize as income changes in our share of net assets, adjusted for any basis differential, in mezzanine investment income, net, in our consolidated statements of operations.

Real Estate

Acquisitions

Upon the acquisition of real estate, we determine whether the purchase qualifies as an asset acquisition or, less frequently, meets the definition of an acquisition of a business. We generally recognize the acquisition of apartment communities or interests in partnerships that own communities at our cost, including the related transaction costs, as asset acquisitions.

We allocate the cost of apartment communities acquired based on the relative fair value of the assets acquired and liabilities assumed. The fair value of these assets and liabilities is determined using valuation techniques that rely on Level 2 and Level 3 inputs within the fair value framework. We determine the fair value of tangible assets, such as land, buildings, furniture, fixtures and equipment using valuation techniques that consider comparable market transactions, replacement costs and other available information. We determine the fair value of identified intangible assets or liabilities, which typically relate to in-place leases, using valuation techniques that consider the terms of the in-place leases, current market data for comparable leases and our experience in leasing similar communities.

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The intangible assets or liabilities related to in-place leases are comprised of: (a) the value of the above- and below-market leases in-place, measured over the period, including probable lease renewals for below-market leases, that the leases are expected to remain in effect; (b) the estimated unamortized portion of avoided leasing commissions and other costs that ordinarily would be incurred to originate the in-place leases; and (c) the value associated with leased apartment homes during an estimated absorption period, which estimates rental revenue that would not have been earned had leased apartment homes been vacant at the time of acquisition, assuming lease-up periods based on market demand and stabilized occupancy levels. The above- and below-market lease intangibles are amortized to rental revenue over the expected remaining terms of the associated leases, which include reasonably assured renewal periods. Other intangible assets related to in-place leases are amortized to depreciation and amortization over the expected remaining terms of the associated leases.

Capital Additions

We capitalize costs, including certain indirect costs, incurred in connection with our capital additions activities, including redevelopments, developments, other tangible apartment community improvements, and replacements of existing apartment community components. Included in these capitalized costs are payroll costs associated with time spent by employees in connection with capital additions activities at the apartment community level. We characterize as “indirect costs” an allocation of certain department costs, including payroll, at the area operations and corporate levels that clearly relate to capital additions activities. We also capitalize interest, property taxes, and insurance during periods in which construction projects are in progress. We begin capitalization of costs, including certain indirect costs, incurred in connection with our capital addition activities, upon commencement of activities necessary to ready apartment communities for their intended use. These activities include when apartment communities or apartment homes are undergoing physical construction, as well as when homes are held vacant in advance of planned construction, provided that other activities such as permitting, planning and design are in progress. We cease the capitalization of costs when the apartment communities are substantially complete and ready for their intended use, which is typically when construction has been substantially completed and apartment homes are available for occupancy. Costs, including ordinary repairs, maintenance, and r