Apartment Investment and Management Company Q4 FY2020 earnings call

• Terry Considine highlighted 2020 as transformative with the separation from Aimco, unlocking $1 billion of shareholder value and strong shareholder returns. He emphasized AIR's appeal to traditional REIT and yield investors with its simple, transparent business, best-in-class property management, diversified portfolio, strong balance sheet, and low overhead costs.
• Keith Kimmel discussed 2020 full-year results (revenue down 2.4%, residential net rental income down 4%, controllable operating expenses down 1.1%, total expenses up 1.6%, net operating income down 4%), fourth-quarter performance (residential net rental income down 4.3%, revenue down 7.4%, net operating income down 12.5%), lead indicators showing improving occupancy (average daily occupancy improved from 93.3% in August to 95.6% in January), and 2021 prospects by market (5 of 8 core markets expected flat/positive revenue growth, 3 other markets recovering with delays; discussed Los Angeles, Philadelphia, Northern California markets in detail). He also stressed operational architecture and team as keys to success in 2021.
• Paul Beldin discussed 2021 guidance (FFO between $1.91-$2.05 per share, growth from 2020's pro forma $1.73 per share), leverage (pro forma leverage to EBITDA at 7.5x, plan to repay incremental borrowings with property sales), and dividend (quarterly cash dividend of $0.43 per share, 5% increase).

In 2020, total revenue was down 2.4%. Residential net rental income, a key measure of core business health, was down 4% for the full year. For the fourth quarter, residential net rental income was down 4.3%, revenue was down 7.4%, and net operating income was down 12.5%. Blended lease rates in the fourth quarter were down 8.5%, with renewals up 1.4% and new leases down 10.9%. Revenue contribution details weren't explicitly broken down by distinct product segments beyond residential and commercial, but residential was the core focus.

• Forecast FFO for 2021 to be between $1.91 and $2.05 per share, representing 10%-18% growth from 2020's pro forma $1.73 per share.
• Expect expense growth of 2.75% to 3.75%.
• Anticipate 2021 net operating income to be between $424 million and $443 million, a decline year-over-year between negative 1.4% and negative 5.6%, with net operating income increasing each quarter and positive year-over-year results starting in the second half.
• Forecast quarter-to-quarter revenue improvements in 2021 but year-over-year negative revenue growth between negative 3% and negative 20 basis points, with first quarter most negative.

• Bad debts in Los Angeles due to city ordinances allowing those in need to live rent-free and potential abuse, contributing over half of nationwide bad debt in fourth quarter and expected to continue in 2021 until laws are changed.
• Impact of COVID-19 on certain markets like Philadelphia (schools virtual, employees working from home) and Northern California (work-from-home policies affecting rents).
• Potential delays in market recovery affecting occupancy and rental rates.
• Insurance costs expected to increase about 30% as premiums accelerate after a long down cycle.
• Taxes expected to increase 4.5%-5% due to new assessment regime in Colorado and expiration of tax abatement in Philadelphia.

Q: What is the $45 million to $55 million of capital enhancements? Is that all just to get your bad programs? Does that include your technology upgrades? What is included in that? And then what else are you spending the free cash flow on if you don't make any acquisitions this year?

A: Paul Beldin responded that the $45 million to $55 million of capital enhancements are projects to increase revenue growth or reduce costs, heavily weighted towards reaccelerating [K&B] programs paused in 2020. If no acquisitions, would use cash flow to reduce leverage and then increase dividend.

Q: Just a follow-up on that. So the blended lease growth rate that you had, that's negative 8.5% in the fourth quarter. How does that compare to the third quarter? I know Aimco had minus 3%, but it's not quite apples-to-apples. And then that minus 8.5%, how much of that is concession versus reducing the face rent?

A: Keith Kimmel stated that the fourth quarter blended lease rate was mainly driven by new lease rates due to building occupancy in areas like the Bay Area and Los Angeles, and that it's mainly about net effective rents considering occupancy and rate, with most pressure in first and second quarters then improving later.

Q: Congratulations on the first quarter as a new REIT. I'm sure there's a lot of work that goes into this. So I guess, what I really wanted to understand, focusing on a couple of expense items. On the expense growth Q-over-Q, I saw L.A. was probably the highest across your portfolio, it was about 8% sequential increase versus a 1% sequential decline -- sorry, versus 1% across the portfolio. So was this special -- was there something special about L.A.? I mean, could this be because you're not getting utility reimbursements there. And so besides the bad debts that you took of people who did not pay since June, there are people who are paying partial that is rent, but not utilities? Any color you could provide on that 8% spike would be great.

A: Paul Beldin said the driving factors in L.A. quarter-over-quarter were increase in bad debt and costs associated with a long-standing property tax appeal in one of their properties.

Q: Maybe continuing the disposition conversation. Paul, it sounded like your opening remarks where there is something imminent where you had a batch of dispositions teed up to delever. So is the -- are New York City properties or California properties currently in process? Are they teed up? Or is this more of a longer-term 2- to 3-year type deal?

A: Terry Considine said they have opportunities to exit from New York City and lighten allocation to California, potentially through joint ventures, and these would be low cap executions not likely dilutive to FFO.

Q: Just talking about the time line of the New York City dispositions potential, what would you need to see in the market to feel comfortable disposing of those assets?

A: Terry Considine and Conor Wagner responded that they would look for the right price, being judicious and not acting rashly, with optimism around vaccine and market improvement helping underwriting.