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Morningstar | Strong Fundamentals Growth for AIMCO, Leading to 3Q Outperforming Our Outlook and Its Own Guidance

Apartment Investment & Management Company saw better-than-expected fundamentals drive bottom-line outperformance. Same-store occupancy was sequentially flat but improved 30 basis points year over year to 96.3%. Average revenue per apartment was up 2.8%, much better than our estimate of flat rate growth, to lead revenue growth up 3.1% compared with our estimate of 0.7% growth. However, expenses were also up 4.5% compared with the third quarter of 2017, higher than we expected. This led to same-store net operating income being up 2.6% while we had assumed only 0.6% growth for the quarter. California markets continue to lead the way with San Diego (9.2% NOI growth), San Francisco (6.1%), and Los Angeles (4.1%) all performing better than portfolio average while weakness continues to be felt on the East Coast with markets like Philadelphia (negative 4.3%) and Atlanta (negative 2.7%) trailing. The beat on fundamentals led to AIMCO reporting core funds from operations of $0.63 for the quarter, 2 cents higher than we estimated. As a result of beating its own guidance for the quarter by 3 cents, AIMCO did narrow 2018 pro forma FFO guidance by 2 cents at the midpoint to $2.47. The updated midpoint is now on top of our 2018 estimate, so despite the beat over our assumptions and its own guidance for the third quarter we don't expect to materially change our $43 fair value estimate or no-moat rating.

AIMCO reported that subsequent to quarter-end it had repurchased 1.7 million common shares at an average price of $43.89 for a total cost of $75 million. While we applaud any management that is actively willing to buyback shares as a way to enhance shareholder value as we believe too few seriously employ this tactic, we question management's assumptions and timing surrounding the move. Management posts its internal net asset value semiannually and uses this as a guidepost for when it should buyback shares. It justified the repurchase by pointing to the fact that it bought shares at a 20% discount to its NAV estimate of $53. We agree that this is the correct way to view NAV but question if management has an outlook that is too optimistic for its own company. After quickly updating the calculations to the third quarter, we still only get to a $46.50 NAV for AIMCO. While a 6% discount still makes a buyback accretive, it is only marginally so and hurts some of the company's leverage ratios. Our NAV estimate is based on a 5.4% average cap rate for AIMCO's portfolio. To reach management's estimate we would have to drop the cap rate to a sub-5% level, which we don't think is appropriate given AIMCO's market and quality mix. Even if management is correct about its NAV, we question the timing of the buyback. Management had numerous opportunities to execute the buyback at more favorable pricing as the stock traded below $40 many times through the first and second quarters and didn't rise above $43 until August. As good as repurchasing shares at a 20% discount is, it is always better to do it at a 25% discount. We are glad that management belatedly decided to use this arrow from its quiver but do question how impactful it will actually be and why it waited so long to use it.