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Morningstar | Fourth-Quarter Fundamentals In Line While Dispositions and Share Repurchases Impact AIMCO's FFO

Apartment Investment & Management Company produced a mixed quarter, leading us to maintain our $47 fair value estimate for the no-moat company. Fourth-quarter fundamentals were in line with our expectations. Same-store occupancy improved 60 basis points sequentially to 96.9%, above our assumption of flat occupancy, but annual rate growth was only 2.7% compared with our 3.4% growth assumption so same-store revenue growth was in line with our 3.4% estimate. Expense growth was also in line with our 3.0% assumption, so net operating income growth also matched our 3.6% assumption for the fourth quarter.

AIMCO reported pro forma FFO of $0.63 for the fourth quarter, 2 cents above our estimate as the company repurchased 8.7 million shares for $394 million. However, the buyback was funded with by the company's credit facility, which will be paid off by an announced disposition of $285 million and other future dispositions. AIMCO's taxable gain on sale is expected to be $285, above the company's regular dividend, so AIMCO has authorized a special dividend that will pay out $67 million in cash and issue 4.5 million in shares. Therefore, the FFO gains AIMCO made from the share repurchase were short term in nature.

Management guidance expects same-store revenue for 2019 to range between 2.8% and 3.8% (we are estimating 2.9% growth), expense growth to range between 2.0% and 3.0% (we are estimating 2.9% growth), and NOI to range between 2.7% and 4.5% (we are estimating 2.9% growth). However, AIMCO is expecting to execute $750 million to $850 million in dispositions in 2019, well above our estimate of $300 million for the year. So, despite the higher internal growth expectations, the lower external growth expectations combined with the lower income tax benefits expected in 2019 sets pro forma FFO at a range of $2.41 to $2.51 with our estimate right at the high end of this range. Still, we don't expect any changes to our fair value estimate despite the many moving parts.

Given that we are likely nearing the end of the current economic cycle, we are pleased to see that AIMCO is taking the opportunity to be net sellers. On the call it talked about how it is approaching its dispositions from an angle of increasing the company's net asset value while keeping FFO neutral. If it is able to sell lower quality assets that are in the bottom quartile of NOI margins at mid-5% cap rates, then we would expect that its planned dispositions should be a positive to portfolio quality and slightly accretive to the company's NAV. We have wanted to see more REITs sell properties at the top of the market to repurchase shares during opportunistic periods, so it is encouraging to see AIMCO's management follow through on this strategy.