ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report on Form 10-Q contains or may contain information that is forward-looking within the meaning of the federal securities laws, including, without limitation, statements regarding: the ongoing relationship between Aimco and AIR (the “Separate Entities”) following the Separation; the impact of the COVID-19 pandemic, including on our ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, developments, and redevelopments; including our ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to our development and redevelopment investments; expectations regarding sales of our apartment communities and the use of proceeds thereof; the availability and cost of corporate debt; and our ability to comply with debt covenants, including financial coverage ratios; and the outcome and consequences of the current proxy contest with Land & Buildings Capital Growth, L.P.("Land & Buildings").
These forward-looking statements are based on management’s judgment as of this date, which is subject to risks and uncertainties that could cause actual results to differ materially from our expectations, including, but not limited to: the effects of the coronavirus pandemic on Aimco’s business and on the global and U.S. economies generally, and the ongoing, dynamic and uncertain nature and duration of the pandemic, geopolitical events which may adversely affect the markets in which our securities trade, and other macroeconomic conditions, including, among other things, supply chain challenges and rising interest rates, all of which heightens the impact of the other risks and factors
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described herein, and the impact on entities in which Aimco holds a partial interest, including its indirect interest in the partnership that owns Parkmerced Apartments, and the impact of coronavirus related governmental lockdowns on Aimco’s residents, commercial tenants, and operations; real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing and effects of acquisitions, dispositions, developments and redevelopments; expectations regarding sales of apartment communities and the use of proceeds thereof; insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; supply chain disruptions, particularly with respect to raw materials such as lumber, steel, and concrete; financing risks, including the availability and cost of financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; the risk that earnings may not be sufficient to maintain compliance with debt covenants, including financial coverage ratios; legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of laws and governmental regulations that affect us and interpretations of those laws and regulations; possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of real estate presently or previously owned by Aimco; the relationship between Aimco and Separate Entities after the Separation; the ability and willingness of the Separate Entities and their subsidiaries to meet and/or perform their obligations under the contractual arrangements that were entered into among the parties in connection with the Separation and any of their obligations to indemnify, defend and hold the other party harmless from and against various claims, litigation and liabilities; and the ability to achieve some or all the benefits that we expect to achieve from the Separation; the outcome and consequences of activist stockholders on our business; and such other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (“SEC”).
In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and depends on our ability to meet the various requirements imposed by the Code through actual operating results, distribution levels and diversity of stock ownership.
Readers should carefully review our financial statements and the notes thereto, as well as Item 1A. Risk Factors in Part II of this report. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Readers should also carefully review the section entitled “Risk Factors” described in Item 1A of Apartment Investment and Management Company’s and Aimco OP L.P.’s combined Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent documents we file from time to time with the SEC.
As used herein and except as the context otherwise requires, “we,” “our,” and “us” refer to Apartment Investment and Management Company (which we refer to as Aimco), Aimco OP L.P. (which we refer to as Aimco Operating Partnership) and their consolidated subsidiaries, collectively.
Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted in the United States ("GAAP"). These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading.
Executive Overview
Our mission is to make real estate investments, primarily focused on the multifamily sector within the continental United States, where outcomes are enhanced through our human capital so that substantial value is created for investors, teammates, and the communities in which we operate.
Our value proposition includes our:
•Platform, consisting of a cohesive and talented leadership team with an average Aimco tenure of over 10 years and nearly 20 years of diverse real estate industry experience combined with a disciplined and proven investment process;
•Diversified portfolio, consisting of high-performing in-process value-add investments, a deep pipeline that has nearly tripled since the Separation with a total potential of more than 15 million square feet, alternative investments, and a portfolio of stabilized real estate to provide risk management and produce predictable cash flow; and
•Capital redeployment plan of reallocating our equity to higher returning investments and prudent recycling of capital.
Our primary goal is outsized risk adjusted returns and accelerating growth for our shareholders. We are focused on providing superior total-return performance to shareholders, primarily through capital appreciation driven by accretive investment and active portfolio management over multi-year periods. We plan to reinvest earnings to facilitate growth and, therefore, do not presently intend to pay a regular quarterly cash dividend.
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Our financial objectives are to create value and produce superior, project-level, risk-adjusted returns on equity as measured by the investment period Internal Rate of Return (“IRR”) and the project-level Multiple on Invested Capital (“MOIC”). We measure broader performance based on Net Asset Value (“NAV”) growth over time.
Our capital allocation strategy has been designed to leverage our investment platform and optimize risk-adjusted returns for our shareholders.
Overall, we target a growth-oriented capital allocation, primarily weighted toward direct investment in “Value Add” and “Opportunistic” multifamily real estate.
From time to time, we expect to allocate a limited/small portion of our capital to passive debt and equity investments, both directly and indirectly. We may also utilize our established platform and existing relationships to generate fees through service offerings.
We have policies in place that support our strategy, guide our investment allocations, and manage risk, including to hold at all times a sizeable portion of our net equity in a diversified portfolio of “Core” and “Core-Plus” assets and before starting a project, require cash or committed credit necessary for completion.
Given our stated strategy, it is expected that at any point in time the value-creation process will be ongoing at numerous of our investments. Over time, we expect the Aimco enterprise to produce superior returns on equity on a risk-adjusted basis and it is our plan to do so by:
•Benefiting from a platform that leverages local and regional expertise
We have corporate headquarters in Denver, Colorado and Bethesda, Maryland. Our investment platform is managed by experienced professionals based in four regions: West Coast, Central and Mountain West, Mid-Atlantic and Northeast, and Southeast. By regionalizing this platform, we are able to leverage the in-depth local market knowledge of each regional leader, creating a comparative advantage when sourcing, evaluating, and executing investment opportunities.
•Managing and investing in value-add and opportunistic real estate
Our dedicated team will source and execute development and redevelopment projects, and various other direct investment strategies. The Aimco development and redevelopment portfolio currently includes $0.6 billion of projects in construction and lease-up. In addition, since the Separation, our team has secured significant, high-quality, future development opportunities, more than tripling Aimco’s controlled pipeline to a total potential of more than 15 million square feet, located in high-growth markets. Generally, we seek direct investment opportunities in locations where barriers to entry are high, target customers can be clearly defined and where we have a comparative advantage over others in the market.
•Owning a portfolio of stabilized core and core plus real estate
Our entire portfolio of operating properties includes 26 apartment communities (22 consolidated properties and four unconsolidated properties) with average rents in line with local market averages (generally defined as B class). We also own one commercial office building that is part of an assemblage with an adjacent apartment building. The target composition of our stabilized portfolio will continue to include primarily B multifamily assets, spread across a geographically diversified portfolio and with a bias toward long established residential neighborhoods that rank highly in regard to schools, employment fundamentals and state and regional governance. Core-Plus opportunities offer the opportunity for incremental capital investment while maintaining stabilized cashflow to accelerate income growth and improve asset values.
•Managing and investing in other alternative investments
We expect to allocate a limited portion of our capital to passive debt and equity investments, both directly and at the entity level when warranted by risk adjusted returns. Our current allocation to alternative investments includes: our indirect interest mezzanine loan to the Parkmerced partnership which owns 3,165 apartment homes and future development rights in San Francisco, California, and our passive equity investments in IQHQ, Inc. (“IQHQ”), a privately held life sciences real estate development company, and in property technology funds consisting of entities that develop technology related to the real estate industry.
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•Maintaining sufficient liquidity and utilizing safe financial leverage
At all times, we will guard our liquidity by maintaining sufficient cash and committed credit.
From time-to-time, we will allocate capital to financial assets designed to mitigate risks elsewhere in the Aimco enterprise. Existing examples include our option to acquire an interest rate swap designed to protect against repricing risk on our maturing liabilities and the use of interest rate caps to provide protection against increases in interest rates on in-place loans.
We expect to capitalize our activities through a combination of non-recourse property debt, construction loans, third-party equity, and the recycling of Aimco equity, including retained earnings. We plan to limit the use of recourse leverage, with a strong preference towards non-recourse property-level debt in order to limit risk to the Aimco enterprise. When warranted, we plan to seek equity capital from joint venture partners to improve our cost of capital, further leverage Aimco equity, reduce exposure to a single investment and, in certain cases, for strategic benefits.
The results from the execution of our business plan during the three and nine months ended September 30, 2022 are further described below.
Financial Results and Recent Highlights
•Net income per share attributable to Aimco, on a fully dilutive basis, was $0.19 for the three months ended September 30, 2022, compared to a loss of ($0.03) for the three months ended September 30, 2021, due primarily to gains related to dispositions of real estate. Net income per share attributable to Aimco, on a fully dilutive basis was $1.81 for the nine months ended September 30, 2022, compared to a loss of ($0.03) for the nine months ended September 30, 2021, due primarily to lease modification income and gains related to the dispositions of real estate.
•For the three months ended September 30, 2022, revenue and net operating income from our Operating Properties were up 11.5% and 17.5%, respectively, year over year, with average monthly revenue per apartment home of $2,173, up $261 year over year, and average daily occupancy of 96.0%, down 190 basis points year over year.
•In September 2022, we as lessee and AIR as lessor, closed the previously announced $669 million lease termination transaction with respect to four leases entered into on January 1, 2021 that pertained to our North Tower of Flamingo Point, 707 Leahy, The Fremont, and Prism properties. This transaction terminated the four leases on September 1, 2022 eliminating $469 million of obligations related to the four leased properties. In exchange we received a payment of $200 million. Our execution in the development and lease-up of these assets resulted in more than $100 million of realized value creation (net of costs) for Aimco shareholders.
•In July 2022, we paid $147.0 million to complete the prepayment of the $534.1 million of Notes Payable to AIR.
•In July and August 2022, we closed on the sales of two apartment communities, exiting the greater Seattle market for $122.0 million.
Value Add, Opportunistic & Alternative Investments
Development and Redevelopment
We generally seek development and redevelopment opportunities where barriers to entry are high, target customers can be clearly defined, and where we have a comparative advantage over others in the market. Our Value Add and Opportunistic investments may also target portfolio acquisitions, operational turnarounds, and re-entitlements.
We currently have four active development and redevelopment projects, located across four U.S. markets, in varying phases of construction and lease-up. These projects remain on track, as measured by budget, lease-up metrics, and current market valuations. During the three and nine months ended September 30, 2022, we invested $60.6 million and $188.9 million respectively, in development and redevelopment activities. Updates include:
•As of September 30, 2022, at The Hamilton in Miami, Florida, leasing of units ahead of initial occupancy progressed with 83 units pre-leased.
•Construction remains on schedule and on budget at Upton Place in Northwest Washington, D.C., the Benson Hotel and Faculty Club on the Anschutz Medical Campus in Aurora, Colorado and at our single-family home development project, Oak Shore, in Corte Madera, California.
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•As previously announced, following the successful development and lease-up of 707 Leahy in Redwood City, California, Prism in Cambridge, Massachusetts, North Tower of Flamingo Point in Miami Beach, Florida, and The Fremont on the Anschutz Medical Campus in Aurora, Colorado, Aimco and AIR entered an agreement that cancelled our leasehold interest in each property on September 1, 2022. The transaction was completed on schedule at a combined asset value of $669 million. We received $200 million, resulting in value creation, net of costs, of approximately $100 million, which was realized about 18 months sooner than originally anticipated.
Alternative Investments
Aimco makes alternative investments where it has special knowledge or expertise relevant to the venture and opportunity exists for positive asymmetric outcomes. Aimco's current alternative investments include a mezzanine loan secured by a stabilized multifamily property with an option to participate in future multi-family development as well as three passive equity investments. Updates include:
•The borrower on our $362.8 million mezzanine loan, which is secured by the Parkmerced stabilized multifamily property plus phases two through nine of the site's future development opportunity, remains current on its first mortgage obligations. Due to the relative size of our investment and alternative accretive uses of capital, we initiated a marketing effort in July 2022 to explore opportunities to monetize all or a portion of our investment. Increased uncertainty within financial markets has led us to extend the timeline for this process and its execution.
Investment Activity
Aimco is focused on development and redevelopment, funded through our joint ventures. Aimco will also consider opportunistic investments in related activities. Updates include:
•As previously announced, in July and August 2022, Aimco closed on the purchase of two development parcels, completing the assemblage it contracted to acquire, for $100 million, in February 2022. The nine-acre assemblage is located in the rapidly growing Flagler Village neighborhood of Fort Lauderdale, Florida, and allows for approximately three million square feet of phased, mixed-use development, which could contain up to 1,500 residential units, more than 300 hotel keys, and more than 100,000 square feet of retail space at full build-out.
Operating Property Results
Aimco owns a diversified portfolio of stabilized apartment communities located in eight major U.S. markets with average rents in line with local market averages. We also own a commercial office building that is part of an assemblage with an adjacent apartment building.
Highlights for the three months ended September 30, 2022 include:
•Revenue in the third quarter of 2022 was $34.7 million, up 11.5% year over year, resulting from a $261 increase in average monthly revenue per apartment home to $2,173, offset with a 190-basis point decrease in Average Daily Occupancy to 96.0%.
•Expenses in the third quarter of 2022 were $10.2 million, down 0.8% year over year.
•Net operating income in the third quarter of 2022 was $24.5 million, up 17.5% year-over-year.
•1001 Brickell Bay Drive, a waterfront office building in Miami, Florida, is owned as part of a larger assemblage with substantial development potential. In the nine months ended September 30, 2022, we executed leases on over 76,000 square feet of office space, at rates per square foot 15% higher than leases executed in the nine months ended September 30, 2021. As of September 30, 2022, the building was 84% occupied, up from 73% at the same time last year.
Balance Sheet and Financing Activity
We are highly focused on maintaining a strong balance sheet, including having at all times ample liquidity. As of September 30, 2022, we had access to $375.4 million in liquidity, including $206.3 million of cash on hand, $19.1 million of restricted cash, and the capacity to borrow up to $150.0 million on our revolving credit facility. Refer to the Liquidity and Capital Resources section for additional information regarding our leverage.
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Financial Results of Operations
We have three segments: (i) Development and Redevelopment, (ii) Operating, and (iii) Other.
Our Development and Redevelopment segment consists of properties that are under construction or have not achieved stabilization, as well as land assemblages that are being held for development adjacent to The Hamilton community and other land purchases. Our Operating segment includes 21 residential apartment communities that have achieved stabilized level of operations as of January 1, 2021 and maintained it throughout the current year and comparable period. We aggregate all our apartment communities that have reached stabilization into our Operating segment. Our Other segment consists of properties that are not included in our Development and Redevelopment or Operating segments.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements included in Item 1.
Three and Nine Months Ended September 30, 2022 compared with the Three and Nine Months Ended September 30, 2021
Net income increased by $34.5 million and by $281.3 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, as described more fully below.
Property Results
As of September 30, 2022, our Development and Redevelopment segment included four properties that were under construction. Our Operating segment included 21 communities with 5,582 apartment homes, and our Other segment included our recent Eldridge Townhomes acquisition, and one office building.
We use proportionate property net operating income to assess the operating performance of our segments. Proportionate property net operating income is defined as our share of rental and other property revenues, less direct property operating expenses, but
•excluding utility reimbursements, for the consolidated communities. In our Condensed Consolidated Statements of Operations, utility reimbursements are included in rental and other property revenues, in accordance with GAAP;
•excluding the results of four apartment communities with an aggregate 142 apartment homes that we neither manage nor consolidate, notes receivable, our investment in IQHQ and the Mezzanine Investment; and
•excluding property management costs and casualty gains or losses, reported in consolidated amounts, in our assessment of segment performance.
Please refer to Note 10 to the condensed consolidated financial statements in Item 1 for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses.
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Proportionate Property Net Operating Income
The results of our segments for the three months ended September 30, 2022 and 2021, as presented below, are based on segment classifications as of September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
(in thousands) |
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
Rental and other property revenues, before utility reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
Development and Redevelopment |
$ |
123 |
|
|
$ |
256 |
|
|
$ |
(133 |
) |
|
|
(52.0 |
%) |
Operating |
|
34,691 |
|
|
|
31,126 |
|
|
|
3,565 |
|
|
|
11.5 |
% |
Other |
|
4,241 |
|
|
|
3,459 |
|
|
|
782 |
|
|
|
22.6 |
% |
Total |
|
39,055 |
|
|
|
34,841 |
|
|
|
4,214 |
|
|
|
12.1 |
% |
Property operating expenses, net of utility reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
Development and Redevelopment |
|
336 |
|
|
|
472 |
|
|
|
(136 |
) |
|
|
(28.8 |
%) |
Operating |
|
10,220 |
|
|
|
10,301 |
|
|
|
(81 |
) |
|
|
(0.8 |
%) |
Other |
|
1,264 |
|
|
|
1,124 |
|
|
|
140 |
|
|
|
12.5 |
% |
Total |
|
11,820 |
|
|
|
11,897 |
|
|
|
(77 |
) |
|
|
(0.6 |
%) |
Proportionate property net operating income: |
|
|
|
|
|
|
|
|
|
|
|
Development and Redevelopment |
|
(213 |
) |
|
|
(216 |
) |
|
|
3 |
|
|
|
(1.4 |
%) |
Operating |
|
24,471 |
|
|
|
20,825 |
|
|
|
3,646 |
|
|
|
17.5 |
% |
Other |
|
2,977 |
|
|
|
2,335 |
|
|
|
642 |
|
|
|
27.5 |
% |
Total |
$ |
27,235 |
|
|
$ |
22,944 |
|
|
$ |
4,291 |
|
|
|
18.7 |
% |
For the three months ended September 30, 2022, compared to the same period in 2021:
•Development and Redevelopment proportionate property net operating income decreased from the amounts presented in our Form 10-Q dated June 30, 2022, due to the termination of the four initial leases.
•Operating proportionate property net operating income increased by $3.6 million, or 17.5%. The increase was attributable primarily to a $3.6 million, or 11.5% increase in rental and other property revenues due to higher average revenues of $261 per apartment home, offset with a 190-basis point decrease in occupancy.
•Other proportionate property net operating income increased by $0.6 million, or 27.5%.
The results of our segments for the nine months ended September 30, 2022 and 2021, as presented below, are based on segment classifications as of September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Historical Change |
|
(in thousands) |
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
Rental and other property revenues, before utility reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
Development and Redevelopment |
$ |
204 |
|
|
$ |
2,006 |
|
|
|
(1,802 |
) |
|
|
(89.8 |
%) |
Operating |
|
100,052 |
|
|
|
90,176 |
|
|
|
9,876 |
|
|
|
11.0 |
% |
Other |
|
13,619 |
|
|
|
9,783 |
|
|
|
3,836 |
|
|
|
39.2 |
% |
Total |
|
113,875 |
|
|
|
101,965 |
|
|
|
11,910 |
|
|
|
11.7 |
% |
Property operating expenses, net of utility reimbursements: |
|
|
|
|
|
|
|
|
|
|
|
Development and Redevelopment |
|
908 |
|
|
|
1,737 |
|
|
|
(829 |
) |
|
|
(47.7 |
%) |
Operating |
|
30,916 |
|
|
|
30,461 |
|
|
|
455 |
|
|
|
1.5 |
% |
Other |
|
4,085 |
|
|
|
3,251 |
|
|
|
834 |
|
|
|
25.7 |
% |
Total |
|
35,909 |
|
|
|
35,449 |
|
|
|
460 |
|
|
|
1.3 |
% |
Proportionate property net operating income: |
|
|
|
|
|
|
|
|
|
|
|
Development and Redevelopment |
|
(704 |
) |
|
|
269 |
|
|
|
(973 |
) |
|
|
(100.0 |
%) |
Operating |
|
69,136 |
|
|
|
59,715 |
|
|
|
9,421 |
|
|
|
15.8 |
% |
Other |
|
9,534 |
|
|
|
6,532 |
|
|
|
3,002 |
|
|
|
46.0 |
% |
Total |
$ |
77,966 |
|
|
$ |
66,516 |
|
|
$ |
11,450 |
|
|
|
17.2 |
% |
For the nine months ended September 30, 2022, compared to the same period in 2021:
•Development and redevelopment proportionate property net operating income decreased by $1.0 million, due primarily to the major redevelopment of The Hamilton. Development and redevelopment proportionate property net operating income decreased in the third quarter due to the termination of the four leases.
•Operating proportionate property net operating income increased by $9.4 million, or 15.8%. The increase was attributable primarily to a $9.9 million, or 11.0% increase in rental and other property revenues due to higher average revenues of $210 per apartment home, offset with a 30-basis point decrease in occupancy.
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•Other proportionate property net operating income increased by $3.0 million, or 46.0%.
Non-Segment Real Estate Operations
Operating income amounts not attributed to our segments include property management costs, casualty losses, and, if applicable, the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.
Depreciation and Amortization
For the three and nine months ended September 30, 2022, depreciation and amortization expense increased by $63.7 million, or 100%, and $80.4 million, or 100%, respectively, when compared to the same periods in 2021, primarily due to accelerated depreciation recognized relating to the lease termination transaction in the amount of $69.9 million and $85.7 million for the three and nine months ended September 30, 2022, respectively.
General and Administrative Expenses
For the three months ended September 30, 2022, general and administrative expenses increased by $1.9 million, or 21.9% compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, general and administrative expenses increased by $6.7 million, or 29.6% compared to the nine months ended September 30, 2021. General and administrative expenses incurred for the three and nine months ended September 30, 2021 were prior to the full build out of our platform and are not representative of what we believe our anticipated expenses will be going forward. Additionally, for three and nine months ended September 30, 2022 and 2021, general and administrative expenses included $1.7 million and $4.6 million of expenses, respectively, to be reimbursed to AIR, per agreement upon separation, for consulting services with respect to strategic growth, direction, and advice. This agreement will conclude at year end.
Interest Expense
For the three and nine months ended September 30, 2022, compared to the same periods in 2021, interest expense decreased by $3.0 million, or 23.4%, and increased by $27.9 million, or 73.4%, respectively. The quarterly decrease of $3.0 million was due primarily to repayment and refinancing activity. The year to date increase of $27.9 million was due primarily to spread maintenance costs related to prepayment of the Notes Payable to AIR and other debt, the refinancing of certain property debt, and the payoff of a construction loan.
Mezzanine Investment Income, Net
On November 26, 2019, Aimco Predecessor made a five-year, $275.0 million mezzanine loan to the partnership owning the “Parkmerced Apartments” located in southwest San Francisco (the “Mezzanine Investment”). The loan bears interest at a 10% annual rate, accruing if not paid from property operations. Ownership of the subsidiaries that originated and hold the mezzanine loan was retained by AIR following the Separation. The Separation Agreement provides for AIR to transfer ownership of the subsidiaries that originated and hold the mezzanine loan, once required third-party consents to transfer are received. Until legal title of the subsidiaries is transferred, AIR is obligated to pass payments on the mezzanine loan to us.
As of September 30, 2022 and December 31, 2021, the total receivable, including accrued and unpaid interest, was $362.8 million and $337.8 million, respectively. During the three and nine months ended September 30, 2022, we recognized $8.4 million and $25.0 million, respectively, of income in connection with the mezzanine loan, compared to $7.6 million and $22.7 million during the three and nine months ended September 30, 2021, respectively.
The loan is subject to certain risks, including, but not limited to, those resulting from the lingering disruption due to the COVID-19 pandemic and associated response, and any similar events that might occur in the future, which may result in all or a portion of the loan not being repaid. In the event we determine that a portion of the related Mezzanine Investment is not recoverable, we will recognize an impairment.
Realized and Unrealized Gains (Losses) on Interest Rate Options
We recorded unrealized gains of $7.5 million and $38.3 million, respectively, during the three and nine months ended September 30, 2022, compared to unrealized gains of $2.2 million and $10.6 million during the three and nine months ended September 30, 2021, respectively. In addition, we recorded realized gains of $1.7 million and $9.7 million during the three and nine months ended September 30, 2022.
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Realized and Unrealized Gains (Losses) on Equity Investments
In June 2022, 22% of our original investment in IQHQ was redeemed for $16.5 million and we recognized a realized gain of $5.7 million. Our remaining investment in IQHQ with a cost basis of $39.2 million was valued at an estimated fair market value of $59.7 million, and a $20.5 million unrealized gain was recognized.at the same per share value as the cash redemption.
We measure our investments in property technology funds at NAV as a practical expedient. As a result of changes in NAV, we recorded unrealized losses of $2.2 million and $6.0 million, respectively, during the three and nine months ended September 30, 2022, compared to unrealized gains of $1.2 million and $2.1 million during the three and nine months ended September 30, 2021.
Gains on Dispositions of Real Estate
In July and August 2022, we sold our Cedar Rim and 2900 on First properties located in Seattle, Washington, for a total gross sales price of $122.0 million and recognized gains from the sales of $75.5 million.
In May 2022, we sold our Pathfinder Village property located in Fremont, California, for a gross sales price of $127.0 million and recognized a gain from the sale of $94.6 million.
Lease Modification Income
In June 2022, we as lessee and AIR as lessor, entered into a lease termination agreement pursuant to which AIR paid us a termination payment on September 1, 2022. Upon receipt of this payment, the leases with respect to four properties were terminated, and we relinquished control of the associated leasehold improvements and underlying land of these four properties. The total lease modification income recognized for the nine months ended September 30, 2022 was $207.0 million.
Other Income (Expense), Net
Other income (expense), net, includes costs associated with our risk management activities, partnership administration expenses, valuation changes associated with equity investments, fee income, and certain non-recurring items. Other income (expense), net, for the three months ended September 30, 2022 decreased by $0.8 million, or 100.0%, compared to the three months ended September 30, 2021. Other income (expense), net, for the nine months ended September 30, 2022, decreased by $4.7 million, or 100.0% compared to 2021.
Income Tax Benefit (Expense)
Certain aspects of our operations, including our development and redevelopment activities, are conducted through taxable REIT subsidiaries, or TRS entities. Additionally, our TRS entities hold investments in one of our apartment communities and 1001 Brickell Bay Drive.
Our income tax benefit calculated in accordance with GAAP includes income taxes associated with the income or loss of our TRS entities. Income taxes, as well as changes in valuation allowance and incremental deferred tax items in conjunction with intercompany asset transfers and internal restructurings (if applicable), are included in income tax benefit (expense) in our Condensed Consolidated Statements of Operations.
Consolidated GAAP income or loss subject to tax consists of pretax income or loss of our taxable entities and gains retained by the REIT. For the three and nine months ended September 30, 2022, we had consolidated net loss and income subject to tax of $75.6 million and $91.0 million, respectively. For the three and nine months ended September 30, 2021, we had consolidated net losses subject to tax of $7.9 million and $26.4 million, respectively.
For the three months ended September 30, 2022, we recognized income tax benefit of $17.6 million compared to a $2.0 million benefit during the same period in 2021. The change is primarily due to the GAAP income taxes associated with the lease modification depreciation expense recognized in the third quarter of 2022.
For the nine months ended September 30, 2022, we recognized income tax expense of $24.3 million compared to a $9.9 million benefit during the same period in 2021. The change is primarily due to the GAAP income taxes associated with the net lease modification income recognized in 2022.
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Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements relate to the impairment of long-lived assets and capitalized costs.
Our critical accounting policies are described in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Aimco’s and Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our critical accounting policies from those reported in our Form 10-K and we believe that the related judgments and assessments have been consistently applied and produce financial information that fairly depicts the financial condition, results of operations, and cash flows for all periods presented.
Non-GAAP Measures
We use EBITDAre and Adjusted EBITDAre in managing our business and in evaluating our financial condition and operating performance. These key financial indicators are non-GAAP measures and are defined and described below. We provide reconciliations of the non-GAAP financial measures to the most comparable financial measure computed in accordance with GAAP.
Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization for Real Estate ("EBITDAre")
EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and allow for comparison of our credit strength to different companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income (loss) as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. Nareit defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation, and amortization expense, further adjusted for:
•gains and losses on the dispositions of depreciated property;
•impairment write-downs of depreciated property;
•impairment write-downs of investments in unconsolidated partnerships caused by a decrease in the value of the depreciated property in such partnerships; and
•adjustments to reflect Aimco’s share of EBITDAre of investments in unconsolidated entities.
EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted to exclude the effect of net income attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests, and unrealized gain on interest rate options, which we believe allow investors to compare a measure of our earnings before the effects of our capital structure and indebtedness with that of other companies in the real estate industry. Additionally, we exclude interest income recognized on our Mezzanine Investment that was accrued but not paid.
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The reconciliation of net income to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2022 and 2021, is as follows (in thousands):
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net income (loss) |
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$ |
34,173 |
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$ |
(4,846 |
) |
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$ |
297,496 |
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$ |
(3,798 |
) |
Adjustments: |
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Interest expense |
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9,719 |
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12,680 |
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65,865 |
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37,995 |
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Income tax (benefit) expense |
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(17,563 |
) |
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(2,021 |
) |
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24,338 |
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(9,881 |
) |
Gains on dispositions of real estate |
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(75,539 |
) |
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— |
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(170,004 |
) |
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— |
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Lease modification income |
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(1,577 |
) |
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— |
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(206,963 |
) |
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— |
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Depreciation and amortization |
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85,438 |
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21,709 |
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143,420 |
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63,065 |
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Adjustment related to EBITDAre of unconsolidated partnerships |
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253 |
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225 |
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768 |
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655 |
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EBITDAre |
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$ |
34,904 |
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$ |
27,747 |
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$ |
154,920 |
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$ |
88,036 |
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Net (income) loss attributable to redeemable noncontrolling interests in consolidated real estate partnerships |
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(2,907 |
) |
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(127 |
) |
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(5,446 |
) |
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(41 |
) |
Net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships |
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(240 |
) |
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(296 |
) |
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(585 |
) |
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(862 |
) |
EBITDAre adjustments attributable to noncontrolling interests |
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(93 |
) |
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177 |
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(325 |
) |
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(54 |
) |
Mezzanine investment income, net (1) |
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(8,423 |
) |
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(7,636 |
) |
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(24,990 |
) |
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(22,654 |
) |
Realized and unrealized (gains) losses on interest rate options |
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(9,209 |
) |
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(2,231 |
) |
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(48,005 |
) |
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(10,608 |
) |
Unrealized (gains) losses on IQHQ investment |
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— |
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— |
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(20,501 |
) |
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— |
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Adjusted EBITDAre |
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$ |
14,032 |
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$ |
17,634 |
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$ |
55,068 |
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$ |
53,817 |
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(1) Includes the portion of accrued and unpaid income recognized during the year |
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Liquidity and Capital Resources
Liquidity
Liquidity is the ability to meet present and future financial obligations. Our primary sources of liquidity are cash flows from operations and borrowing capacity under our loan agreements.
As of September 30, 2022, our available liquidity was $375.4 million, which consisted of:
•$206.3 million in cash and cash equivalents; and
•$19.1 million of restricted cash, including amounts related to tenant security deposits and escrows held by lenders for capital additions, property taxes, and insurance; and
•$150.0 million of available capacity to borrow under our revolving secured credit facility.
We have commitments for, and expect to spend, approximately $152.1 million on development and redevelopment projects underway, with $211.2 million undrawn on our construction loans as of September 30, 2022. The initial allocation to our Edgewater joint venture and DC joint ventures have remaining unfunded commitments of $14.2 million. We also have unfunded commitments in the amount of $2.7 million related to four investments in entities that develop technology for the real estate industry. Our principal uses for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital expenditures, and future investments. Additionally, our third-party property managers may enter into commitments on our behalf to purchase goods and services in connection with the operation of our apartment communities and our office building. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to historical levels.
We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for the next twelve months.
In the event that our cash and cash equivalents, revolving secured credit facility, and cash provided by operating activities are not sufficient to cover our liquidity needs, we have the means to generate additional liquidity, such as from additional property financing activity and proceeds from apartment community sales. We expect to meet our long-term liquidity requirements, including debt maturities, development and redevelopment spending, and future investment activity, primarily through property
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financing activity, cash generated from operations, and the recycling of our equity. Our revolving secured credit facility matures in December 2023, prior to consideration of its two one-year extension options.
Leverage and Capital Resources
The availability and cost of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Any adverse changes in the lending environment could negatively affect our liquidity. We have taken steps to mitigate a portion of our repricing risk. However, if property or development financing options become unavailable, we may consider alternative sources of liquidity, such as reductions in capital spending or apartment community dispositions.
As of September 30, 2022, 81% of our outstanding debt had a fixed interest rate and 19% had a variable interest rate. The weighted-average interest rate on our non-recourse debt was 4.86%, and the average remaining term to maturity was 7.2 years. At quarter end, Aimco had interest rate cap protection in place for 100% of its variable interest rate debt. Aimco's use of interest rate caps may vary from quarter to quarter depending on lender requirements, recycling of interest rate caps between projects, and our view on forecasted interest rates.
While our primary source of leverage is property-level debt, we also have a secured $150.0 million credit facility with a syndicate of financial institutions, and construction loans. As of September 30, 2022, we had no outstanding borrowings under our revolving secured credit facility. Under our revolving secured credit facility, we have agreed to maintain a fixed charge coverage ratio of 1.25X minimum tangible net worth of $625.0 million, and maximum leverage of 60.0% as defined in the credit agreement. We are currently in compliance and expect to remain in compliance with these covenants during the next twelve months.
Changes in Cash, Cash Equivalents, and Restricted Cash
The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing and financing activities, which are presented in our condensed consolidated statements of cash flows in Item 1 of this report.
Operating Activities
For the nine months ended September 30, 2022, net cash provided by operating activities was $228.3 million. Our operating cash flow is primarily affected by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment communities and general and administrative costs. Cash provided by operating activities for the nine months ended September 30, 2022, increased by $206.2 million compared to the same period ended in 2021 due to timing of balance sheet position changes.
Investing Activities
For the nine months ended September 30, 2022, our net cash used in investing activities of $83.0 million consisted primarily of capital expenditures of $184.0 and $130.1 million of cash used to acquire undeveloped land parcels in Fort Lauderdale, Florida, offset by $243.1 million of proceeds received from the disposition of our properties located in Fremont, California and Seattle, Washington.
Total capital additions were $184.0 million and $134.9 million during the nine months ended September 30, 2022 and 2021, respectively, and were primarily used for construction costs on our development and redevelopment properties. We have generally funded capital additions with available cash, cash provided by operating activities, and construction loans.
We exclude the amounts of capital spending related to commercial spaces and to apartment communities sold or classified as held for sale at the end of the period from the foregoing measures. We have also excluded from these measures indirect capitalized costs, which are not yet allocated to communities with capital additions, and their related capital spending categories.
Financing Activities
For the nine months ended September 30, 2022, our net cash used in financing activities of $164.4 million consisted primarily of the $534.1 million payoff of the Notes Payable to AIR, $284.6 million to retire property debt and the $138.4 million paydown
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of construction loans, offset by $674.7 million in cash raised from the issuance of new property debt and a $102.0 million redeemable noncontrolling interest preferred equity contribution from an institutional partner.
Net cash provided by financing activities for the nine months ended September 30, 2021 was $158.6 million primarily due to $142.3 million of proceeds received from construction loans undertaken.
Future Capital Needs
We expect to fund any future acquisitions, development and redevelopment, and other capital spending principally with operating cash flows, short-term borrowings, and debt and equity financing. Our near-term business plan does not contemplate the issuance of equity. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for the next twelve months.