SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Form 10-Q
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 No
The number of shares of Class A Common Stock outstanding as of October 31, 2001: 74,280,257
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 STATEMENTSSeptember 30, 2001(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 “Operating Partnership”) through its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP, Inc. The Company held an approximate 86% interest in the Operating Partnership as of September 30, 2001. AIMCO-GP, Inc. is the sole general partner of the Operating Partnership.
As of September 30, 2001, AIMCO:
At September 30, 2001, AIMCO had 74,224,713 shares of Class A Common Stock (the “Common Stock”) outstanding and the Operating Partnership had 12,376,417 Partnership Common OP Units (“Common OP Units”) and other units (excluding units held by the Company), for a combined total of 86,601,130 shares of Common Stock, Common OP Units and other units outstanding.
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 and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.
The balance sheet at December 31, 2000 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, 2000. Certain 2000 financial statement amounts have been reclassified to conform to the 2001 presentation.
The accompanying consolidated financial statements include the accounts of AIMCO, the 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 other entities. 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. With regard to such partnerships, losses in excess of the minority partners’ basis of $19.2 million for the three months ended, and $30.1 for the nine months ended, September 30, 2001 have been charged to operations. The assets of property owning limited partnerships and limited liability companies owned or
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controlled by AIMCO or the Operating Partnership generally are not available to pay creditors of AIMCO or the Operating Partnership.
NOTE 3 — Acquisitions
During the nine months ended September 30, 2001 the Company purchased:
On March 26, 2001, the Company completed a merger pursuant to an agreement entered into on November 29, 2000 between AIMCO and Oxford Tax Exempt Fund II Limited Partnership (“OTEF”), for a total purchase price of $270 million, comprised of $100 million in Class P Convertible Cumulative Preferred Stock (the “Class P Preferred Stock”), $106 million in Common Stock issued at $48.46 per share, $17 million in cash, and $47 million in assumed liabilities. OTEF merged with a subsidiary of the Operating Partnership. In connection with the Company’s acquisition of interests in properties (the “Oxford properties”) from affiliates of Oxford Realty Financial Group, Inc., on September 20, 2000, the Company had acquired interests in OTEF’s managing general partner and OTEF’s associate general partner. After the merger, the Company’s interests in OTEF include a 1% general partner interest held by OTEF’s managing general partner and a 99% limited partner interest held by the Operating Partnership. OTEF was a publicly traded master limited partnership that invested primarily in tax-exempt bonds issued to finance high quality apartment and senior living/health care communities, the majority of which were owned by affiliates of OTEF, including the Oxford properties. In the merger, each BAC was converted into the right to receive 0.299 shares of Common Stock and 0.547 shares of AIMCO’s Class P Preferred Stock. In addition, the BAC holders received a special distribution of $50 million, or $6.21 per BAC.
NOTE 4 — Notes Receivable
The following table summarizes the Company’s notes receivable from unconsolidated real estate partnerships and subsidiaries at September 30, 2001 and 2000 (in thousands):
The Company recognizes interest income earned from its investments in notes receivable based upon whether 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 September 30, 2001 and September 30, 2000, the Company held $128.5 million and $60.6 million, respectively, of par value notes receivable from unconsolidated real estate partnerships, including accrued interest, for which management believes the collectibility of such amounts is both probable and estimable. As such, interest
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income from the par value notes is generally recognized as it is earned. Interest income from the par value notes for the three and nine months ended September 30, 2001 totaled $8.1 million and $22.8 million, respectively, and for the three and nine months ended September 30, 2000, totaled $7.0 million and $17.0 million, respectively.
As of September 30, 2001 and 2000, the Company held discounted notes, including accrued interest, with a carrying value of $128.9 million and $85.0 million, respectively. The total face value plus accrued interest of these notes were $289 million and $221 million in 2001 and 2000, respectively. Effective January 1, 2001, the Company now consolidates its previously unconsolidated subsidiaries (see Note 10). As a result, the notes receivable from unconsolidated subsidiaries have been eliminated and notes receivable from unconsolidated real estate partnerships have increased, and includes discounted notes which were held at the previously unconsolidated subsidiaries. In general, interest income from the discounted notes is not recognized as it is earned until such time as the timing and amounts of cash flows are probable and estimable.
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 and nine months ended September 30, 2001, the Company recognized deferred interest income and discounts of approximately $3.1 million ($0.04 per basic and diluted share) and $5.7 million ($0.08 per basic and diluted share), respectively, and in the three and nine months ended September 30, 2000, the Company recognized deferred interest income and discounts of approximately $7.2 million ($0.11 per basic and $0.10 per diluted share) and $20.6 million ($0.31 per basic and $0.30 per diluted share), respectively. Approximately 90% of the recognized interest income is collected in cash or recapitalized within 12 months from the date that such amounts were determined to be collectible, and the remainder is collected in the following nine months.
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 (including mergers with such limited partnerships) 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.
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 presence or release of the hazardous substances. The presence of, or the failure to properly remediate, hazardous substances may adversely affect occupancy at contaminated apartment communities and our ability to sell or finance contaminated properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous substances 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
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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 properties or properties it acquires or manages in the future.
NOTE 6 — Stockholders’ Equity
Preferred Stock
On July 20, 2001, AIMCO completed the sale of 3,600,000 shares of newly created Class R Cumulative Preferred Stock, par value $0.01 per share (the “Class R Preferred Stock”) in an underwritten public offering. AIMCO also gave the underwriters an option to purchase up to 540,000 additional shares of the Class R Preferred Stock to cover over-allotments, which was exercised on July 26, 2001. On August 1, 2001 an additional 800,000 shares were issued pursuant to an underwriting agreement dated July 27, 2001. The total net proceeds of approximately $119 million were used to repay short-term indebtedness. Holders of Class R Preferred Stock are entitled to receive dividends that are cumulative from the date of original issue and are payable quarterly each year, when and as declared by the AIMCO board of directors beginning on September 15, 2001, in an amount per share equal to $2.50 per year (equivalent to 10% of the $25 liquidation preference). Preferred stock for cash at a price per share equal to the liquidation preference plus accumulated, accrued and unpaid dividends. 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.
On March 26, 2001, AIMCO issued 4,000,000 shares of newly created Class P Preferred Stock, par value $.01 per share, in connection with the OTEF merger. The Class P Preferred Stock is valued at $100 million based on a $25 per share liquidation preference. Holders of Class P Preferred Stock are entitled to receive, when and as declared by the AIMCO board of directors, cash dividends in an amount per share equal to the greater of (i) $2.25 per year (equivalent to 9% of the liquidation preference) or (ii) the cash dividends payable on the number of shares of Common Stock into which a share of Class P Preferred Stock is convertible. Each share of Class P Preferred Stock is convertible at the option of the holder into 0.4464 shares of Common Stock, subject to certain anti-dilutive adjustments. The initial conversion ratio was in excess of the fair market value of the Common Stock on the commitment date. The Class P Preferred Stock is senior to Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of the Company, before payments or distributions by the Company are made to any holders of Common Stock, the holders of the Class P Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Each share of Class P Preferred Stock is redeemable beginning March 26, 2004, 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.
On March 19, 2001, AIMCO completed the sale of 2,200,000 shares of its Class Q Cumulative Preferred Stock, $.01 par value per share (the “Class Q Preferred Stock”), in an underwritten public offering. AIMCO also gave the underwriters an option to purchase up to 330,000 additional shares of the Class Q Preferred Stock to cover over-allotments, which was exercised on March 29, 2001. The net proceeds of approximately $61 million were used to repay short-term indebtedness. Holders of Class Q Preferred Stock are entitled to receive, when and as declared by the AIMCO board of directors cash dividends in an amount per share equal to $2.525 per year (equivalent to 10.10% of the liquidation preference). On and after March 19, 2006, the Company may redeem the Class Q Preferred Stock for cash at a price per share equal to the $25 liquidation preference plus accumulated, accrued and unpaid dividends, if any, to the redemption date. The Class Q Preferred Stock is senior to Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payments or distributions by AIMCO are made to any holders of Common Stock, the holders of the Class Q Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Each share of Class Q Preferred Stock is redeemable beginning March 19, 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 March 26, 2001, AIMCO issued approximately 2.2 million shares of Common Stock in connection with the OTEF merger. Pursuant to the agreement of merger, each OTEF BAC was converted into the right to receive 0.299 shares of Common Stock.
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During the three and nine months ended September 30, 2001, the Company repurchased and retired approximately 45,000 shares and 713,000 shares, respectively, of Common Stock at average prices of $45.62 per share and $43.03 per share, respectively.
During the three and nine months ended September 30, 2001, the holders of trust convertible preferred securities (“TOPRS”) converted a total of $4.0 million and $11.0 million of TOPRS into 84,109 and 224,881 shares of Common Stock, respectively. The convertible preferred securities were assumed by AIMCO in October 1998 in connection with its merger with Insignia Financial Group, Inc. The preferred securities have a conversion price of $49.61 per share which, based on a liquidation amount of $50 per security, results in the issuance of 1.0079 shares of Common Stock for each preferred security converted.
During the nine months ended September 30, 2001, approximately 312,000 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 tables illustrate the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2001 and 2000 (in thousands, except per share data):
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NOTE 8 — Industry Segments
AIMCO has two reportable segments: real estate and service 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 residents. 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 residents, 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 residents that contributed 10% or more of the Company’s total revenues during the three and nine months ended September 30, 2001 and 2000. The Company also manages apartment properties for third parties and affiliates through its service business segment. As disclosed, a significant portion of the revenues of the service 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 minus 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 (“FFO”), Adjusted Funds From Operations (“AFFO”) and Earnings Before Structural Depreciation (“EBSD”).
The following tables present the contribution (separated between consolidated and unconsolidated activity) to the Company’s Free Cash Flow for the three and nine months ended September 30, 2001 and 2000 from these segments, and a reconciliation of Free Cash Flow to Funds From Operations, Adjusted Funds From Operations, and net income (in thousands, except equivalent units (ownership effected and period weighted) and monthly rents):
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FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Three Months Ended September 30, 2001 and 2000(in thousands, except share and unit data)
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FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Nine Months Ended September 30, 2001 and 2000(in thousands, except share and unit data)
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Reconciliation of FCF, EBSD, FFO and AFFO to Net Income:
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NOTE 9 — Derivative Financial Instruments
In June 1998, Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities (“Statement 133”) was issued. In June 2000, Statement of Financial Accounting Standards No. 138,Accounting for Certain Derivative Instruments and Hedging Activities(“Statement 138”), an amendment of Statement 133 was issued. Statements 133 and 138 require that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.
The Company predominately uses long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid, among other things, risk related to fluctuating interest rates. Where the Company does use variable-rate debt, occasionally the Company enters into short-term economic hedges, such as interest rate swap agreements and interest rate cap agreements, to reduce its exposure to interest rate fluctuations. The interest rate swap agreements are generally utilized by the Company to modify the Company’s exposure to interest rate risk by converting the variable-rate debt to a fixed rate. The interest rate cap agreements utilized by the Company effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable rate debt. Normally, the interest rate caps are embedded within the original debt contract and are considered clearly and closely related to the debt contract and, therefore, are not measured as separate derivative instruments. Free standing interest rate exchange agreements were not material and were recorded on the balance sheet at their fair value and in current earnings in each period. The Company adopted Statements 133 and 138 on January 1, 2001. Due to the Company’s limited use of derivative instruments, the adoption of Statements 133 and 138 did not have a material effect on the Company’s financial statements.
NOTE 10 — Consolidation of Subsidiaries
In prior years, in order to satisfy certain requirements of the Internal Revenue Code applicable to the Company’s status as a REIT, certain assets of the Company were held through unconsolidated subsidiaries in which the Operating Partnership held non-voting preferred stock representing a 99% economic interest and certain officers and directors of the Company held all of the voting common stock, representing a 1% economic interest. As a result of the controlling ownership interest in the unconsolidated subsidiaries being held by others, the Company accounted for its interest in the unconsolidated subsidiaries using the equity method.
The REIT Modernization Act, which became effective January 1, 2001, among other things, permits REITS to own taxable REIT subsidiaries. Therefore, effective January 1, 2001, the Company acquired the 1% controlling ownership interest in the unconsolidated subsidiaries. As a result, the Company now consolidates these subsidiaries.
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The following table provides selected financial information assuming these subsidiaries were consolidated in the prior year (in thousands):
NOTE 11 — Transactional Income
For the three and nine months ended September 30, 2001, the Company’s interest and other income included transactional income (gains on sale of bonds or accretion of discounted notes) of $5.8 and $17.0 million, respectively.
During the nine months ended September 30, 2001, the Company received net proceeds of approximately $237.8 million from the sale of certain of the tax-exempt mortgage bonds. The remaining tax-exempt mortgage bonds of $9.0 million have been classified with other assets and are recorded at their fair value. All gains and losses have been realized and were determined on the specific identification method and are reflected in net income.
NOTE 12 — Dilutive Securities
In June 2001, AIMCO shareholders approved the sale by AIMCO’s 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 comprised of a limited number of AIMCO employees for an aggregate offering price of $4.9 million. For further information on this transaction, see Proposal 3 in AIMCO’s proxy statement for its 2001 annual meeting of stockholders.
There is substantial uncertainty that the High Performance Units will have more than nominal value due to the required total return over the respective measurement periods. The Company has not met the required measurement benchmarks at September 30, 2001, and therefore, the Company has not recorded any value to the High Performance Units in the consolidated financial statements as of September 30, 2001, and such High Performance Units have had no dilutive effect.
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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 September 30, 2001:
NOTE 13 — Recent Accounting Developments
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statement is expected to result in an increase in annual net income of $6.7 million ($.09 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and believes that there will be no material effect on the earnings and financial position of the Company.
In July of 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issue” (“SAB 102”). SAB 102 summarizes certain of the SEC’s views on the development, documentation, and application of a systematic methodology as required by Financial Reporting Release No. 28 for determining allowances for loan and lease losses in accordance with generally accepted accounting principles. The Company believes that it is in compliance with the guidelines set forth in SAB 102.
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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 residents 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, distributions 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 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 18 regional operating centers, which holds a geographically diversified portfolio of apartment communities. As of September 30, 2001, the Company owned or managed 303,805 apartment units, comprised of 154,081 units in 564 apartment properties owned or controlled by the Company (the “Owned Properties”), 97,120 units in 593 apartment properties in which the Company has an equity interest (the “Equity Properties”) and 52,604 units in 409 apartment properties which the Company manages for third parties (the “Managed Properties” and together with the Owned Properties and the Equity Properties, the “AIMCO Properties”). The apartment communities are located in 46 states, the District of Columbia and Puerto Rico.
In the three months ended September 30, 2001, the Company completed the following:
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Results of Operations
Comparison of the Three Months Ended September 30, 2001 to the Three Months Ended September 30, 2000
In order for a meaningful analysis of the financial statements to be made, the revenues and expenses for the unconsolidated subsidiaries for the three months ended September 30, 2000, have been included as though they had been consolidated in the following analysis. All significant intercompany revenues and expenses have been eliminated.
Net Income
The Company recognized net income of $26.1 million for the three months ended September 30, 2001, compared with $30.2 million for the three months ended September 30, 2000. The following paragraphs discuss the results of operations in detail.
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Consolidated Rental Property Operations
Consolidated rental and other property revenues from the consolidated Owned Properties totaled $323.8 million for the three months ended September 30, 2001, compared with $271.1 million for the three months ended September 30, 2000, an increase of $52.7 million, or 19.4%. This increase in consolidated rental and other property revenues is a result of the purchase of interests in the Oxford properties, as well as 11 other properties in 2000, and 3 properties in 2001, which contributed 94.0% of the increase; the purchase of controlling interests and the subsequent consolidation of partnerships owning 7 properties in 2000 and 3 properties in 2001, which contributed 7.2% of the increase, and a 3.1% increase in “same store” sales revenues, which contributed 15.9% of the total increase. The effect of the foregoing was offset by the sale of 18 apartment properties in 2000 and 20 apartment properties in 2001.
Consolidated property operating expenses for the consolidated Owned Properties, consisting of on-site payroll costs, utilities, contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $131.5 million for the three months ended September 30, 2001, compared with $107.0 million for the three months ended September 30, 2000, an increase of $24.5 million or 22.9%. The increase in property operating expenses was due to the purchase of interests in the Oxford properties, as well as 11 other properties in 2000, and 3 properties in 2001, which contributed 67.8% of the increase; the purchase of controlling interests and the subsequent consolidation of partnerships owning 7 properties in 2000 and 3 properties in 2001, which contributed 24.0% of the increase, and an increase in “same store” expenses of 3.5%, which contributed 15.3% of the total increase, offset by the sale of 18 apartment properties in 2000 and 20 apartment properties in 2001.
Depreciation expense increased $23.6 million to $100.1 million for the three months ended September 30, 2001, compared to $76.5 million for the three months ended September 30, 2000. This is primarily a result of the purchase of interests in the Oxford properties, as well as 11 other properties in 2000, and 3 in 2001, and the purchase of controlling interests and the subsequent consolidation of partnerships owning 7 properties in 2000 and 3 properties in 2001.
Consolidated Service Business
The Company’s share of income from the consolidated service business totaled $21.3 million for the three months ended September 30, 2001, compared with income of $12.0 million for the three months ended September 30, 2000, an increase of $9.3 million. The increase resulted from higher construction revenue of $13.8 million, due to the seasonality of increased capital expenditures from construction and redevelopment activities. In addition, the Company took advantage of the lower interest rate environment and increased its refinancing activities generating additional fee revenue of approximately $2.9 million. This was offset by higher operating and corporate expenses of $5.3 million, primarily employee severance, and health insurance costs, and additional property and asset management contract intangible amortization of $2.1 million as a result of the acquisition of interests in the Oxford properties.
Consolidated General and Administrative Expenses
Consolidated general and administrative expenses decreased by $.6 million or 12.2% from $4.9 million for the three months ended September 30, 2000 compared to $4.3 million for the three months ended September 30, 2001, due to a reduction in temporary office assistance, recruiting, outside consultant, and travel expenses.
Consolidated Interest Expense
Consolidated interest expense, which includes the amortization of deferred financing costs, totaled $81.6 million for the three months ended September 30, 2001, compared with $68.6 million for the three months ended September 30, 2000, an increase of $13.0 million, or 19.0%. The increase was due to the acquisition of interests in the Oxford properties, as well as 11 other properties in 2000, and 3 properties in 2001, which contributed 138.7% of the increase; and the purchase of controlling interests and the subsequent consolidation of partnerships owning 7 properties in 2000 and 3 properties in 2001, which contributed 5.4% of the increase. These increases were offset by the sale of 18 apartment properties in 2000 and 20 apartment properties in 2001. In addition, there was a 32.4%
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decrease in the interest expense on the Company’s line of credit, as the Company had $109 million outstanding on its credit facility as of September 30, 2001, compared with $175 million at September 30, 2000, and the cost of such borrowing was at a weighted average interest rate of 6.12% compared to 9.17% at September 30, 2001 and September 30, 2000, respectively.
Consolidated Interest and Other Income
Consolidated interest and other income decreased $4.2 million or 21.9% from $19.2 million for the three months ended September 30, 2000, to $15.0 million for the three months ended September 30, 2001. The majority of this decrease is due to a $3.5 million decrease in interest income from money market and interest bearing accounts. The Company had $69.2 million in cash as of September 30, 2001, compared to $106.5 million at September 30, 2000, as well as interest rates on deposit accounts have decreased. In addition, transactional income, which was comprised of gain on sale of bonds or accretion of discounted notes, net of allocated expenses, decreased nearly $1.3 million from $7.2 million for the three months ended September 30, 2000 to $5.8 million for the three months ended September 30, 2001.
Equity in Losses of Unconsolidated Real Estate Partnerships
Equity in losses of unconsolidated real estate partnerships totaled $4.9 million for the three months ended September 30, 2001, compared with $8.4 million for the three months ended September 30, 2000, an increase of $3.5 million. The acquisition of interests in the Oxford properties in 2000 was a contributing factor to this increase.
Minority Interest in Other Entities
Minority interest in other entities was relatively unchanged, with $9.1 million for the three months ended September 30, 2001, compared to $9.0 million for the three months ended September 30, 2000.
Gain on Disposition of Properties
Gain on disposition of properties totaled $2.8 million for the three months ended September 30, 2001, compared to $8.9 million for the three months ended September 30, 2000, a decrease of $6.1 million. In both periods the properties sold were considered by management to be inconsistent with the Company’s long-term investment strategy.
Minority Interest in Operating Partnership
Minority interest in Operating Partnership remained relatively unchanged with $3.0 million for the three months ended September 30, 2001 compared to $3.2 million for the three months ended September 30, 2001.
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Comparison of the Nine Months Ended September 30, 2001 to the Nine Months Ended September 30, 2000
In order for a meaningful analysis of the financial statements to be made, the revenues and expenses for the unconsolidated subsidiaries for the nine months ended September 30, 2000, have been included as though they had been consolidated in the following analysis. All significant intercompany revenues and expenses have been eliminated.
The Company recognized net income of $70.6 million for the nine months ended September 30, 2001, compared with $67.9 million for the nine months ended September 30, 2000. The following paragraphs discuss the results of operations in detail.
Consolidated rental and other property revenues from the consolidated Owned Properties totaled $969.8 million for the nine months ended September 30, 2001, compared with $753.5 million for the nine months ended September 30, 2000, an increase of $216.3 million, or 28.7%. This increase in consolidated rental and other property revenues is a result of the purchase of interests in the Oxford properties, as well as 12 other properties in 2000, and 3 in 2001, which contributed 67.1% of the increase; the purchase of controlling interests and the subsequent consolidation of
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partnerships owning 66 properties in 2000 and 3 properties in 2001, which contributed 23.4% of the increase, and a 4.2% increase in “same store” sales revenues, which contributed 14.6% of the total increase. The effect of the foregoing was offset by the sale of 28 apartment properties in 2000 and 20 apartment properties in 2001.
Consolidated property operating expenses for the consolidated Owned Properties, consisting of on-site payroll costs, utilities, contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $384.4 million for the nine months ended September 30, 2001, compared with $302.4 million for the nine months ended September 30, 2000, an increase of $82.0 million or 27.1%. The increase in property operating expenses was due to the purchase of interests in the Oxford properties, as well as 12 other properties in 2000, and 3 in 2001, which contributed 61.4% of the increase; the purchase of controlling interests and the subsequent consolidation of partnerships owning 66 properties in 2000 and 3 properties in 2001, which contributed 23.4% of the increase, and an increase in “same store” expenses of 4.6%, which contributed 17.0% of the total increase, offset by the sale of 28 apartment properties in 2000 and 20 apartment properties in 2001.
Depreciation expense increased $77.9 million to $300.7 million for the nine months ended September 30, 2001, compared to $222.8 million for the nine months ended September 30, 2000 as a primary result of the purchase of interests in the Oxford properties, as well as 12 other properties in 2000, and 3 in 2001, and the purchase of controlling interests and the subsequent consolidation of partnerships owning 66 properties in 2000 and 3 properties in 2001.
The Company’s share of income from the consolidated service business totaled $47.6 million for the nine months ended September 30, 2001, compared with income of $32.5 million for the nine months ended September 30, 2000, an increase of $15.1 million. The increase resulted from higher construction revenue of $24.4 million, due to the seasonality of increased capital expenditures from construction and redevelopment activities. In addition, the Company took advantage of the lower interest rate environment and increased its refinancing activities generating additional fee revenue of approximately $5.2 million. This was offset by higher operating and corporate expenses of $7.2 million, primarily employee severance, and health insurance costs, and additional property and asset management contract intangible amortization of $7.3 million as a result of the acquisition of interests in the Oxford properties.
Consolidated general and administrative expenses decreased by $.7 million or 5.1% from $13.6 million for the nine months ended September 30, 2000 compared to $12.9 million for the nine months ended September 30, 2001, due to a reduction in temporary office assistance, recruiting, outside consultant, and travel expenses.
Consolidated interest expense, which includes the amortization of deferred financing costs, totaled $250.0 million for the nine months ended September 30, 2001, compared with $193.6 million for the nine months ended September 30, 2000, an increase of $56.4 million, or 29.1%. The increase was due to the acquisition of interests in the Oxford properties, as well as 12 other properties in 2000, and 3 in 2001, which contributed 93.7% of the increase; and the purchase of controlling interests and the subsequent consolidation of partnerships owning 66 properties in 2000 and 3 properties in 2001, which contributed 19.3% of the increase. These increases were offset by the sale of 28 apartment properties in 2000 and 20 apartment properties in 2001. In addition, there was a 6.6% decrease in the interest expense on the Company’s line of credit, as the Company had $109 million outstanding on its credit facility as of September 30, 2001, compared with $175 million at September 30, 2000, and the cost of such borrowing was at a weighted average interest rate of 6.12% compared to 9.17% at September 30, 2001 and September 30, 2000, respectively.
Consolidated interest and other income remained relatively unchanged with $47.0 million for the nine months ended September 30, 2001, compared to $49.0 million for the nine months ended September 30, 2000. While
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transactional income, which was comprised of gain on sale of bonds or accretion of discounted notes, net of allocated expenses, decreased nearly $3.6 million from $20.6 million for the three months ended September 30, 2000 to $17.0 million for the three months ended September 30, 2001, and interest from money market and interest bearing accounts decreased $2.6 million, interest from general partner notes receivable increased $5.9 million, as a result of increased funding of general partner loans.
Equity in losses of unconsolidated real estate partnerships totaled $14.1 million for the nine months ended September 30, 2001, compared with $6.8 million for the nine months ended September 30, 2000, a decrease of $7.3 million. The acquisition of interests in the Oxford properties in 2000 has contributed over $1.0 million to the earnings of unconsolidated real estate partnerships. However, this was offset by the purchase of equity interests in better performing apartment properties which resulted in these properties being consolidated and contributing to consolidated rental revenues and expenses (66 properties in 2000 and 3 properties in 2001).
Deferred Income Tax Benefit (Provision)
In the nine months ended September 30, 2001, there was no provision for income taxes, compared to an expense of $2.7 million in the nine months ended September 30, 2000. This decrease is a result of a reduction in income from the Company’s taxable REIT subsidiaries.
Minority interest in other entities totaled $20.0 million for the nine months ended September 30, 2001, compared to $22.5 million for the nine months ended September 30, 2000, a decrease of $2.5 million. This decrease is a result of the Company’s purchase of additional interests in consolidated properties, thereby reducing the minority interest allocation.
Gain on disposition of properties totaled $4.4 million for the nine months ended September 30, 2001, compared to $14.2 million for the nine months ended September 30, 2000, a decrease of $9.8 million. In both periods the properties sold were considered by management to be inconsistent with the Company’s long-term investment strategy.
Minority interest in Operating Partnership increased $.7 million, from $7.1 million for the nine months ended September 30, 2000 to $7.8 million for the nine months ended September 30, 2001. This increase is due to additional partnership units issued in tender, merger and acquisition related activities, resulting in dilution and an increase to minority interest shareholders. As a result, AIMCO’s interest in the Operating Partnership has decreased to 86% from 91% as of September 30, 2000.
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Same Store Property Operating Results
The Company defines “same store” properties as conventional apartment communities in which AIMCO’s ownership interest exceeded 10% in the comparable periods of 2001 and 2000. Total portfolio includes same store properties plus 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):
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Funds From Operations
For the three and nine months ended September 30, 2001 and 2000, the Company’s Funds From Operations (“FFO”) on a fully diluted basis were as follows (dollars in thousands):
Liquidity and Capital Resources
For the nine months ended September 30, 2001 and 2000, net cash flows were as follows (dollars in thousands):
During the nine months ended September 30, 2001, the Company closed $791 million in secured notes payable with a weighted average interest rate of 6.19%. Each of the notes is individually secured by one of 75 properties with no cross-collateralization, and the majority are long-term, fixed-rate and fully amortizing. The Company used its share of the proceeds, approximately $633 million, to repay the existing mortgage debt and to fund operating activities.
On November 6, 2001, the Company amended and restated its revolving credit facility. 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 the stock of certain subsidiaries of the Company owned by the Operating Partnership, NHP Management Company, AIMCO/Bethesda Holdings, Inc., and AIMCO Holdings, L.P. 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 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’s reference rate or 0.50% over the federal funds rate, plus, in either case, an applicable margin. From November 6, 2001 through July 31,
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2002, 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 August 1, 2002 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 November 6, 2001 was 5.01%. The amount available under the credit facility at September 30, 2001 was $291 million. At November 6, 2001, $128.5 million was outstanding on the line, providing availability of $271.5 million.
On September 20, 2000, AIMCO completed the acquisition of interests in the Oxford properties. In order to pay the cash portion of the purchase price and transactions costs, the Company borrowed $302 million from Bank of America, N.A., Lehman Commercial Paper Inc. and several other lenders, pursuant to a term loan. In March 2001, the Company paid off the remaining balance of the term loan and charged to operations approximately $2.2 million for the complete amortization of deferred financing and loan origination costs principally related to the term loan.
At September 30, 2001, the Company had $69.2 million in cash and cash equivalents. In addition, the Company had $147.6 million of restricted cash, primarily consisting of reserves and impounds held by lenders for capital replacements, property taxes and insurance. The Company’s principal liquidity requirements include normal operating expenses, payments of principal and interest on outstanding debt, capital improvements, acquisitions of or investments in properties, dividends paid to its stockholders and distributions paid to limited partners. The Company considers its cash provided by operating activities, and funds available under its credit facilities, to be adequate to meet short-term liquidity demands. The Company utilizes its revolving credit facility for general corporate purposes and to fund investments on an interim basis.
The Company expects to fund its requirements for property acquisitions, tender offers and refinancing of short-term debt with: cash generated from operations; long-term, fixed rate, fully amortizing non-recourse property debt; secured or unsecured short-term debt; and the issuance of debt or equity securities in public offerings or private placements.
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 nine months ended September 30, 2001, the Company made separate offers to the limited partners of 238 partnerships to acquire their limited partnership interests, and purchased approximately $148.5 million (including transaction costs) of limited partnership interests.
Return on Assets and Return on Equity
The Company’s Return On Assets and Return On Equity for the nine months ended September 30, 2001 and 2000 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 believes that an increase in energy costs will not have a material adverse effect on its results of operations. 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 proceeds from equity offerings or long-term debt financings.
The Company had $708.5 million of variable rate debt outstanding at September 30, 2001, which represented 15.9% of the Company’s total outstanding debt. 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 $7.1 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 September 30, 2001 is assumed to approximate their carrying value due to their relatively short terms. 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
None.
ITEM 2. Changes in Securities and Use of Proceeds
From time to time during the quarter, AIMCO issued shares of Common Stock in exchange for Common OP Units tendered to the Operating Partnership for redemption in accordance with the terms and provisions of the agreement of limited partnership of the 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 September 30, 2001, 61,737 shares of Common Stock were issued in exchange for Common OP Units in these transactions.
During the three months ended September 30, 2001, the holders of trust convertible preferred securities (“TOPRS”) converted a total of $4.0 million of TOPRS into 84,109 shares of Common Stock. The convertible preferred securities were assumed by AIMCO in October 1998 in connection with its merger with Insignia Financial Group, Inc. The preferred securities have a conversion price of $49.61 per share which, based on a liquidation amount of $50 per security, results in the issuance of 1.0079 shares of Common Stock for each preferred security converted.
All of the foregoing issuances were made in private placement transactions exempt from registration under the Securities Act pursuant to Section 4(2) thereof.
ITEM 3. Defaults Upon Senior Securities
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: November 14, 2001
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EXHIBIT INDEX(1)