SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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(Exact name of registrant as specified in its charter)
(303) 757-8101(Registrant’s telephone number, including area code)
Not Applicable(Former name, former address, and former fiscal year,if changed since last report)
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. Yes [X] No [ ]
The number of shares of Class A Common Stock outstanding as of April 30, 2002: 81,743,242
TABLE OF CONTENTS
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
FORM 10-QINDEX
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CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share Data)
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME(In Thousands, Except Per Share Data)(Unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2002(Unaudited)
NOTE 1 — Organization
Apartment Investment and Management Company, a Maryland corporation incorporated on January 10, 1994 (“AIMCO” and, together with its consolidated subsidiaries and other controlled entities, the “Company”), owns a majority of the ownership interests in AIMCO Properties, L.P., (the “AIMCO Operating Partnership”) through its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP, Inc. The Company held an approximate 86% interest in the AIMCO Operating Partnership as of March 31, 2002. AIMCO-GP, Inc. is the sole general partner of the AIMCO Operating Partnership. Interests in the AIMCO Operating Partnership that are held by limited partners other than the Company are referred to as “OP Units”.
As of March 31, 2002, AIMCO:
At March 31, 2002, AIMCO had 78,981,650 shares of Class A Common Stock (the “Common Stock”) outstanding and the AIMCO Operating Partnership had 12,742,302 common OP Units and other OP Units outstanding, for a combined total of 91,723,952 shares of Common Stock and OP Units outstanding (excluding preferred OP Units).
NOTE 2 — Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the statements and notes thereto included in the AIMCO annual report on Form 10-K for the year ended December 31, 2001. Certain 2001 financial statement amounts have been reclassified to conform to the 2002 presentation.
The accompanying consolidated financial statements include the accounts of AIMCO, the AIMCO Operating Partnership, majority owned subsidiaries and controlled real estate limited partnerships. Interests held by limited partners in real estate partnerships controlled by the Company are reflected as minority interest in consolidated real estate partnerships. All significant intercompany balances and transactions have been eliminated in consolidation. Minority interest in limited partnerships represents the non-controlling partners’ share of the underlying net assets of the Company’s controlled limited partnerships. When these partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distribution over net income, even though there is no economic impact, cost or risk to the Company. This charge is classified in
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the consolidated statements of income as distributions from (to) minority partners’ in excess of income. Losses are allocated to minority partners to the extent they do not create a minority interest deficit, in which case, the Company recognizes 100% of the losses in operating earnings. With regard to such partnerships, no losses were charged to operations for the three months ended March 31, 2002. The assets of property owning limited partnerships and limited liability companies owned or controlled by AIMCO or the AIMCO Operating Partnership generally are not available to pay creditors of AIMCO or the AIMCO Operating Partnership.
NOTE 3 — Acquisitions
During the three months ended March 31, 2002 the Company:
NOTE 4 — Notes Receivable
The following table summarizes the Company’s notes receivable from unconsolidated real estate partnerships at March 31, 2002 and 2001 (in thousands):
The Company recognizes interest income earned from its investments in notes receivable when the collectibility of such amounts is both probable and estimable. The notes receivable were either extended by the Company and are carried at the face amount plus accrued interest (“par value notes”) or were made by predecessors whose positions have been acquired by the Company at a discount and are carried at the acquisition amount using the cost recovery method (“discounted notes”).
As of March 31, 2002 and 2001, the Company held, primarily through its consolidated subsidiaries, $145.2 million and $125.0 million, respectively, of par value notes receivable from unconsolidated real estate partnerships,
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including accrued interest, for which management believes the collectibility of such amounts is both probable and estimable. As such, interest income from the par value notes is generally recognized as it is earned. Interest income from such notes for the three months ended March 31, 2002 and 2001, totaled $8.1 million and $6.8 million, respectively.
As of March 31, 2002 and 2001, the Company held discounted notes, including accrued interest, with a carrying value of $103.9 million and $102.5 million, respectively. The total face value plus accrued interest of these notes was $278.2 million and $227.3 million at March 31, 2002 and 2001, respectively.
Under the cost recovery method, the discounted notes are carried at the acquisition amount, less subsequent cash collections, until such time as collectibility is probable and the timing and amounts are estimable. Based upon closed or pending transactions (including sales activity), market conditions, and improved operations of the obligor, among other things, certain notes and the related discounts have been determined to be collectible. Accordingly, interest income that had previously been deferred and portions of the related discounts were recognized as interest income during the period. For the three months ended March 31, 2002 and 2001, the Company recognized deferred interest income and discounts of approximately $4.4 million ($0.06 per basic and diluted share) and $1.4 million ($0.02 per basic and diluted share), respectively. These amounts are net of allocated expenses of $0.4 million for the three months ended March 31, 2002, and none for the three months ended March 31, 2001. Interest income is ultimately collected in cash or through foreclosure of the property securing the note.
NOTE 5 — Commitments and Contingencies
Legal
The Company is a party to various legal actions resulting from its operating activities. These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole.
Limited Partnerships
In connection with the Company’s acquisitions of interests in limited partnerships that own properties, the Company and its affiliates are sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such partnerships or violations of the relevant partnership agreements. The Company believes it complies with its fiduciary obligations and relevant partnership agreements, and does not expect any such legal actions to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole. The Company may incur costs in connection with the defense or settlement of such litigation, which could adversely affect the Company’s desire or ability to complete certain transactions or otherwise have a material adverse effect on the Company and its subsidiaries.
Environmental
Various federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to properly remedy, hazardous substances may adversely affect occupancy at affected apartment communities and our ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of our properties, the Company could potentially be liable for environmental liabilities or costs associated with its properties or properties it acquires or manages in the future.
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Other Legal Matters
On January 30, 2002, AIMCO and four of its affiliated partnerships were named as defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco in the Superior Court, County of San Francisco. The City Attorney asserts that the defendants have violated certain state and local residential housing codes, and engaged in unlawful business practices and unfair competition, in connection with four properties owned and operated by the affiliated partnerships. The City Attorney asserts civil penalties from $500 to $1,000 per day for each affected unit, as well as other statutory and equitable relief. The Company has engaged in preliminary discussions with the City Attorney to resolve the lawsuit. In the event it is unable to resolve the lawsuit, the Company believes it has meritorious defenses to assert and will vigorously defend itself. While the outcome of any litigation is uncertain, the Company does not believe that the ultimate outcome will have a material impact upon the Company’s financial condition taken as a whole.
NOTE 6 — Stockholders’ Equity
Preferred Stock
On March 19, 2002, the Company announced that it would redeem for Common Stock all outstanding shares of its Class K Convertible Cumulative Preferred Stock (the “Class K Preferred Stock”) on April 18, 2002 at a redemption price of $27.2125 per share of Class K Preferred Stock. The redemption price was paid in shares of Common Stock at a price of $45.7835 per share, which resulted in the issuance of 0.5944 shares of Common Stock for each share of Class K Preferred Stock redeemed. As of March 31, 2002, approximately 659,000 shares of Class K Preferred Stock were converted into approximately 392,000 shares of Common Stock.
On March 25, 2002, the Company sold 1,000,000 additional shares of Class R Cumulative Preferred Stock, par value $0.01 per share (the “Class R Preferred Stock”) in a registered public offering. The total net proceeds of approximately $25 million were used to repay short-term indebtedness. Holders of the Class R Preferred Stock are entitled to receive dividends that are cumulative from the date of original issue and are payable quarterly each year, equal to $2.50 per year (equivalent to 10% of the $25 liquidation preference). The Class R Preferred Stock is senior to Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payments of distributions by AIMCO are made to any holders of Common Stock, the holders of the Class R Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Each share of Class R Preferred Stock is redeemable beginning July 20, 2006 at the option of the Company, at a price equal to a liquidation preference of $25 per share, plus all accumulated, accrued and unpaid dividends, if any, to the date fixed for redemption.
Common Stock
On January 14, 2002, the Company redeemed $35 million of Class B Preferred Partnership Units, originally issued in December of 1998 by an AIMCO subsidiary to AEW Targeted Securities Fund, L.P., an institutional investor. The Class B Preferred Partnership Units were originally issued with a warrant to purchase 875,000 shares of Common Stock at $40 per share. AIMCO redeemed the $35 million of Class B Preferred Partnership Units, paid accrued dividends and settled the warrant for a total of 447,991 shares of Common Stock and 444,247 common OP Units.
On March 11, 2002, AIMCO issued approximately 3.508 million shares of Common Stock ($164.9 million) and 882,784 Common OP Units ($41.5 million) based on $47 per share/unit in connection with the Casden Merger.
During the three months ended March 31, 2002, approximately 10,000 shares of Common Stock were issued in exchange for common OP Units.
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NOTE 7 — Earnings Per Share
Earnings per share is calculated based on the weighted average number of shares of common stock, common stock equivalents and dilutive convertible securities outstanding during the period. The following table illustrates the calculation of basic and diluted earnings per share for the three months ended March 31, 2002 and 2001 (in thousands, except per share data):
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NOTE 8 — Industry Segments
AIMCO has two reportable segments: real estate (owning and operating apartments); and investment management business (providing, to third parties, services relating to the apartment business). The Company owns and operates multi-family apartment communities throughout the United States and Puerto Rico which generate rental and other property related income through the leasing of apartment units to a diverse base of tenants. The Company separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single apartment communities segment, or real estate segment. There are different components of the multi-family business for which management considers disclosure to be useful. All real estate revenues are from external customers and no revenues are generated from transactions with other segments. There were no tenants that contributed 10% or more of the Company’s total revenues during the three months ended March 31, 2002 or 2001. The Company also manages apartment properties and provides other services for third parties and affiliates through its investment management business segment. As disclosed, a significant portion of the revenues of the investment management business are from affiliates of the Company.
The performance measure used by management of the Company for each segment is its contribution to free cash flow (“Free Cash Flow” (“FCF”)). Free Cash Flow is defined by the Company as net operating income less the capital spending required to maintain the related assets. Free Cash Flow measures profitability prior to the cost of capital. Other performance measures also used by management of the Company include funds from operations, adjusted funds from operations and earnings before structural depreciation.
The following tables present the contribution (separated between consolidated and unconsolidated activity) to the Company’s Free Cash Flow for the three months ended March 31, 2002 and 2001, from these segments, and a reconciliation of Free Cash Flow to funds from operations, funds from operations less a reserve for capital replacements, and net income (in thousands, except equivalent units (ownership effected) and monthly rents):
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FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Three Months Ended March 31, 2002 and 2001(in thousands, except unit data)
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FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Three Months Ended March 31, 2002 and 2001(in thousands, except share data)
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Reconciliation of FCF, EBSD, FFO and AFFO to Net Income (in thousands):
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NOTE 9 — Dilutive Securities
In June 2001, AIMCO shareholders approved the sale by the AIMCO Operating Partnership of an aggregate of 15,000 of its Class II, III, and IV High Performance Partnership Units (the “Class II Units”, “Class III Units” and “Class IV Units,” respectively, and, collectively the “High Performance Units”) to three limited liability companies owned by a limited number of AIMCO employees for an aggregate offering price of $4.9 million.
The valuation period for the Class II Units ended on December 31, 2001, with no value added, and therefore the allocable investment made by the holders of $1.275 million was lost.
The valuation periods for the Class III Units and Class IV Units end December 31, 2002 and 2003, respectively. At March 31, 2002, the Company did not meet the required measurement benchmarks for Class III or Class IV Units, and therefore, the Company has not recorded any value to the High Performance Units in the consolidated financial statements as of March 31, 2002, and such High Performance Units have had no dilutive effect. The table below illustrates the calculation of the value of High Performance Units at March 31, 2002 (in thousands):
AIMCO has additional dilutive securities, which include options, warrants, convertible preferred securities and convertible debt securities. The following table represents the total amount of common shares that would be outstanding if all dilutive securities were converted or exercised (not all of which are included in the fully diluted share count) as of March 31, 2002:
NOTE 10 — Discontinued Operations and Assets Held for Sale
In October 2001, FASB issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 establishes criteria beyond that previously specified in Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of(SFAS 121), to determine when a long-lived asset is classified as held for sale and it provides a single accounting model for the disposal of long-lived assets. SFAS 144 was effective for the Company beginning January 1, 2002. Due to the adoption of SFAS 144, the Company now reports assets held for sale (as defined by SFAS 144) and assets sold in the current period, as discontinued operations. All results of these discontinued operations, less applicable income taxes, are included in a separate component of income on the income statement.
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The Company is currently marketing for sale certain real estate properties that are inconsistent with the Company’s long-term investment strategies (as determined by management from time to time). As of March 31, 2002, the Company had 8 properties with 1,686 units classified as assets held for sale.
NOTE 11 — Recent Accounting Developments
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 141, Business Combinations(“SFAS 141”) and Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires the Company to reflect intangible assets apart from goodwill and supercedes previous guidance related to business combinations. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the Company’s financial position or results of operations. SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires the Company to perform impairment tests at least annually on all goodwill and other indefinite lived intangible assets. The Company adopted the requirements of SFAS 142 beginning January 1, 2002. The adoption of the non-amortization provision of SFAS 142 impacted net income and earnings per share for the three months ended March 31, 2002 and would have impacted net income and earnings per share for the three months ended March 31, 2001 as shown below (in thousands, except per share amounts):
In April 2002, FASB issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). SFAS 145 rescinds Statement of Financial Accounting Standard No. 4 (“SFAS 4”), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion 30, will now be used to classify those gains and losses. Statement of Financial Accounting Standard No. 64 amended SFAS 4, and is no longer necessary because SFAS 4 has been rescinded. Statement of Financial Accounting Standard No. 44 and the amended sections of Statement of Financial Accounting Standard No. 13 are not applicable to the Company and therefore have no effect on the Company’s financial statements. SFAS 145 is effective for fiscal years beginning after May 15, 2002 with early application encouraged. The adoption of SFAS 145 will likely not have a material effect on the Company as the gains and losses on the extinguishment of debt are generally not material to the Company’s financial statements.
NOTE 12 — Casden Merger
On March 11, 2002, the Company completed the acquisition of Casden Properties Inc. (“Casden”) pursuant to an Agreement and Plan of Merger dated as of December 3, 2001, by and among AIMCO, Casden and XYZ Holding LLC. The acquisition of Casden included the merger (the “Casden Merger”) of Casden into AIMCO, and the merger of a subsidiary of AIMCO into another REIT affiliated with Casden. The $1.1 billion acquisition is comprised of the following:
In addition, as part of the Casden Merger, AIMCO has committed to the following:
AIMCO paid $1.1 billion, which included an earnout of $15 million as a result of property performance for the period ended December 31, 2001. The Company issued 3.508 million shares of Class A Common Stock ($164.9 million), and 882,784 common OP Units ($41.5 million), based on $47 per share/unit, paid approximately $198 million in cash and assumed responsibility for existing mortgage indebtedness of approximately $673 million. The Company has also incurred $21 million in transaction costs comprised of professional fees, which included legal, accounting/tax and acquisition due diligence. This transaction was accounted for as a purchase, and as a result, the results of operations were included in the consolidated statement of income from the date of acquisition. The allocation of the purchase price of Casden is based upon preliminary estimates and is subject to final determination based upon estimates and other evaluations of fair value.
In connection with the Casden Merger, the Company borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan (the “Casden Loan”) to pay the cash required to complete the Casden Merger.
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NOTE 13 — Subsequent Events
Redemption of Class K Preferred Stock
On April 18, 2002, the Company redeemed for Common Stock all remaining outstanding shares of its Class K Preferred Stock at a redemption price of $27.2125 per share of Class K Preferred Stock. The redemption price was paid in shares of Common Stock at a price of $45.7835 per share, which resulted in the issuance of 0.5944 shares of Common Stock for each share of Class K Preferred Stock redeemed. Subsequent to March 31, 2002, approximately 4,341,000 shares of Class K Preferred Stock were either converted into or redeemed for approximately 2,580,000 shares of Common Stock.
Issuance of Class R Preferred Stock
On April 11, 2002, the Company sold an additional 1,000,000 shares of Class R Preferred Stock, par value $0.01 per share, in a registered public offering (see Note 6 for terms of the Class R Preferred Stock). The net proceeds of approximately $25 million were used to repay short-term indebtedness.
Approval of Class V High Performance Partnership Units
On April 26, 2002, AIMCO shareholders approved the sale by the AIMCO Operating Partnership of 5,000 of its Class V High Performance Partnership Units (the “Class V Units”) to a limited liability company owned by a limited number of AIMCO employees for an offering price of $1.1 million. The Class V Units have identical characteristics to the Class IV Units sold in 2001, except for the dilutive impact limit, which was reduced from 1.5% to 1%, and a different three-year measurement period. The valuation period of the Class V Units began on January 1, 2002, and will end on December 31, 2004. At March 31, 2002, the Company did not meet the required measurement benchmarks for the Class V Units, and therefore, the Company did not record any value to these units in the consolidated financial statements, nor did they have any dilutive effect.
Conversion of Class L Convertible Cumulative Preferred Stock
On May 6, 2002, GE Capital Equity Investments, Inc. converted 2,500,000 of its shares of AIMCO Class L Convertible Cumulative Preferred Stock (the “Class L Preferred Stock”), with a face value of $62.5 million, into 1,344,664 shares of AIMCO Common Stock. As a result of this conversion, as of May 6, 2002, 2,500,000 shares of Class L Preferred Stock remain outstanding.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Report contains or may contain information that is forward-looking, including, without limitation, statements regarding the effect of acquisitions, the Company’s future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation, national and local economic conditions; the general level of interest rates; the terms of governmental regulations that affect the Company and interpretations of those regulations; the competitive environment in which the Company operates; financing risks, including the risk that the Company’s cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; acquisition and development risks, including failure of such acquisitions to perform in accordance with projections; and possible environmental liabilities, including costs which may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the Company. In addition, the Company’s current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on its 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 the Company’s financial statements and the notes thereto, as well as the risk factors described in the documents the Company files from time to time with the Securities and Exchange Commission.
AIMCO is a real estate investment trust with headquarters in Denver, Colorado and 19 regional operating centers, which holds a geographically diversified portfolio of apartment communities. As of March 31, 2002, the Company owned or managed 333,496 apartment units, comprised of 171,059 units in 666 apartment properties owned or controlled by the Company (the “Owned Properties”), 133,278 units in 999 apartment properties in which the Company has an equity interest (the “Equity Properties”) and 29,159 units in 222 apartment properties which the Company provided services or managed for unrelated third parties (the “Managed Properties” and together with the Owned Properties and the Equity Properties, the “AIMCO Properties”). The apartment communities are located in 47 states, the District of Columbia and Puerto Rico.
In the three months ended March 31, 2002, the Company:
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Results of Operations
Comparison of the Three Months Ended March 31, 2002 to the Three Months Ended March 31, 2001
Net Income
The Company recognized net income of $70.1 million for the three months ended March 31, 2002, compared with $14.0 million for the three months ended March 31, 2001. The following paragraphs discuss the results of operations in detail.
Consolidated Rental Property Operations
Consolidated rental and other property revenues from the consolidated Owned Properties totaled $331.5 million for the three months ended March 31, 2002, compared with $316.8 million for the three months ended March 31, 2001, an increase of $14.7 million, or 4.6%. This increase in consolidated rental and other property revenues was a result of the following:
Consolidated property operating expenses for the consolidated Owned Properties, consisting of on-site payroll costs, utilities (net of reimbursements received from residents), contract services, property management fees, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $127.2 million for the three months ended March 31, 2002, compared with $119.1 million for the three months ended March 31, 2001, an increase of $8.1 million or 6.8%. This increase in property operating expenses was a result of the following:
Consolidated Investment Management Business
Income from the consolidated asset and investment management business, which is primarily earned from affiliated unconsolidated real estate partnerships in which the Company is the general partner, was $6.3 million for the three months ended March 31, 2002, compared to $5.8 million for the three months ended March 31, 2001, an increase of $0.5 million or 8.6%. This increase in consolidated investment management business was a result of the following:
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Consolidated General and Administrative Expenses
Consolidated general and administrative expenses decreased $1.0 million or 24.4% to $3.1 million for the three months ended March 31, 2002 compared to $4.1 million for the three months ended March 31, 2001. Lower compensation expense due to a reduction in work force contributed 25.2% to this decrease, with the remaining due to a decrease in professional fees, primarily legal and accounting, as a result of the Company’s cost saving efforts.
Consolidated Depreciation of Rental Property
Consolidated depreciation of rental property decreased $22.6 million to $70.5 million for the three months ended March 31, 2002, compared to $93.1 million for the three months ended March 31, 2001. During 2001, the Company completed a comprehensive review of its real estate related depreciation. As a result of this review, the Company changed its estimate of the remaining useful lives for its buildings and improvements. The Company believes the change reflects the remaining useful lives of the assets and is consistent with prevailing industry practice. The Company expects this change in useful lives to increase net income by approximately $65 million in 2002 over 2001. This change in estimate of useful lives contributed $26.0 million, or 115.0% of the decrease, which was in line with management's expectations. This decrease was offset by the following:
Consolidated Interest Expense
Consolidated interest expense, which includes the amortization of deferred financing costs, totaled $81.8 million for the three months ended March 31, 2002, compared with $84.5 million for the three months ended March 31, 2001, a decrease of $2.7 million, or 3.2%. The decrease was a result of the following:
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Consolidated Interest and Other Income
Consolidated interest and other income increased $4.0 million, or 27.2%, to $18.7 million for the three months ended March 31, 2002, compared with $14.7 million for the three months ended March 31, 2001. This increase was a result of the following:
Equity in Earnings (Losses) of Unconsolidated Real Estate Partnerships
Equity in earnings of unconsolidated real estate partnerships totaled $3.7 million for the three months ended March 31, 2002, compared with a loss of $4.3 million for the three months ended March 31, 2001, an increase of $8.0 million. The reason for this increase was the change in estimate of useful lives completed by the Company in 2001, which resulted in lower depreciation expense (see previous discussion on the change in estimate in Consolidated Depreciation of Rental Property).
Minority Interest in Consolidated Real Estate Partnerships
Minority interest in consolidated real estate partnerships totaled $3.4 million for the three months ended March 31, 2002, compared to $5.3 million for the three months ended March 31, 2001, a decrease of $1.9 million. This decrease is a result of the Company’s purchase of additional interests in consolidated partnerships, thereby reducing the minority interest allocation.
Distributions from (to) Minority Interest Partners in Excess of Income
Distributions from minority interest partners in excess of income was $1.6 million for the three months ended March 31, 2002 compared to distributions to minority interest partners of $10.9 million for the three months ended March 31, 2001, an increase of $12.5 million. When partnerships consolidated in the Company’s financial
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statements make cash distributions in excess of net income, generally accepted accounting principles require the Company, as the majority partner, to record a charge equal to the minority partners’ excess of distribution over net income, even though there is no economic impact, cost or risk to the Company. This increase is due to earnings from these partnerships generated from sales and operations, resulting in the Company being credited profits to the extent of such losses previously absorbed, as well as a reduced level of distributions being made from the consolidated partnerships.
Discontinued Operations
Income from discontinued operations totaled $4.7 million for the three months ended March 31, 2002, compared to a loss of $0.7 million for the three months ended March 31, 2001, an increase of $5.4 million. The increase is primarily related to the increase in gain on disposals of $3.9 million. As a result of the adoption of SFAS 144, effective January 1, 2002, the Company now reports assets held for sale (as defined by SFAS 144) and assets sold in the current period, as discontinued operations. In both periods the properties sold, as well as the properties held for sale, were considered by management to be inconsistent with the Company’s long-term investment strategy.
Same Store Property Operating Results
The Company defines “same store” properties as conventional apartment communities in which the Company’s ownership interest exceeded 10% in the comparable periods of 2002 and 2001. “Total portfolio” includes same store properties plus conventional acquisition and redevelopment properties. The following table summarizes the unaudited conventional rental property operations on a “same store” and a “total portfolio” basis (dollars in thousands):
Same store net operating income had a moderate increase of $0.3 million from the three months ended March 31, 2001 to the three months ended March 31, 2002. The 1% increase in average rent per occupied unit, from $687 in 2001, to $694 in 2002 contributed $3.0 million to this increase. Additionally, other income, primarily utility reimbursement, telephone and cable television commission, and resident fees for late payments, contributed $7.0 million. These increases were offset by a 1.2% decrease in average occupancy quarter over quarter, which resulted in a $3.0 million decrease in same store net operating income, an increase in bad debt expense of $3.4 million, and increases in property expenses including property taxes and insurance costs of $1.3 million and $2.0 million, respectively. Same store expenses for both periods presented above include capitalized costs. Had these costs not been included in either period, changes in same store results would have remained unchanged.
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Funds From Operations
For the three months ended March 31, 2002 and 2001, the Company’s Funds From Operations (“FFO”) on a fully diluted basis were as follows (dollars in thousands):
Liquidity and Capital Resources
For the three months ended March 31, 2002 and 2001, net cash flows were as follows (dollars in thousands):
During the three months ended March 31, 2002, the Company closed $59 million of long-term, fixed-rate, fully amortizing notes payable with a weighted average interest rate of 7.25%. Each of the notes is individually secured by one of 11 properties with no cross-collateralization. After repayment of existing debt totaling $45 million, the Company’s share of the proceeds was $9 million, which was used to repay existing debt and for working capital.
On March 11, 2002, the Company amended and restated its revolving credit facility as necessitated by the execution of the Casden Loan, in order to conform certain provisions of the loans. The commitment remains $400 million, and the number of lender participants in the facility’s syndicate is ten. The obligations under the amended and restated credit facility are secured by a first priority pledge of certain non-real estate assets of the Company and a second priority pledge of the equity owned by the Company and certain subsidiaries of AIMCO in other subsidiaries of AIMCO. Borrowings under the amended and restated credit facility are available for general corporate purposes. The amended and restated credit facility matures in July 2004 and can be extended once at
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AIMCO’s option, for a term of one year. The annual interest rate under the credit facility is based either on LIBOR or a base rate which is the higher of Bank of America, N.A.’s reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. From March 11, 2002 through the later of July 31, 2002 or the date on which the Casden Loan is paid in full, the margin ranges between 2.05% and 2.55%, in the case of LIBOR-based loans, and between 0.55% and 1.05%, in the case of base rate loans, based upon a fixed charge coverage ratio. Commencing on the later of August 1, 2002 or the day after the date on which the Casden Loan is paid in full through maturity, the margin will range between 1.60% and 2.35%, in the case of LIBOR-based loans, and between 0.20% and 0.95%, in the case of base rate loans, based upon a fixed charge coverage ratio. The weighted average interest rate at March 31, 2002 was 4.43% and the outstanding balance was $229.7 million. The amount available under the credit facility at March 31, 2002 was $170.3 million.
On March 11, 2002, the Company borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan to pay the cash required to complete the Casden Merger. The borrowers under the Casden Loan are the Company, the AIMCO Operating Partnership and NHP Management Company, and all obligations thereunder are guaranteed by certain of AIMCO’s subsidiaries. The obligations under the Casden Loan are secured by a first priority pledge of the equity owned by the Company and certain subsidiaries of AIMCO in other subsidiaries of AIMCO and a second priority pledge of certain non-real estate assets of the Company. The annual interest rate under the Casden Loan is based either on LIBOR or a base rate which is the higher of Lehman Commercial Paper Inc.’s reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. The margin is 3.0% in the case of LIBOR-based loans and 2.0% in the case of base rate loans, but the margin may increase to 3.25% in the case of LIBOR-based loans and 2.25% in the case of base rate loans if the rating of the Company’s or the AIMCO Operating Partnership’s senior unsecured debt is downgraded, the Company’s or the AIMCO Operating Partnership’s corporate credit rating is downgraded or the rating, if any, of the Casden Loan is downgraded. The Casden Loan matures in March 2004 and can be extended once at AIMCO’s option, for a term of one year. The Casden Loan imposes minimum net worth requirements and provides other financial covenants related to certain of AIMCO’s assets and obligations. These borrowings are expected to be repaid with internal operating cash flow, proceeds from property sales or proceeds from equity issuances. The weighted average interest rate at March 31, 2002 was 4.90% and the balance outstanding was $287 million. The amount outstanding on the Casden Loan at April 20, 2002 was $259.2 million.
The financial covenants contained in the amended and restated revolving credit facility and the Casden Loan require the Company to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, and an interest coverage ratio of 2.25 to 1.0, and a fixed charge coverage ratio of at least 1.70 to 1.0. In addition, the amended and restated revolving credit facility and the Casden Loan limit AIMCO from distributing more than 80% of its Funds From Operations (or such amounts as may be necessary for AIMCO to maintain its status as a REIT).
On March 25, 2002, the Company completed the sale of 1,000,000 additional shares of Class R Preferred Stock, par value $0.01 per share in a registered public offering. The total net proceeds of approximately $25 million were used to repay short-term indebtedness.
From time to time, the Company has offered to acquire and, in the future, may offer to acquire the interests held by third party investors in certain limited partnerships for which the Company acts as general partner. Any such acquisitions will require funds to pay the cash purchase price for such interests. During the three months ended March 31, 2002, the Company made separate offers to the limited partners of 125 partnerships to acquire their limited partnership interests, and purchased approximately $5 million of limited partnership interests.
At March 31, 2002, the Company had $107.3 million in cash and cash equivalents. In addition, the Company had $210.2 million of restricted cash ($70 million of which was acquired in the Casden Merger), primarily consisting of reserves and impounds held by lenders for capital replacements, property taxes and insurance. The Company’s principal demands for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital improvements, acquisitions of and investments in properties, dividends paid to stockholders and distributions paid to limited partners. The Company considers its cash provided by operating activities to be adequate to meet short-term liquidity demands. In the event that there is an economic downturn and the cash provided by operating activities is no longer adequate, the Company has additional means, such as short-term borrowing availability, to be able to meet its short-term liquidity demands. The Company utilizes its revolving credit facility for general corporate purposes and to fund investments on an interim basis.
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The Company expects to meet its long-term liquidity requirements, such as refinancing debt and property acquisitions, through long-term borrowings, both secured and unsecured, the issuance of debt or equity securities (including OP Units) and cash generated from operations.
Return on Assets and Return on Equity
The Company’s Return On Assets and Return On Equity for the three months ended March 31, 2002 and 2001 are as follows:
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s primary market risk exposure relates to changes in interest rates. The Company is not subject to any foreign currency exchange rate risk or commodity price risk, or any other material market rate or price risks. The Company uses predominantly long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid the refunding or repricing risks of short-term borrowings. The Company uses short-term debt financing and working capital primarily to fund acquisitions and generally expects to refinance such borrowings with cash from operating activities, property sales proceeds or long-term debt financings.
The Company had $1,476.0 million of variable rate debt outstanding at March 31, 2002, which represented 26.4% of the Company’s total outstanding debt. Of the total variable debt, the major components were floating rate tax-exempt bond financing ($869.7 million), floating rate secured notes ($89.6 million), the Company’s amended and restated credit facility ($229.7 million) and the Casden Loan ($287.0 million). Based on this level of debt, an increase in interest rates of 1% would result in the Company’s income and cash flows being reduced by $14.8 million on an annual basis.
The estimated aggregate fair value of the Company’s cash and cash equivalents, receivables, payables and short-term secured and unsecured debt as of March 31, 2002 approximates their carrying value due to their relatively short term nature. Management further believes that, after consideration of interest rate agreements, the fair market value of the Company’s secured tax-exempt bond debt and secured long-term debt approximates their carrying value, based on market comparisons to similar types of debt instruments having similar maturities.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
From time to time during the quarter, AIMCO issued shares of Class A Common Stock in exchange for common OP Units tendered to the AIMCO Operating Partnership for redemption in accordance with the terms and provisions of the agreement of limited partnership of the AIMCO Operating Partnership. Such shares are issued based on an exchange ratio of one share for each common OP Unit. The shares are issued in exchange for common OP Units in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof. During the three months ended March 31, 2002, approximately 10,000 shares of Class A Common Stock were issued in exchange for common OP Units in these transactions.
After March 19, 2002, holders of Class K Preferred Stock converted approximately 659,000 shares of Class K Preferred Stock into approximately 392,000 shares of Class A Common Stock. The shares were issued in exchange for Class K Preferred Stock in private transactions exempt from registration under the Securities Act pursuant to Section 4(2) thereof.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
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ITEM 6. Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 14, 2002
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EXHIBIT INDEX(1)