Apartment Investment and Management Company Q3 FY2020 earnings call

Management Statement and Operational Highlights:

• Third quarter faced pandemic challenges with uneven GDP rebound, sectors like offices and universities impacted.
• Aimco operations did well, reduced leverage by $1 billion via joint venture, unlocked shareholder value through separation.
• Keith Kimmel's team worked on property operations with suburban markets performing better than urban.
• Wes Powell's team advanced redevelopment, acquired Miami property, and invested in IQHQ.
• Paul Beldin discussed balance sheet, financial results, rent collections, and special dividend.

Segment Performance:

• Suburban markets: 19,100 units, occupancy 95.7%, turnover 39.6%, blended rates nearly flat, residential net rental income up 60 basis points.
• Urban areas: 8,500 units, occupancy 89.5%, turnover 47%, blended lease rates down 6.7%, residential net rental income down 7.1%.

Guidance:

• Expect to reduce leverage by $2 billion in 2020, with $1 billion from joint venture and $1 billion from separation.
• Anticipate improvement in forward-looking metrics like lease space and occupancy as pandemic impacts ease.
• Urban markets expect turnaround once local conditions improve, with suburban markets continuing steady performance.

Risks:

• Continued effects of pandemic with uncertain public health outlook.
• Unprecedented government regulation on rent setting and collections.
• Turbulence in certain markets with rioting, violence, and challenges to public order.
• Market illiquidity and potential impact of regulatory changes on transactions.

Q: Good morning, Terry. You mentioned the public markets valuing FFO and net asset value. What has changed to make you do a complete separation?

A: Rich, that is an excellent question and it does reflect a change in the public markets that increasingly the public markets seems to me the marginal price setter, values FFO and many of those more complicated transactions are better measured by net asset value. And so as we pursue alpha, in that category we would be in competition with and undermine our FFO business. And so I think the separation allows the market to see the benefits of both or each.

Q: Hi, thank you for taking my question. So, you provided the urban versus suburban breakout there, but I’m just curious how are you coming to the demarcation of those properties that you classify?

A: This is Keith. I’ll take it. The way that we’re getting there is, sort of, where the geography is and where they’re physically located. So, I emphasized Philadelphia, Northern California and Los Angeles in my prepared remarks. But I’ll give you a couple of one-off examples that would be different. So, in Washington, D.C., as an example, we have a lot – most of our portfolio there is in – in our suburban markets, but we have Latrobe that’s in the district. So, it’s a one-off that we would categorize that as an urban location. Similarly, in San Diego, we have lots of suburban locations that are in North San Diego, but we have – our Broadway Lofts property that’s in the Gaslamp District in the middle of the city. So, really the way that we’ve separated these is physically where they’re located and how they’re performing.

Q: Hi, everyone. Thank you for taking my questions today. So, I was just wondering if you guys can talk a little bit about the – your New York City properties. I believe this time you guys put it under other markets. I just want to see how those assets are performing? Those are, I believe mostly urban, how occupancy is there?

A: Hey, Alua. This is Paul. Thank you for your question. Just on your comment about the combination of the New York City properties, we did move those into other markets this quarter. And the rationale for that was that we have our River Club property, which has been – it’s in Edgewater, New Jersey but has been classified in New York from day one. That is under contract to sell. And that contributed over 30% of our New York operations. And so with that being gone, we didn’t think it made sense to separately present New York. But in response to your question, Keith, do you have some additional color you would like to add on New York? Well, Alua, the main thing I would say is we have less than 500 units that’s in that other markets in New York City. And there are walk-ups. They have definitely been impacted by what’s going on in the city. But it’s really a small fraction of the contribution here.

Q: Hey, good morning out here. Terry, a question for you. I know it’s not a lot of money mostly, but maybe you can help us understand the decision behind making the $50 million investment in the life sciences development company, especially given the prior Aimco march toward simplification? How did you weigh the pros versus perhaps the skepticism or pushback from investors who may not want you to go down path? And then, maybe you could talk a bit more about the expected returns or potential scope of the opportunity? What specifically makes you excited enough here to make you withstand any skepticism or pushback here? Thanks.

A: Haendel, as to the first, I would say that this is an investment in the future of the development redevelopment company and that – as we discussed with Rich earlier on the call, we have really these two different businesses. You’re exactly right that they’re in conflict with each other in many ways. The stabilized apartment communities are best measured by FFO and predictability and the development business is best measured by net asset value creation. And it’s lumpier and riskier. And so, this is an investment in that second business. And the issue for shareholders is that, they’ll soon be able to choose which business best suits them or what their allocations might be. So that’s how I would address the question of how to serve shareholders. The second question is the $50 million was an expression of commitment to Allen Gold, a very talented entrepreneur whom you must know, who’s had great success with Alexandria and Biomed and other such, and is going to do it again. And we think the opportunity to invest in a collaborative way with him, will bring with it opportunities that we cannot quantify today. But we would expect would be quite substantial.

Q: Thanks. Good morning. Earlier today, ISS announced its support for the special shareholder vote. And I just wanted to ask what your thoughts are as far as the timing of when this may occur and also the timing of any next hurdles that we should be looking for as far as your move forward with your split?

A: John, I think I think it’s an important question. I have had a chance to read it. We did have a meeting with ISS. They were completely helpful and thoughtful and we enjoyed a chance to discuss it with them. But we’re not prepared to discuss it today. But this will all be part of the public filing that is being reviewed by the SEC. It will be public I think sometime next week. And perhaps, we’ll invite all of you to come back or we’ll be in touch one way or another to discuss it at that time.

Q: Thanks. Terry, maybe following up on your point there, did I hear you right that the plan is to still liquidate the separate portfolio post-spin?

A: John, I really want to talk about the companies post-spin and so forth at another time, perhaps next week, but that is – the intent of that is to have a – to complete the liquidation and the de-levering of AIR, but let’s talk about that next week.

Q: Thanks. You talked a lot about leverage coming down post-spin by another $1 billion. Obviously, AIR will no longer be focusing on development or complicated redevelopment. So that acquisition piece becomes important leg in the external investment opportunity heading into the next cycle. So, I guess given the greater aversion to markets with high regulation, I mean, what markets are attracted to you including any potential new markets?

A: Austin, you are exactly right. Our analysis is to reallocate capital, including new capital to markets that are faster-growing and have freer economies. Wes has already spoken about our appetite for Florida, not just South Florida but Florida in general. But that will be true in Georgia, Tennessee, North Carolina, a market such as that and perhaps, additionally, in the Rocky Mountain West.

Q: Thanks. So, with – you talked a lot about leverage coming down post-spin by another $1 billion. Obviously, AIR will no longer be focusing on development or complicated redevelopment. So that acquisition piece becomes important leg in the external investment opportunity heading into the next cycle. So, I guess given the greater aversion to markets with high regulation, I mean, what markets are attracted to you including any potential new markets?

A: Austin, you are exactly right. Our analysis is to reallocate capital, including new capital to markets that are faster-growing and have freer economies. Wes has already spoken about our appetite for Florida, not just South Florida but Florida in general. But that will be true in Georgia, Tennessee, North Carolina, a market such as that and perhaps, additionally, in the Rocky Mountain West.

Q: Just maybe we could talk operations then, Keith. In terms of the positive inflection points and the bottoming and the blue skies you refer to, curious what gives you confidence today on that stability and bottom because yourselves and a lot of peers have used the term bottoming before. And I’m not trying to hold you to a prior comment because we’ve been wrong on plenty of forecasts internally. Nobody can predict the future right now. But just curious on the ground trends what gives you a little bit more confidence today that these markets have bottomed versus 3 months ago?

A: John thanks for the question and thanks for the caveat. There’s obviously a lot of unknowns still in front of us. But let me give you some insights of what we’re seeing and what makes us think that. So when we look at our third quarter and our – looking at suburban and urban type of situations, our suburban portfolio was running in the mid-95s. And now as we finish up October we’re seeing it in the mid to high 96s. We also see the rates in that same portfolio that have increased in and have gotten stronger. When we look at our urban areas, while occupancy has held relatively flat in the 90s. What we’ve seen is it started to tick up. And I will use a very specific example in Los Angeles. And so, when we look at Los Angeles in the third quarter, we were running in the 92s, and now we’re going to finish in the mid to high-94s and we see a path that starts getting us in 95% and 96% by year-end. So, there’s a series of things that we start seeing across the country that are starting to show us that there are some blue skies coming. Now, I’d point out that Philadelphia is one that will be on a switch that says, does UPENN come back and Drexel come back, does Comcast in the cities come back? In Philadelphia, we have administrators that live with us that work at some of those institutions who have given us an indication they are working hard to find a way that could they open in January and they would like to open in January. Whether that happens or not? I don’t know. There is not any public statements around that, but it gives us optimism. And another thing that we know is that I will give you an example, in Evanston, Illinois, we have a property there right next to Northwestern University. When they came back, we went from struggling in occupancy to nearly 100% in a matter of a week. And so, we know that if these come back there will be an opportunity, particularly in Philadelphia, for a switch type of opportunity, not a dial but we think it’ll come back strong. That’s what we’re looking forward to. But there’s plenty of other things that are – green shoots that are coming up in other markets that give us indication that we’ve hit the bottom, it’s market-by-market, there’s plenty of different variables, but we’re optimistic that we’ll start seeing some benefits of those things.

Q: Thanks, guys. Appreciate you taking the follow-up. Terry, referenced how lower cap rates may reflect the lower income streams and perhaps values are stable versus pre-COVID levels. And I recognize there hasn’t been a tremendous amount of transactions. But you just completed a sizable JV in a coastal market and you mentioned you’re pursuing additional sales. So just curious what your view is toward values for multi-family properties?

A: Austin, thank you for the follow-up. I think that values are affected by alternatives and the price of one thing is the cost of the alternative forgone. And so if we look at apartments as a relatively predictable, it’s hard to say during 2020, but over time a relatively predictable cash flowing asset class, that if it can be simplified as we’re seeking to do with low leverage and measured by current return, in a world of very low interest rates, that’s a positive in terms of demand for pricing. But as I say, there are many other competing factors including most – in an unprecedented way government intrusion. So those are the factors that are being worked out. I don’t think they’ve been worked out which is why you see this reduction in valuation. And I think that it would be logical to think that there probably has been some reduction in value. But I think that that’s probably as much due to – as I say, to the regulatory intrusions of being in a recession which I think seems to be recovering and offset by low interest rates.

Q: Hi, guys. This is in for Nick. Really a question about one of the things we saw earlier this quarter on one of you properties or actually quite a few of your properties around pay no rent for – or rent does not increase for a long time to come. So it seemed to imply that there were certain leases that you were ready to sign with tenants who are going to be longer term with no rent increases. Just one, trying to figure what sort of tenant profile are you trying to attract there and what’s the sort of market vacancy profile that’s driving this kind of a concession or as in your words, Terry, a promotion. And second whether these assets or these programs are part of the entity that remains or the entity that is going to be the development-focused entity. Now, you can defer the second part to next week. That’s totally fine.

A: No, thank you. Thank you. This is Keith, I’ll take it and I’m not sure whether it’s exactly what you’re looking up but I’m guessing it’s something that’s on one of our websites or some sort of promotion. What you’re likely seeing there is that we will do long-term leases in certain circumstances. And so, what it is, is it’s a tag line for an inquiry about how we will sign 24-month leases, things like that, in which we will have an agreed upon rental rate over a longer period time that what may be traditionally the way that some people do write leases that being only 12 months.