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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13232
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
(Exact name of registrant as specified in its charter)
MARYLAND 84-1259577
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1873 SO. BELLAIRE STREET, SUITE 1700, DENVER, 80222-4348
CO (Zip Code)
(Address of principal executive offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 757-8101
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Class A Common Stock New York Stock Exchange
Class C Cumulative Preferred Stock New York Stock Exchange
Class D Cumulative Preferred Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10K. / /
As of March 18, 1998, there were 41,417,376 shares of Class A Common Stock
and 162,500 shares of Class B Common Stock outstanding. The aggregate market
value of the voting and non-voting common stock held by non-affiliates of the
registrant, was approximately $1,377 million as of March 18, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1998 annual meeting of
stockholders are incorporated by reference into Part III of this Annual Report.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
ITEM PAGE
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PART I
1. Business............................................................................................ 1
Recent Developments................................................................................. 2
Financial Information About Industry Segments....................................................... 9
Growth Strategies................................................................................... 9
Operating Strategies................................................................................ 10
Taxation of the Company............................................................................. 11
Competition......................................................................................... 12
Regulation.......................................................................................... 12
Environmental Matters............................................................................... 13
Insurance........................................................................................... 13
Employees........................................................................................... 13
2. Properties.......................................................................................... 13
3. Legal Proceedings................................................................................... 14
4. Submission of Matters to a Vote of Security Holders................................................. 16
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 16
6. Selected Financial Data............................................................................. 18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 19
7a. Quantitative and Qualitative Disclosures About Market Risk.......................................... 31
8. Financial Statements and Supplementary Data......................................................... 31
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 31
PART III
10. Directors and Executive Officers of the Registrant.................................................. 31
11. Executive Compensation.............................................................................. 36
12. Security Ownership of Certain Beneficial Owners and Management...................................... 37
13. Certain Relationships and Related Transactions...................................................... 37
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 37
PART I
INTRODUCTION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements in certain circumstances. Certain
information included in this Report, the Company's (as defined hereafter) Annual
Report to Shareholders and other Company filings (collectively "SEC Filings")
under the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended (as well as information communicated orally or in writing
between the dates of such SEC Filings) contains or may contain information that
is forward looking, including, without limitation, statements regarding the
effect of acquisitions, the Company's future financial performance and the
effect of government regulations. Actual results may differ materially from
those described in the forward looking statements and will be affected by a
variety of risks and factors including, without limitation, national and local
economic conditions, the general level of interest rates, terms of governmental
regulations that affect the Company and interpretations of those regulations,
the competitive environment in which the Company operates, financing risks,
including the risk that the Company's cash flows from operations may be
insufficient to meet required payments of principal and interest, real estate
risks, including variations of real estate values and the general economic
climate in local markets and competition for tenants in such markets,
acquisition and development risks, including failure of such acquisitions to
perform in accordance with projections, and possible environmental liabilities,
including costs which may be incurred due to necessary remediation of
contamination of properties presently owned or previously owned by the Company.
In addition, the Company's continued qualification as a real estate investment
trust involves the application of highly technical and complex provisions of the
Internal Revenue Code. Readers should carefully review the Company's financial
statements and the notes thereto, as well as the risk factors described in the
SEC filings.
ITEM 1. BUSINESS
Apartment Investment and Management Company, a Maryland corporation formed
on January 10, 1994 ("AIMCO" and, together with its subsidiaries and other
entities in which it owns an equity interest, the "Company"), is a
self-administered and self-managed real estate investment trust (a "REIT")
engaged in the ownership, acquisition, development, expansion and management of
mulit-family apartment properties. On July 24, 1994, AIMCO completed its initial
public offering and engaged in a business combination and consummated a series
of related transactions which enabled it to continue and expand the property
management and related businesses of Property Asset Management, L.L.C., Limited
Liability Company, and its affiliated companies, and PDI Realty Enterprises,
Inc. (collectively, the "AIMCO Predecessors"). Through its controlling interests
in AIMCO Properties, L.P. a Delaware limited partnership (the "AIMCO Operating
Partnership"), other limited partnerships and subsidiary corporations, the
Company owned or controlled 40,039 units in 147 apartment properties (the "Owned
Properties"), held an equity interest in 83,431 units in 515 apartment
properties (the "Equity Properties") and managed 69,587 units in 374 apartment
properties for third party owners and affiliates (the "Managed Properties" and,
together with the Owned Properties and Equity Properties, the "AIMCO
Properties"), bringing the total portfolio to 193,057 units in 1,036 apartment
properties as of December 31, 1997. The AIMCO Properties are located in 42
states, the District of Columbia and Puerto Rico. As of December 31, 1997, AIMCO
held an 88% ownership interest in the AIMCO Operating Partnership. The Company
focuses on "middle market" apartment properties (properties with rents at or
near the averages in their markets).
The Company's principal executive offices are located at 1873 So. Bellaire
Street, Suite 1700, Denver, Colorado 80222-4348 and its telephone number is
(303) 757-8101.
1
1997 DEVELOPMENTS
NHP ACQUISITION
In a series of transactions in 1997, the Company acquired NHP Incorporated
("NHP"), a nationwide real estate services company engaged in property and asset
management, as well as related services, including equity investments,
purchasing, risk management and home healthcare.
On May 5, 1997, pursuant to a Stock Purchase Agreement dated as of April 16,
1997, AIMCO acquired 2,866,073 shares of common stock ("NHP Common Stock") of
NHP Incorporated ("NHP") from Demeter Holdings ("Demeter"), Capricorn Investors,
L.P. ("Capricorn") and certain of Capricorn's limited partners (collectively,
the "NHP Sellers") in exchange for 2,142,857 shares of AIMCO Class A Common
Stock, par value $0.01 per share ("Class A Common Stock"), with a recorded value
of $57.3 million.
NHP provides a broad array of real estate services nationwide, including
property management and asset management as well as a group of related services,
including equity investments, purchasing, risk management and home health care.
Subsequent to the purchase, AIMCO contributed the NHP Common Stock to the
AIMCO Operating Partnership in exchange for additional Partnership Common Units
("OP Units") of the AIMCO Operating Partnership. The AIMCO Operating Partnership
then contributed the NHP Common Stock to the Company's unconsolidated
subsidiary, AIMCO/NHP Holdings, Inc. ("ANHI") in exchange for all of the shares
of ANHI's non-voting preferred stock, representing a 95% economic interest in
ANHI. Concurrently, ANHI obtained a loan in the amount of $72.6 million (the
"ANHI Credit Facility") and used the proceeds from the loan to purchase an
additional 3,630,000 shares of NHP Common Stock from the NHP Sellers. Upon the
completion of this transaction, ANHI owned 6,496,073 shares of NHP Common Stock,
representing 51.3% of the NHP Common Stock outstanding as of May 31, 1997.
In separate transactions, occurring in August and September 1997, ANHI sold
to AIMCO 5,717,000 shares of NHP Common Stock for an aggregate purchase price of
$114.4 million. ANHI used $74.3 million of the proceeds from the sale to repay
the principal and accrued interest outstanding under the ANHI Credit Facility
and distributed $40.0 million to the AIMCO Operating Partnership and its other
shareholders. In addition, AIMCO acquired an additional 434,049 shares of NHP
Common Stock from the NHP Sellers, bringing the total number of shares of NHP
Common Stock owned by AIMCO and ANHI to 6,930,122.
On December 8, 1997, AIMCO/NHP Acquisition Corp., a wholly-owned subsidiary
of AIMCO merged with and into NHP, with NHP being the surviving corporation and
becoming a wholly owned subsidiary of AIMCO (the "NHP Merger"). As a result of
the NHP Merger, each outstanding share of NHP Common Stock, other than the
shares owned by ANHI, was converted into the right to receive either (i) 0.74766
shares of AIMCO Class A Common Stock or (ii) at the election of the holder,
0.37383 shares of AIMCO Class A Common Stock and $10.00 in cash. The conversion
of the NHP Common Stock resulted in the issuance of an additional 4,554,827
shares of AIMCO Class A Common Stock and cash payments of $0.3 million,
excluding cash paid to ANHI of $7.8 million.
Immediately following the NHP Merger, the Company completed a reorganization
(the "NHP Reorganization") of the assets and operations of NHP. As a result of
the NHP Reorganization, the former operations of NHP are now primarily conducted
through unconsolidated subsidiaries of AIMCO (the "Unconsolidated
Subsidiaries"). The Unconsolidated Subsidiaries have ownership structures
similar in which the Company holds a 95% economic interest through ownership of
shares of non-voting preferred stock, and certain directors and officers of
AIMCO hold a 5% economic interest through direct or indirect ownership of all of
the outstanding shares of common stock.
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NHP REAL ESTATE PARTNERSHIPS
In June 1997, the Company purchased from Demeter, Capricorn, Phemus
Corporation, J. Roderick Heller, III and NHP Partners Two LLC, a group of
companies (the "NHP Real Estate Companies") affiliated with NHP that hold
general and limited partnership interests in partnerships (the "NHP
Partnerships") that own 534 conventional and affordable apartment properties
(the "NHP Properties") containing 87,659 units, a captive insurance subsidiary
and certain related assets. "Affordable Units" are units benefitting from some
sort of interest rate or rental subsidy or otherwise subject to governmental
programs aimed at providing low and moderate income housing. The Company paid
aggregate consideration of $54.8 million in cash and warrants to purchase
399,999 shares of Class A Common Stock at an exercise price of $36.00 per share.
As a result of the NHP Reorganization, the Master Property Management Agreement,
pursuant to which NHP managed the NHP Properties, was terminated.
As of December 31, 1997, the Company had made offers to the limited partners
of 25 NHP Partnerships to acquire their limited partnerships interests. The
Company has accepted tenders from certain limited partners, in exchange for
$34.2 million in cash and Partnership Common Units ("OP Units") of the AIMCO
Operating Partnership, valued at $7.3 million. In addition, during September and
October 1997, the Company purchased the existing mortgages on four NHP
Properties for an aggregate of $60.6 million in cash, and land leases for two
NHP Properties for $12.9 million in cash transactions.
INDIVIDUAL PROPERTY ACQUISITIONS
During the year ended December 31, 1997, the Company purchased or acquired
control of 59 properties (including 15 NHP Properties) consisting of 17,191
apartment units and disposed of five properties consisting of 916 apartment
units, as described below. The cash portions of the acquisitions were funded
from proceeds raised through public offerings, private offerings, borrowings
under the Company's revolving credit facility, other short-term and long-term
financings or with working capital. The cash proceeds from the property
dispositions was used to repay outstanding indebtedness or fund working capital
requirements.
FOXCHASE. In December 1997, the Company purchased Foxchase Apartments
("Foxchase"), a 2,113-unit apartment complex built in 1947 and located in
Alexandria, Virginia, for approximately $107.7 million, consisting of
approximately $70 million in assumed mortgage obligations and the remainder in
OP Units. The Company purchased Foxchase from a limited partnership for which
the Company serves as general partner and majority limited partner.
FISHERMAN'S LANDING. In December 1997, the Company acquired Fisherman's
Landing, a 200-unit apartment complex built in 1984 and located in Tampa,
Florida, for approximately $8.5 million, including the assumption of outstanding
indebtedness.
WINDWARD AT THE VILLAGES. In October 1997, the Company purchased Windward
at the Villages Apartments ("Windward"), a 196-unit apartment community built in
1988 and located in West Palm Beach, Florida, for approximately $10.8 million.
Windward is adjacent to the Bear Lakes Country Club and Golf Course in the
Villages of Palm Beach Lakes, a master planned golf course community.
MORTON TOWERS. In September 1997, the Company, through two subsidiary
limited partnerships in which the Company is the sole general partner and has an
aggregate ownership interest of approximately 77%, acquired the Morton Towers
Apartments, a 1,277-unit, twin tower high rise apartment complex built in 1960
and located in Miami Beach, Florida, for $63.0 million, including approximately
1.4 million OP Units valued at $42.0 million. The Company expects to undertake a
major renovation of the complex at an estimated total cost of $35.0 million.
LOS ARBOLES. In September 1997, the Company acquired Los Arboles
Apartments, a 232-unit apartment community built in 1985 and located in
Chandler, Arizona, for approximately $11.3 million. Los
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Arboles is adjacent to Vista del Lagos, a 200-unit apartment community in which
the Company has an equity interest.
SAWGRASS. In July 1997, the Company purchased Sawgrass Apartments, a
208-unit apartment community built in 1989 and located in Orlando, Florida, for
approximately $9.6 million. Sawgrass was formerly a Managed Property.
TUSTIN EAST VILLAGE/THE CALIFORNIAN. In June 1997, the Company acquired
Tustin East Village and The Californian, two garden-style apartment communities
consisting of 292 units built in 1970, and Red Hill Plaza, an adjacent shopping
plaza built in 1970 and located in Tustin, California, for $21.4 million,
including approximately 0.5 million OP Units valued at $13.9 million. These
properties are contiguous to Brookside Apartments, another Owned Property,
consisting of 336 units, purchased in April 1996 from the same seller, and are
operated with Brookside as one property.
THE VININGS. In June 1997, the Company acquired The Vinings at the
Waterways, a 180-unit luxury garden-style apartment community built in 1991 and
located in Aventura, Florida, for approximately $16.4 million. The Vinings is
located by a yacht basin and marina directly accessing the Intracoastal Waterway
and is also adjacent to a commercial center. Aventura is a coastal city located
near North Miami Beach.
STONEBROOK. In May 1997, the Company acquired the Stonebrook Apartments, a
244-unit apartment community built in 1991 and located in Orlando, Florida, for
approximately $11.0 million. Stonebrook is less than a mile from the location of
a proposed interchange on a beltway around Orlando and is near a regional
airport being expanded for commercial aviation.
BAY CLUB. In April 1997, the Company acquired The Bay Club at Aventura, a
702-unit luxury high rise apartment complex, consisting of two towers built in
1990, located in Aventura, Florida, for approximately $71.0 million. The
property includes approximately 3.5 acres of land with permits to construct a
third tower, consisting of 225 units.
WINTHROP ACQUISITION
In October 1997, the Company acquired a portfolio of 35 residential
apartment properties (the "Winthrop Portfolio"). The 35 garden-style apartment
communities comprising the Winthrop Portfolio are located in seven states, have
an average age of 17 years and contain a total of 8,175 apartment units. Fifteen
of the apartment communities are located in Arizona, with 2,602 units in Phoenix
and 816 units in Tucson; eleven apartment communities with 2,075 units are
located throughout Texas; two apartment communities with 1,223 units are located
in Florida; two apartment communities with 494 units are located in Michigan;
three apartment communities with 536 units are located in Georgia; one apartment
community with 293 units is located in Illinois; and one apartment community
with 136 units is located in North Carolina.
The aggregate purchase price for the Winthrop Portfolio, including
transactions costs, was approximately $263.5 million. The Company paid aggregate
consideration of $116.1 million in cash to the sellers, assumed $8.3 million in
mortgage indebtedness and incurred $139.1 million of new indebtedness secured by
the properties, to complete the purchase. The Company has also budgeted an
additional $16.0 million in initial capital expenditures related to the Winthrop
Portfolio.
ENGLISH TENDER OFFERS
During 1997, the Company made separate offers (the "English Tender Offers")
to the limited partners of 25 partnerships, acquired in November 1996 (the
"Tender Offer English Partnerships"), to acquire their limited partnerships
interests. Various limited partners accepted tenders representing, in the
aggregate,
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approximately 46% of all outstanding limited partnership interests in the Tender
Offer English Partnerships subject to the offers. The Company paid $16.0 million
in cash and issued OP Units valued at $1.7 million, for the interests tendered
in the English Tender Offers. The remaining limited partners have elected to
continue as limited partners in the Tender Offer English Partnerships.
PROPERTY DISPOSITIONS
In October 1997, the Company sold the Meadowbrook, Ashwood, Parkside,
Chimney Ridge and Cobble Creek apartment properties, which consisted of an
aggregate of 916 units located in Texas and Arizona, to an unaffiliated third
party. Cash proceeds from the sale of approximately $22.7 million were used to
repay a portion of the Company's outstanding short-term indebtedness. The
Company recognized a gain of approximately $2.8 million on the disposition of
these five properties.
DEBT ASSUMPTIONS AND FINANCINGS
In order to reduce the impact of changes in interest rates prior to the
refinancing, the Company routinely enters into interest rate lock agreements
that are accounted for as anticipatory hedges.
In April 1997, 23 partnerships controlled by the Company completed a $108.0
million refinancing of secured, short term, floating rate indebtedness with
secured, 20-year, fixed rate, fully amortizing debt. The new debt is secured by
27 apartment properties owned by such partnerships. In connection with this
refinancing, the Company received proceeds of $3.4 million from two interest
rate lock agreements accounted for as hedges. The aggregate gain on the interest
rate lock agreements was deferred and will be amortized over the life of the
debt.
During 1997, the Company assumed $220.4 million of mortgage indebtedness in
connection with purchases of 39 apartment properties. In addition, in connection
with the acquisition of the NHP Real Estate Companies, the Company assumed
fixed-rate mortgage indebtedness totaling $212.3 million, which is secured by 15
properties held by partnerships in which the Company acquired controlling
interests.
In December 1997, the Company refinanced certain mortgage indebtedness
secured by 27 properties, of which five are Owned Properties. The new notes,
which have an aggregate outstanding principal balance of $91.5 million as of
December 31, 1997, have an aggregate weighted average fixed interest rate of
6.71%. The new notes are fully amortizing, require monthly principal and
interest payments and mature in December 2012. In anticipation of the
refinancing, the Company entered into an interest rate lock agreement with an
investment banking company. Upon the settlement of the interest rate lock
agreement, the Company realized a loss of $10.9 million, which will be amortized
over the life of the new debt.
In May 1997, the Company increased its maximum amount available under its
revolving credit facility (the "Credit Facility") with Bank of America National
Trust and Savings Association ("Bank of America") from $50.0 million to $100.0
million. The outstanding balance under the Credit Facility was $33.5 million at
December 31, 1997. As of December 31, 1997 the Company was in compliance with
all debt covenants associated with the Credit Facility.
In January 1998, the Company replaced the Credit Facility with a new
unsecured $50 million revolving credit facility (the "New Credit Facility") with
Bank of America and BankBoston, N.A. The AIMCO Operating Partnership is the
borrower under the New Credit Facility, but all obligations thereunder are
guaranteed by AIMCO and certain of its subsidiaries. The interest rate under the
New Credit Facility is based on either LIBOR or Bank of America's reference
rate, at the election of the Company, plus an applicable margin (the "Margin").
The Margin ranges between 0.6% and 1.0% in the case of LIBOR-based loans and
between 0% and 0.5% in the case of loans based on Bank of America's reference
rate, depending upon the credit rating of the AIMCO Operating Partnership's
senior unsubordinated unsecured long-term indebtedness. The New Credit Facility
expires on January 26, 2000 unless extended for successive one-year periods, at
the discretion of the lenders. The New Credit Facility provides for the
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conversion of the revolving facility into a three year term loan. The
availability of funds to the Company under the New Credit Facility is subject to
certain borrowing base restrictions and other customary restrictions, including
compliance with financial and other covenants thereunder.
In February 1998, the AIMCO Operating Partnership, as borrower, and AIMCO
and certain single asset wholly-owned subsidiaries of the Operating Partnership
(the "Owners"), as guarantors, entered into a five year $50 million secured
credit facility agreement (the "WMF Credit Facility") with Washington Mortgage
Financial Group, Ltd. ("Washington Mortgage"), which provides for the conversion
of all or a portion of such revolving credit facility to a base loan facility.
The WMF Credit Facility provides that all the rights of Washington Mortgage are
assigned to the Federal National Mortgage Association ("FNMA"), but FNMA does
not assume Washington Mortgage's obligations under the WMF Credit Facility. At
the AIMCO Operating Partnership's request, the commitment amount may be
increased to an amount not to exceed $250 million, subject to the consent of
Washington Mortgage and FNMA in their sole and absolute discretion. The AIMCO
Operating Partnership and affiliates have pledged their ownership interests in
the Owners as security for its obligations under the WMF Credit Facility. The
guarantees of the Owners are secured by assets of the Owners, including four
apartment properties and two mortgage notes. Advances to the AIMCO Operating
Partnership under the WMF Credit Facility are funded with the proceeds of the
sale to investors of FNMA mortgage-backed securities that are secured by the
advance and an interest in the collateral. The interest rate on each advance is
determined by investor bids for such mortgage-backed securities, plus a margin
presently equal to 0.5%. The maturity date of each advance under the revolving
portion of the WMF Credit Facility is a date between three and nine months from
the closing date of the advance, as selected by the AIMCO Operating Partnership.
Advances under the base facility mature at a date, selected by the AIMCO
Operating Partnership between ten and twenty years from the date of the advance.
Subject to certain conditions, the AIMCO Operating Partnership has the right to
add or substitute collateral. The WMF Credit Facility requires the Company to
maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, an
interest coverage ratio of at least 2.25 to 1.0, and a debt service coverage
ratio of at least 2.0 to 1.0, imposes minimum net worth requirements and also
provides other financial covenants and interest coverage ratio requirements that
are specifically related to the collateral.
The Company anticipates that it will refinance a portion of its floating
rate indebtedness with fixed rate indebtedness during 1998. In September 1997,
the Company entered into an interest rate lock agreement with a major investment
banking company, having a notional principal amount of $75 million. The interest
rate lock agreement matures on March 19, 1998, and fixes the ten year treasury
rate at 6.211%. Based on the fair value of the interest rate lock at December
31, 1997, the Company has a potential loss of approximately $2.6 million, which
will be amortized over the life of the new debt and included in interest
expense.
EQUITY OFFERINGS
In February 1997, AIMCO completed a public offering of 2,015,000 shares of
Class A Common Stock at a public offering price of $26.75 per share. The net
proceeds of approximately $51.0 million were used to repay a portion of the
Company's indebtedness incurred in connection with 1996 acquisitions.
In May 1997, AIMCO sold 2,300,000 shares of Class A Common Stock at an
average price of $28.00 per share in two public offerings. The net proceeds of
approximately $63.0 million were used to repay outstanding indebtedness under
the Credit Facility and to provide working capital.
In August 1997, AIMCO sold 750,000 shares of newly created Class B
Cumulative Convertible Preferred Stock, par value $.01 per share ("Class B
Preferred Stock") for gross proceeds of $75.0 million in cash to an
institutional investor in a private transaction. The proceeds from the sale of
the Class B Preferred Stock were used to repay borrowings outstanding under the
Credit Facility and to provide working capital.
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In August and September 1997, AIMCO issued an aggregate of 5,052,418 shares
of Class A Common Stock to institutional investors for aggregate net proceeds of
$156.9 million. The Company used $114.4 million of such proceeds to purchase
6,068,974 shares of NHP Common Stock from ANHI, repaid $7.0 million of
indebtedness and contributed the remaining $35.5 million to the AIMCO Operating
Partnership.
In October 1997, AIMCO issued 7,000,000 shares of Class A Common Stock. Net
proceeds from the sale of approximately $242.5 million were used to fund certain
property acquisitions, repay outstanding indebtedness under the Credit Facility
and provide working capital.
In December 1997, AIMCO issued 2,400,000 shares of newly created Class C
Cumulative Preferred Stock, par value $.01 per share ("Class C Preferred Stock")
in a public offering. The net proceeds of $58.1 million were used to repay
borrowings outstanding under the Credit Facility and to provide working capital.
Subsequent to December 31, 1997, AIMCO issued 4,200,000 shares of newly
created Class D Cumulative Preferred Stock, par value $0.01 per share (the
"Class D Preferred Stock") in a public offering. The net proceeds of $101.7
million were used to repay indebtedness under the New Credit Facility and to
provide working capital.
MANAGEMENT STOCK ACQUISITION
In July 1997, AIMCO sold 1,100,000 newly issued shares of Class A Common
Stock to certain members of the Company's senior management, at a price of
$30.00 per share, the closing price of the stock on the date of purchase. In
exchange for the shares purchased, such members of senior management executed
notes payable to the Company totaling $33.0 million, of which $15.8 million has
been repaid as of February 28, 1998. The notes bear interest at 7.25% per annum,
payable quarterly, and are due in ten years. The notes are secured by the stock
purchased and are recourse as to 25% of the original amount borrowed.
As of December 31, 1997, members of the Company's management and Board of
Directors own 3,003,056 shares of Class A Common Stock and 905,232 OP Units,
which represents an 8.5% ownership interest in the Company. Based on the closing
price of AIMCO's Class A Common Stock, management's investment in the Company
has increased from $65.1 million as of December 31, 1996 to $143.6 million as of
December 31, 1997.
PENDING ACQUISITIONS
On December 23, 1997, AIMCO and Ambassador Apartments, Inc., a Maryland
corporation that has elected to be taxed as a REIT ("Ambassador"), entered into
an Agreement and Plan of Merger (the "Ambassador Merger Agreement") pursuant to
which Ambassador will be merged with and into AIMCO, with AIMCO being the
surviving corporation (the "Ambassador Merger"). The Ambassador Merger Agreement
also provides that, unless otherwise agreed by the parties, Ambassador
Apartments, L.P., a Delaware limited partnership (the "Ambassador Operating
Partnership"), will be merged with and into the AIMCO Operating Partnership (the
"Ambassador Reorganization") and all outstanding Ambassador Operating
Partnership interests will be converted into AIMCO OP Units based on the
Conversion Ratio, as defined below. In the Ambassador Merger Agreement,
Ambassador's Common Stock, par value $0.01 per share, (the "Ambassador Common
Stock"), is valued at $21 per share. In the Ambassador Merger, holders of
Ambassador Common Stock will receive for each share of Ambassador Common Stock a
number of shares of AIMCO Class A Common Stock equal to the Conversion Ratio.
The "Conversion Ratio" means the quotient determined by dividing $21 by the
"AIMCO Index Price," which is the aggregate of the average of the high and low
sales prices for Class A Common Stock on each of the twenty consecutive New York
Stock Exchange ("NYSE") trading days ending on the fifth NYSE trading day
immediately preceding the closing of the Ambassador Merger, divided by 20. If
the AIMCO Index Price is
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less than $36 (i.e. the Conversion Ratio is greater than 0.583), then AIMCO may
elect to fix the Conversion Ratio at 0.583 and pay to each holder of Ambassador
Common Stock cash sufficient to provide $21 in value for each share of
Ambassador Common Stock. Any outstanding options to purchase Ambassador Common
Stock may be converted, at the election of the option holder, into cash or
options to purchase Class A Common Stock at the Conversion Ratio. The Ambassador
Merger Agreement provides that Ambassador's outstanding preferred stock, par
value $0.01 per share (the "Ambassador Preferred Stock"), shall be redeemed,
subject to the right of holders of shares of Ambassador Preferred Stock to
convert such shares into Ambassador Common Stock, immediately prior to the
Ambassador Merger. Assuming a conversion ratio of 0.583, the Company will issue
up to an aggregate of 7,205,739 shares of Class A Common Stock in the Ambassador
Merger, based upon the number of shares of Ambassador Common Stock, options to
purchase Ambassador Common Stock and other securities currently convertible into
shares of Ambassador Common Stock outstanding as of December 31, 1997.
Ambassador is a self-administered and self-managed REIT engaged in the
ownership and management of garden-style apartment properties leased primarily
to middle income tenants. As of December 31, 1997, Ambassador owned 52 apartment
communities with a total of 15,728 units located in Arizona, Colorado, Florida,
Georgia, Illinois, Tennessee and Texas. In addition, Ambassador manages one
property containing 252 units for an unrelated third party. Ambassador conducts
substantially all of its operations through the Ambassador Operating Partnership
and its subsidiaries. As of December 31, 1997, Ambassador held approximately 94%
of the outstanding common units and 100% of the outstanding preferred units of
the Ambassador Operating Partnership.
Consummation of the Ambassador Merger is subject to the affirmative vote of
the holders of at least two-thirds of the outstanding shares of Ambassador
Common Stock, the approval of all appropriate governmental and regulatory
authorities and other customary conditions. The closing of the transaction is
expected to occur during the second quarter of 1998.
On March 17, 1998, AIMCO entered into a definitive merger agreement (the
"Insignia Merger Agreement") to acquire the multi-family apartment management
operations and certain property holdings, of Insignia Financial Group, Inc.
("Insignia"). Insignia is one of the largest managers of multi-family
residential properties in the United States. The acquisition of Insignia will
add approximately 191,000 apartment units to AIMCO's management portfolio,
including approximately 122,000 units in which AIMCO will own an equity interest
and approximately 69,000 units which will be managed for unaffiliated third
parties. Pursuant to the Insignia Merger Agreement, the Company anticipates
issuing approximately $303.0 million in convertible preferred stock to Insignia
shareholders, the payment of a $50 million special dividend to Insignia
shareholders and the assumption of $557.0 million of existing indebtedness. In
addition, the Company will offer to purchase the 25% interest in Insignia
Properties Trust, which is not owned by Insignia, for a price not less than
$13.25 per share of beneficial ownership interest.
The Insignia shareholders will receive shares of AIMCO preferred stock based
on an exchange ratio that fluctuates based on the average high and low sales
price of AIMCO Class A Common Stock for 20 trading days prior to the fifth
trading day preceding the closing of the transaction (the "Index Price"). If the
Index Price is greater than $38.00 per share, then the Index Price will be
$38.00 per share for the exchange ratio. If the Index Price is below $36.50 per
share, then AIMCO may pay a portion of the purchase price in cash to the extent
the Index Price is less than $36.50 per share.
Consummation of the transactions contemplated by the Insignia Merger
Agreement is subject to the affirmative vote of the holders of the outstanding
shares of Insignia, the approval of all appropriate governmental and regulatory
authorities and other customary conditions.
In the ordinary course of business, the Company engages in discussions and
negotiations regarding the acquisition of apartment properties (including
interests in entities that own apartment properties). The Company frequently
enters into contracts and nonbinding letters of intent with respect to the
purchase of properties. These contracts are typically subject to certain
conditions and permit the Company to
8
terminate the contract in its sole and absolute discretion if it is not
satisfied with the results of its due diligence investigation of the properties.
The Company believes that such contracts essentially result in the creation of
an option on the subject properties and give the Company greater flexibility in
seeking to acquire properties. As of March 18, 1998, the Company had under
contract or letter of intent an aggregate of 21 multi-family apartment
properties with a maximum aggregate purchase price of $223.9 million, including
estimated capital improvements, which, in some cases, may be paid in the form of
assumption of existing debt. All such contracts are subject to termination by
the Company as described above. No assurance can be given that any of these
possible acquisitions will be completed or, if completed, that they will be
accretive on a per share basis.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment, the ownership and management
of real estate properties. See the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K for financial
information relating to the Company.
GROWTH STRATEGIES
The Company's primary objective is to maximize shareholder value by
increasing the amount and predictability of its Funds From Operations ("FFO") on
a per share basis. The Company seeks to achieve this objective primarily by
improving net operating income from its Owned Properties and by acquiring
additional properties at values that are accretive on a per share basis. The
Company's operating and financial strategies include: (i) maintaining a
geographically diversified portfolio of properties; (ii) providing a minimum of
$300 per apartment unit per year for capital replacements to maintain its
properties; (iii) emphasizing long-term, fixed rate, fully amortizing debt; and
(iv) maintaining a dividend payout ratio of less than 80% of FFO. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Funds From Operations."
ACQUISITIONS
During 1997, the Company directly acquired 44 apartment properties
containing 11,706 units for total consideration of $464.8 million, consisting of
$191.0 million in cash, approximately 1.9 million OP units valued at $53.4
million and the assumption or incurrence of $220.4 million of indebtedness. In
addition, the Company acquired a controlling interest in 15 partnerships which
own 5,285 units located in 15 apartment communities as a result of the
acquisition of the NHP Real Estate Companies, subsequent tender offers made to
investors in certain NHP Partnerships, and the purchase of mortgage debt and
land leases. As a result of these transactions, the Company increased the number
of apartment units it owns or controls to 40,039 units as of December 31, 1997,
a net increase of approximately 68% from the 23,764 units number of units owned
or controlled as of December 31, 1996.
The Company intends to continue to expand its portfolio of Owned Properties
by: (i) acquiring properties in markets familiar to the Company's management;
(ii) developing and expanding its Owned Properties; and (iii) acquiring
controlling interests in companies that own or manage multi-family properties.
MANAGED PROPERTIES
The Company believes its property management operations are integral to its
overall business strategy. The economies of scale realized from managing more
than 193,000 apartment units enable the Company to more efficiently operate its
properties. In addition, the Company believes that managing properties for third
parties improves the performance of its Owned Properties by subjecting property
managers to market-based pricing and service standards. The Company's property
management operations
9
also support the Company's acquisition activities by enhancing its ability to
identify and evaluate acquisition and development opportunities in its markets.
The Company's local and regional personnel maintain first-hand knowledge of
local market conditions and often obtain early notification of Managed
Properties and other properties that may be offered for sale.
REDEVELOPMENT AND EXPANSION PROPERTIES
The Company has a cautious strategy concerning new development of properties
and intends to develop only in situations in which it believes it has a
significant advantage. The Company believes that redevelopment of selected
properties in superior locations can provide advantages over the development of
new properties because, compared with new development, redevelopment generally
can be accomplished with relatively lower financial risk, in less time and with
reduced delays attributable to governmental approval procedures. The Company
believes that expansion within, or adjacent to, existing properties will provide
growth opportunities at lower risks than are associated with new development,
and may offer certain cost advantages to the extent common area amenities and
on-site management personnel can be utilized.
Recently, the Company acquired and redeveloped Sun Katcher Apartments, a
360-unit apartment property located in Jacksonville, Florida, at a cost of $8.9
million, including $4.9 million in redevelopment costs. The Company also
recently commenced the renovation and upgrading of Bay West Apartments, a
376-unit apartment property located in Tampa, Florida, for a projected cost of
$4.8 million (of which $0.9 million has already been spent), to reposition the
property in the marketplace.
The Company expects to undertake a major renovation of the Morton Towers
Apartments, a 1,277-unit apartment property located in Miami Beach, Florida, at
an estimated cost of $35 million. Pending zoning approval and economic
feasibility studies, the Company intends to construct a third high rise tower on
undeveloped land adjacent to the property, which will add an additional 521
units at an estimated cost of $60.0 million.
The Company believes that expansion within or adjacent to existing AIMCO
Properties also provides growth opportunities at lower risk than new
development. Such expansion can offer cost advantages to the extent common area
amenities and on-site management personnel can service the expanded property.
Recently, the Company constructed 92 additional units at Fairways, an apartment
property located in Phoenix, Arizona, at a cost of $6.5 million. The Company is
planning the construction of 42 additional units at the Township Apartments,
located in Littleton, Colorado, for a projected cost of approximately $3.0
million. In addition, the Company owns or controls 136 acres of vacant land,
adjacent to existing Owned Properties or Equity Properties, which management
believes is suitable for the development of approximately 1,300 apartment units.
The Company generally finances redevelopment and expansion activities initially
with short-term indebtedness, and subsequently arranges permanent financing.
OPERATING STRATEGIES
INTERNAL GROWTH STRATEGY
The Company's strategy for internal growth and to increase cash flow is to
continually: (i) seek higher net rental revenues by enhancing and maintaining
the competitiveness of properties through periodic property upgrades which
typically include cable television, selective refurbishment and the addition of
other amenities; (ii) provide a high level of service to residents; (iii) manage
expenses through a system of detailed management reporting and accountability;
and (iv) provide training programs, orientation workshops and technical courses
for on-site marketing, maintenance and management personnel.
In pursuing its internal growth strategy, the Company's policy is to: (i)
provide on-site management trained to respond promptly to residents' needs; (ii)
conduct annual resident satisfaction surveys;
10
(iii) respond to maintenance calls within 24 hours; and (iv) maintain the
quality and appearance of its properties with an annual provision of $300 per
apartment unit for capital replacements.
PROPERTY MANAGEMENT
The Company's property management strategy is to achieve improvements in
operating results by combining centralized financial control and uniform
operating procedures with localized property management decision making and
market knowledge. The Company is organized into geographically diversified
Regional Operating Centers ("ROC"). Each ROC is served by local offices of
regional property managers and is supervised by a Regional Vice President.
DIVERSIFIED MARKETS
The Company seeks to operate primarily in markets: (i) where population and
employment growth rates are expected to exceed the national averages; (ii) where
it believes it can become one of the regionally significant owners and managers
of multi-family apartment properties; and (iii) that will enable the Company to
maintain a geographically diversified portfolio or otherwise gain significant
financial benefits. The distribution of the Owned Properties reflects the
Company's focus on growth markets and its belief that geographic diversification
will help to insulate the portfolio from regional and local economic
fluctuations. The Company also seeks to create concentrations of properties
within each of its markets in order to achieve economies of scale in management
and operations. The Company owns or manages apartment units in 18 principal
markets, including in excess of 5,000 apartment units in the Chicago, Dallas,
Houston, Indianapolis, New York, Philadelphia, Phoenix, Tampa and Washington,
D.C. metropolitan areas, and more than 2,000 apartment units in the Albuquerque,
Atlanta, Austin, Baltimore, Ft. Lauderdale, Norfolk, Orlando, San Antonio and
St. Louis metropolitan areas.
TAXATION OF THE COMPANY
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with its taxable year ended
December 31, 1994, and the Company intends to continue to operate in such a
manner. The Company's current and continuing qualification as a REIT depends on
its ability to meet the various requirements imposed by the Code, through actual
operating results, distribution levels and diversity of stock ownership.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to U.S. federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a corporation. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to U.S. federal income tax at
regular corporate rates (including any applicable alternative minimum tax). Even
if the Company qualifies as a REIT, it may be subject to certain state and local
income taxes and to U.S. federal income and excise taxes on its undistributed
income.
If in any taxable year the Company fails to qualify as a REIT and incurs
additional tax liability, the Company may need to borrow funds or liquidate
certain investments in order to pay the applicable tax and the Company would not
be compelled to make distributions under the Code. Unless entitled to relief
under certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Company to fail to
qualify as a REIT or may cause the Board of Directors to revoke the REIT
election.
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the Federal income tax treatment.
11
COMPETITION
There are numerous housing alternatives that compete with the Company's
Owned Properties and Managed Properties in attracting residents. The Company's
properties compete directly with other multi-family rental apartments and single
family homes that are available for rent in the markets in which the Company's
properties are located. The Company's properties also compete for residents with
new and existing homes and condominiums. The number of competitive properties in
a particular area could have a material effect on the Company's ability to lease
apartment units at its properties and on the rents charged. The Company competes
with numerous real estate companies in acquiring, developing and managing
multi-family apartment properties and seeking tenants to occupy the AIMCO
Properties. In addition, the Company competes with numerous property management
companies in the markets where the Managed Properties are located.
REGULATION
GENERAL
Multifamily apartment properties are subject to various laws, ordinances and
regulations, including regulations relating to recreational facilities such as
swimming pools, activity centers and other common areas. Changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions, as
well as changes in laws affecting development, construction and safety
requirements, may result in significant unanticipated expenditures, which would
adversely affect the Company's cash flows from operating activities. In
addition, future enactment of rent control or rent stabilization laws or other
laws regulating multi-family housing may reduce rental revenue or increase
operating costs in particular markets.
RESTRICTIONS IMPOSED BY LAWS BENEFITING DISABLED PERSONS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of
public accommodation are required to meet certain Federal requirements related
to access and use by disabled persons. These requirements became effective in
1992. A number of additional Federal, state and local laws exist which also may
require modifications to the Owned Properties, or restrict certain further
renovations thereof, with respect to access thereto by disabled persons. For
example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment
properties first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the ADA or the FHAA could result in the
imposition of fines or an award of damages to private litigants and also could
result in an order to correct any non-complying feature, which could result in
substantial capital expenditures. Although management of the Company believes
that the Owned Properties are substantially in compliance with present
requirements, if the Owned Properties are not in compliance, the Company is
likely to incur additional costs to comply with the ADA and the FHAA.
HUD ENFORCEMENT AND LIMITED DENIALS
A significant number of the affordable units included in the AIMCO
Properties are subject to regulation by the U.S. Department of Housing and Urban
Development ("HUD"). HUD has the authority to suspend or deny property owners
and managers from participation in HUD programs with respect to additional
assistance within a geographic region through imposition of a limited denial of
participation ("LDP") by any HUD office or nationwide for violations of HUD
regulatory requirements. See "Item 7-- Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Contingencies."
12
ENVIRONMENTAL MATTERS
Under Federal, state and local environmental laws and regulations, a current
or previous owner or operator of real property may be required to investigate
and clean up a release of hazardous substances at such property, and may, under
such laws and common law, be held liable for property damage and other costs
incurred by third parties in connection with such releases. The liability under
certain of these laws has been interpreted to be joint and several unless the
harm is divisible and there is a reasonable basis for allocation of
responsibility. The failure to remediate the property properly may also
adversely affect the owner's ability to sell or rent the property or to borrow
using the property as collateral. In connection with its ownership, operation
and management of the AIMCO Properties, the Company could be potentially liable
for environmental liabilities or costs associated with its properties or
properties it may in the future acquire or manage. See "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Environmental."
INSURANCE
Management believes that the Owned Properties are covered by adequate fire,
flood and property insurance provided by reputable companies and with
commercially reasonable deductibles and limits.
EMPLOYEES
The Company has a staff of employees performing various acquisition,
redevelopment and management functions. The Company, through the AIMCO Operating
Partnership and related service company businesses, has approximately 7,000
employees, most of whom are employed at the property level. None of the
employees are represented by a union, and the Company has never experienced a
work stoppage. The Company believes it maintains satisfactory relations with its
employees.
ITEM 2. PROPERTIES
The AIMCO Properties are located in 42 states, Puerto Rico and the District
of Columbia. A significant portion of the AIMCO Properties are concentrated in
or around 9 metropolitan areas in which the Company owns, controls or manages
more than 5,000 units. The following table sets forth certain market information
for the AIMCO Properties as of December 31, 1997:
PERCENTAGE OF TOTAL
UNITS
NUMBER OF NUMBER OF OWNED/CONTROLLED
PROPERTIES UNITS OR MANAGED
----------- ----------- ---------------------
Chicago, IL................................................. 23 5,463 3%
Dallas, TX.................................................. 35 7,518 4%
Houston, TX................................................. 38 8,064 4%
Indianapolis, IN............................................ 22 6,074 3%
New York, NYv 44 6,729 3%
Philadelphia, PA............................................ 30 8,587 4%
Phoenix, AZ................................................. 27 5,958 3%
Tampa/St. Petersburg, FL.................................... 18 6,242 3%
Washington, DC.............................................. 34 9,249 5%
----- ----------- ---
Principal markets total................................... 271 63,884 32%
Other markets............................................... 765 129,173 68%
----- ----------- ---
Total..................................................... 1,036 193,057 100%
----- ----------- ---
----- ----------- ---
The AIMCO Properties average 186 apartment units each, with the largest
property containing 2,113 apartment units.
13
The Owned Properties are located in 19 states, primarily located in the
Sunbelt regions of the United States. A significant portion of the Owned
Properties are concentrated in or around 12 metropolitan areas in which the
Company owns or controls more than 1,000 units. The following table sets forth
certain market information for Owned Properties as of December 31, 1997:
PERCENTAGE OF TOTAL
NUMBER OF NUMBER OF UNITS
PROPERTIES UNITS OWNED OR CONTROLLED
----------- ----------- ---------------------
Atlanta, GA................................................. 9 2,100 5%
Chicago, IL................................................. 7 1,875 5%
Denver, CO.................................................. 5 1,255 3%
Dallas, TX.................................................. 10 2,525 6%
Houston, TX................................................. 22 5,365 13%
Miami/Ft. Lauderdale, FL.................................... 6 3,737 9%
Orlando, FL................................................. 4 1,072 3%
Phoenix, AZ................................................. 18 4,514 11%
San Antonio, TX............................................. 7 1,414 4%
Tampa/St. Petersburg, FL.................................... 4 1,530 4%
Tuscon, AZ.................................................. 5 1,088 3%
Washington, DC.............................................. 1 2,113 5%
----- ----------- ---
Principal markets total................................... 98 28,588 71%
Other markets............................................... 49 11,451 29%
----- ----------- ---
Total..................................................... 147 40,039 100%
----- ----------- ---
----- ----------- ---
At December 31, 1997, the Company owned or controlled 147 properties
containing 40,039 units. The Owned Properties average 272 apartment units each,
with the largest property containing 2,113 apartment units.
The Owned Properties offer residents a range of amenities. Many of the Owned
Properties include a swimming pool and clubhouse, spas, fitness centers, tennis
courts and saunas. Many of the apartment units offer design and appliance
features such as vaulted ceilings, fireplaces, washer and dryer hook-ups, cable
television, balconies and patios.
Substantially all of the Owned Properties are encumbered by mortgage
indebtedness or serve as collateral for the Company's indebtedness. At December
31, 1997, the Company had aggregate mortgage indebtedness totaling $774.5
million, which was secured by 129 Owned Properties with a combined net book
value of $1,246.3 million, having an aggregate weighted average interest rate of
8.1%. At December 31, 1997, the Company had borrowings of $33.5 million
outstanding under its Credit Facility which were collateralized by seven Owned
Properties with a combined net book value of $82.8 million. See the financial
statements included elsewhere in this Annual Report for additional information
about the Company's indebtedness.
ITEM 3. LEGAL PROCEEDINGS
In November 1996, the Company completed the acquisition (the "English
Acquisition") of certain partnership interests, real estate and related assets
from J.W. English, a Houston, Texas-based real estate syndicator and developer,
and certain affiliated entities (collectively, the "J.W. English Companies"). In
the English Acquisition, the Company purchased all of the general and limited
partnerships interests owned by the J.W. English Companies in 22 limited
partnerships which act as the general partner to 31 limited partnerships (the
"English Partnerships") that own 22 multi-family apartment properties and other
assets and interests related to the J.W. English Companies, and assumed
management of the properties owned by the English Partnerships. The Company made
separate tender offers (the "English Tender Offers") to the limited partners of
25 of the English Partnerships (the "Tender Offer English Partnerships").
14
In November 1996, purported limited partners of certain of the Tender Offer
English Partnerships filed a class action lawsuit against the Company and J.W.
English in the U.S. District Court for the Northern District of California (the
"Federal Action"), alleging among other things, that the Company conspired with
J.W. English to breach his fiduciary duty to the plaintiffs, and that the
offering materials used by the Company in connection with the English Tender
Offers contained misleading statements or omissions. The Federal Action was
voluntarily dismissed, without prejudice, in favor of another purported class
action filed in May 1997 by limited partners of certain of the Tender Offer
English Partnerships and six additional English Partnerships. Two complaints
were filed in Superior Court of the State of California (the "California
Actions") against the Company and the J.W. English Companies, alleging, among
other things, that the consideration the Company offered in the English Tender
Offers was inadequate and designed to benefit the J.W. English Companies at the
expense of the limited partners, that certain misrepresentations and omissions
were made in connection with the English Tender Offers, that the Company
receives excessive fees in connection with its management of the properties
owned by the English Partnerships, that the Company continues to refuse to
liquidate the English Partnerships and that the English Acquisition violated the
partnership agreements governing the English Partnerships and constituted a
breach of fiduciary duty.
In addition to unspecified compensation and exemplary damages, the original
complaints in the California Actions sought an accounting, a constructive trust
on the assets and monies acquired by the English defendants in connection with
the English Acquisition, a court order removing the Company from management of
the English Partnerships and/or ordering disposition of the properties and
attorneys fees, expert fees and other costs. The Company intends to vigorously
defend itself in connection with these actions. The Company also believes it is
entitled to indemnification from the J.W. English Companies, subject to certain
exceptions. Failure by the Company to prevail in the California Actions or to
receive indemnification could have a material adverse effect on the Company's
financial condition and results of operations.
On August 4, 1997, the Company filed demurrers to both complaints in the
California Actions. At a hearing on the demurrers on January 9, 1998, the court
granted the Company's demurrers to each of the three causes of action against it
in the two complaints, with leave to amend. On February 25, 1998, the plaintiffs
filed a consolidated amended class and derivative complaint for damages (the
"Consolidated Amended Complaint"). The Consolidated Amended Complaint has added
as defendants the general partners of the English Partnerships and dropped
certain defendants, including AIMCO/PAM Properties, L.P. The Consolidated
Amended Complaint seeks compensatory and punitive damages and alleges six causes
of action for breach of fiduciary duty (two separate causes of action), for an
accounting, breach of the implied covenant of good faith and fair dealing, and
for inducing breach of contract. Plaintiffs have also added allegations of
alleged wrongful conduct in connection with the Company's second group of tender
offers commenced in late 1997. The Company will likely file a demurrer. The date
to move, answer or otherwise respond to the Consolidated Amended Complaint with
respect to all of the defendants is March 27, 1998.
The Company is a party to various legal actions resulting from its operating
activities. These actions are routine litigation and administrative proceedings
arising in the ordinary course of business, some of which are covered by
liability insurance, and none of which are expected to have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AIMCO held a special meeting of stockholders on December 8, 1997 to consider
the issuance by AIMCO of up to 5,433,695 shares of Class A Common Stock in
connection with the NHP Merger. The matter was approved by the following vote:
VOTES
VOTES FOR AGAINST ABSTENTIONS
- ------------ --------- -----------
19,997,613 163,073 134,247
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
AIMCO's Class A Common Stock has been listed and traded on the NYSE under
the symbol "AIV" since July 22, 1994. The following table sets forth the
quarterly high and low sales prices of the Class A Common Stock, as reported on
the NYSE, and the dividends paid by the Company for the periods indicated.
DIVIDENDS
PAID
QUARTER ENDED HIGH LOW (PER SHARE)
- ------------------------------------------------------------------------------ ----- --- -----------
1995
March 31, 1995................................................................ $ 181/2 $ 171/8 $ 0.415
June 30, 1995................................................................. 201/4 177/8 0.415
September 30, 1995............................................................ 211/8 191/2 0.415
December 31, 1995............................................................. 20 18 0.425
1996
March 31, 1996................................................................ 211/8 193/8 0.425
June 30, 1996................................................................. 21 183/8 0.425
September 30, 1996............................................................ 22 183/8 0.425
December 31, 1996............................................................. 283/8 211/8 0.425
1997
March 31, 1997................................................................ 301/2 251/2 0.4625
June 30, 1997................................................................. 293/4 26 0.4625
September 30, 1997............................................................ 363/16 281/8 0.4625
December 31, 1997............................................................. 38 32 0.4625
1998
March 31, 1998 (through March 15, 1998)....................................... 0.5625(1)
- ------------------------
(1) On January 22, 1998, the Company's Board of Directors declared a cash
dividend of $0.5625 per share of Common Stock, paid on February 13, 1998 to
stockholders of record on February 6, 1998.
On March 18, 1998, there were 41,417,376 shares of Class A Common Stock
outstanding, held by 328 stockholders of record.
The Company, as a REIT, is required to distribute annually to holders of
common stock at least 95% of its "real estate investment trust taxable income,"
which, as defined by the Code and Treasury regulations, is generally equivalent
to net taxable ordinary income. The Company measures its economic profitability
and intends to pay regular dividends to its stockholders based on FFO during the
relevant period. However, the future payment of dividends by the Company will be
at the discretion of the Board of Directors and will depend on numerous factors
including the Company's financial condition, its capital
16
requirements, the annual distribution requirements under the provisions of the
Code applicable to REITs and such other factors as the Board of Directors deems
relevant.
From time to time, AIMCO issues shares of Class A Common Stock in exchange
for OP Units tendered to the AIMCO Operating Partnership for redemption in
accordance with the terms and provisions of the agreement of limited partnership
of the AIMCO Operating Partnership. Such shares are issued based on an exchange
ratio of one share for each OP Unit. The shares are issued in exchange for OP
Units in private transactions exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof.
During 1997, a total of 563,426 shares were issued in exchange for OP Units.
On June 3, 1997, AIMCO issued warrants (the "NHP Warrants") exercisable to
purchase an aggregate of 399,999 shares of Class A Common Stock at $36 per share
at any time prior to June 3, 2002. The NHP Warrants were issued as part of the
consideration for the NHP Real Estate Companies in a private transaction exempt
from registration under the Securities Act pursuant to Section 4(2) thereof.
On December 2, 1997, AIMCO issued warrants (the "Oxford Warrants")
exercisable to purchase up to an aggregate of 500,000 shares of Class A Common
Stock at $41 per share. The Oxford Warrants were issued to affiliates of Oxford
Realty Financial Group, Inc., a Maryland corporation ("Oxford"), in connection
with the amendment of certain agreements pursuant to which the Company manages
properties controlled by Oxford or its affiliates. The actual number of shares
of Class A Common Stock for which the Oxford Warrants will be exercisable is
based on certain performance criteria with respect to the Company's management
arrangements with Oxford for each of the five years ending December 31, 2001.
The Oxford Warrants are exercisable for six years after the determination of
such criteria for each of the five years. The Oxford Warrants were issued in a
private transaction exempt from registration under the Securities Act pursuant
to Section 4(2) thereof.
17
ITEM 6. SELECTED FINANCIAL DATA
The historical selected financial data for AIMCO for the years ended
December 31, 1997, 1996 and 1995 is based on audited financial statements. This
information should be read in conjunction with such financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein. The historical
selected financial data for AIMCO for the period from January 10, 1994 (the date
of inception) through December 31, 1994 and for the AIMCO Predecessors for the
period January 1, 1994 through July 28, 1994 and for the year ended December 31,
1993 is based on audited financial statements.
THE COMPANY AIMCO PREDECESSORS
--------------------------------------------------------- ----------------------------
FOR THE FOR THE
PERIOD PERIOD
JANUARY 10, JANUARY 1,
FOR THE YEAR FOR THE YEAR FOR THE YEAR 1994 1994 FOR THE YEAR
ENDED ENDED ENDED THROUGH THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 28, DECEMBER 31,
1997 1996 1995 1994 1994 1993
------------ ------------- ------------- ------------- ------------- -------------
OPERATING DATA:
RENTAL PROPERTY OPERATIONS:
Rental and other income.............. $ 193,006 $ 100,516 $ 74,947 $ 24,894 $ 5,805 $ 8,056
Property operating expenses.......... (76,168) (38,400) (30,150) (10,330) (2,263) (3,200)
Owned property management expenses... (6,620) (2,746) (2,276) (711) -- --
------------ ------------- ------------- ------------- ------------- -------------
110,218 59,370 42,521 13,853 3,542 4,856
Depreciation......................... (37,741) (19,556) (15,038) (4,727) 1,151) (1,702)
------------ ------------- ------------- ------------- ------------- -------------
72,477 39,814 27,483 9,126 2,391 3,154
------------ ------------- ------------- ------------- ------------- -------------
SERVICE COMPANY BUSINESS:
Management fees and other income..... 13,937 8,367 8,132 3,217 6,533 8,069
Management and other expenses........ (9,910) (5,352) (4,953) (2,047) (5,823) (6,414)
Corporate overhead allocation........ (588) (590) (581) -- -- --
Owner and seller bonuses............. -- -- -- -- (204) (468)
Amortization of management company
goodwill........................... (948) (500) (428) -- -- --
Depreciation and amortization........ (453) (218) (168) (150) (146) (204)
------------ ------------- ------------- ------------- ------------- -------------
2,038 1,707 2,002 1,020 360 983
------------ ------------- ------------- ------------- ------------- -------------
Minority interests in service company
business........................... (10) 10 (29) (14) -- --
------------ ------------- ------------- ------------- ------------- -------------
Company's shares of income from
service company business........... 2,028 1,717 1,973 1,006 360 983
------------ ------------- ------------- ------------- ------------- -------------
General and administrative
expenses........................... (5,396) (1,512) (1,804) (977) -- --
Interest income...................... 8,676 523 658 123 -- --
Interest expense..................... (51,385) (24,802) (13,322) (1,576) (4,214) (3,510)
Minority interest in other
partnerships....................... 1,008 (111) -- -- -- --
Equity in losses of unconsolidated
partnerships....................... (1,798) -- -- -- -- --
Equity in earnings of unconsolidated
subsidiaries....................... 4,636 -- -- -- -- --
Income from operations............... 30,246 15,629 14,988 7,702 (1,463) 627
Gain on disposition of properties.... 2,720 44 -- -- -- --
Provision for income taxes........... -- -- -- -- (36) (336)
------------ ------------- ------------- ------------- ------------- -------------
Income (loss) before extraordinary
item and minority interest in
Operating Partnership.............. 32,966 15,673 14,988 7,702 (1,499) 291
Extraordinary item--early
extinguishment of debt............. (269) -- -- -- -- --
------------ ------------- ------------- ------------- ------------- -------------
Income (loss) before minority
interest in Operating
Partnership........................ 32,697 15,673 14,988 7,702 (1,499) 291
Minority interest in Operating
Partnership........................ (4,064) (2,689) (1,613) (559) -- --
------------ ------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ 28,633 $ 12,984 $ 13,375 $ 7,143 $ (1,499) $ 291
------------ ------------- ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- ------------- -------------
18
THE COMPANY AIMCO PREDECESSORS
--------------------------------------------------------- ----------------------------
FOR THE FOR THE
PERIOD PERIOD
JANUARY 10, JANUARY 1,
FOR THE YEAR FOR THE YEAR FOR THE YEAR 1994 1994 FOR THE YEAR
ENDED ENDED ENDED THROUGH THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 28, DECEMBER 31,
1997 1996 1995 1994 1994 1993
------------ ------------- ------------- ------------- ------------- -------------
OTHER INFORMATION:
Total owned properties (end of
period)............................ 147 94 56 48 4 4
Total owned apartment units (end of
period)............................ 40,039 23,764 14,453 12,513 1,711 1,711
Units under management (end of
period)............................ 69,587 19,045 19,594 20,758 29,343 28,422
Basic earnings per common share
(1)................................ $ 1.09 $ 1.05 $ 0.86 $ 0.42 N/A N/A
Diluted earnings per common share
(1)................................ $ 1.08 $ 1.04 $ 0.86 $ 0.42 N/A N/A
Dividends paid per common share...... $ 1.85 $ 1.70 $ 1.66 $ 0.29 N/A N/A
BALANCE SHEET INFORMATION:
Real estate, before accumulated
depreciation....................... $1,659,763 $ 865,222 $ 477,162 $ 406,067 $ 47,500 $ 46,819
Total assets......................... 2,103,066 834,813 480,361 416,739 39,042 38,914
Total mortgages and notes payable.... 808,530 522,146 268,692 141,315 40,873 41,893
Mandatorily redeemable 1994
Cumulative Senior Preferred
Stock.............................. -- -- -- 96,600 -- --
Stockholders' equity................. 1,045,301 222,889 169,032 140,319 (9,345) (7,556)
- ------------------------
(1) Earnings per share figures for all periods prior to 1997 have been restated
to reflect the application of Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 128, Earnings Per Share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
financial statements incorporated by reference in Item 8 of this Annual Report
on Form 10-K.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996
NET INCOME
The Company recognized net income of $28.6 million and net income
attributable to common shareholders of $26.3 million for the year ended December
31, 1997 compared to net income and net income attributable to common
shareholders of $13.0 million for the year ended December 31, 1996. Net income
attributable to common shareholders represents net income less a provision for
accrued dividends on the Company's Class B Preferred Stock and Class C Preferred
Stock. The Class B Preferred Stock and Class C Preferred Stock were issued in
August and December 1997, respectively. There was no preferred stock outstanding
during 1996. The increase in net income allocable to common shareholders of
$13.3 million, or 102.3%, was primarily the result of the following:
- the acquisition of 10,484 units in 42 apartment communities primarily
during November and December 1996 (the "1996 Acquisitions");
- the acquisition of 11,706 units in 44 apartment communities during 1997
(the "1997 Acquisitions");
- the acquisition of interests in the NHP Partnerships during the period
June through December 1997; and
- the acquisition of NHP in December 1997.
19
- interest income on general partner loans to unconsolidated real estate
partnerships.
The effect of these acquisitions on net income was partially offset by the
sale of four properties in August 1996 (the "1996 Dispositions") and five
properties in October 1997 (the "1997 Dispositions"). These factors are
discussed in more detail in the following paragraphs.
RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the Company's Owned Properties
totaled $193.0 million for the year ended December 31, 1997, compared to $100.5
million for the year ended December 31, 1996, an increase of $92.5 million, or
92.0%. Rental and other property revenues consisted of the following (in
thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
"Same store" properties.......................................... $ 78,724 $ 75,069
1996 Acquisitions................................................ 68,505 14,970
1997 Acquisitions................................................ 22,163 --
Acquisition of interests in the NHP Partnerships................. 15,592 --
1996 Dispositions................................................ -- 3,363
1997 Dispositions................................................ 4,092 4,719
Properties in lease-up after the completion of an expansion or
renovation..................................................... 3,930 2,395
------------ ------------
Total............................................................ $ 193,006 $ 100,516
------------ ------------
------------ ------------
Average monthly rent per occupied unit for the same store properties
increased to $571 at December 31, 1997 from $560 at December 31, 1996, an
increase of 2.0%. Weighted average physical occupancy for the properties
increased to 94.8% at December 31, 1997 from 94.5% at December 31, 1996, an
increase of 0.3%.
Property operating expenses consist of on-site payroll costs, utilities (net
of reimbursements received from tenants), contract services, turnover costs,
repairs and maintenance, advertising and marketing, property taxes and
insurance. Property operating expenses totaled $76.2 million for the year ended
December 31, 1997, compared to $38.4 million for the year ended December 31,
1996, an increase of $37.8 million, or 98.4%. Property operating expenses
consisted of the following (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
"Same store" properties.......................................... $ 28,009 $ 28,234
1996 Acquisitions................................................ 28,911 5,258
1997 Acquisitions................................................ 8,402 --
Acquisition of interests in the NHP Partnerships................. 7,304 --
1996 Dispositions................................................ 1,793
1997 Dispositions................................................ 1,972 2,300
Properties in lease-up after the completion of an expansion or
renovation..................................................... 1,570 815
------------ ------------
Total............................................................ $ 76,168 $ 38,400
------------ ------------
------------ ------------
Owned Property management expenses, representing the costs of managing the
Company's Owned Properties, totaled $6.6 million for the year ended December 31,
1997, compared to $2.7 million for the
20
year ended December 31, 1996, an increase of $3.9 million, or 144.4%. The
increase resulted from the acquisition of properties in 1996 and 1997 and the
acquisition of interests in the NHP Partnerships.
SERVICE COMPANY BUSINESS
The Company's share of income from the service company business was $2.0
million for the year ended December 31, 1997, compared to $1.7 million for the
year ended December 31, 1996, an increase of $0.3 million or 17.6%. The increase
is due to the acquisition by the Company of property management businesses in
August and November 1996, the acquisition of partnership interests which provide
for certain partnership and administrative fees, and a captive insurance
subsidiary acquired in connection with the acquisition of the NHP Real Estate
Companies in June 1997, which were offset by the expiration of the Company's
commercial asset management contracts on March 31, 1997. The Company's share of
income from service company businesses consisted of the following (in
thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Properties managed for third parties and affiliates
Management fees and other income............................... $ 9,353 $ 5,679
Management and other expenses.................................. (9,045) (4,405)
------------ ------------
308 1,274
------------ ------------
Commercial asset management
Management and other income.................................... 245 1,026
Management and other expenses.................................. (275) (339)
------------ ------------
(30) 687
------------ ------------
Reinsurance operations
Revenues....................................................... 4,228 1,267
Expenses....................................................... (360) (282)
------------ ------------
3,868 985
------------ ------------
Brokerage and other
Revenues....................................................... 111 395
Expenses....................................................... (230) (326)
------------ ------------
(119) 69
------------ ------------
$ 4,027 $ 3,015
------------ ------------
------------ ------------
Income from the management of properties for third parties and affiliates
was $0.3 million for the year ended December 31, 1997, compared to $1.3 million
for the year ended December 31, 1996, a decrease of $1.0 million, or 76.9%.
Losses from commercial asset management were $30,000 for the year ended
December 31, 1997 compared to income of $0.7 million for the year ended December
31, 1996. The decrease is primarily due to the expiration of certain commercial
management contracts in March 1997.
Income from the reinsurance operations for the year ended December 31, 1997
increased by $2.9 million from the year ended December 31, 1996, due to
increased premiums collected from a larger work force, improved loss experience
and the closure of claims for less than the amounts previously reserved, as well
as the acquisition of the NHP Real Estate Companies, which included the
acquisition of a captive insurance company.
21
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $5.4 million for the year ended
December 31, 1997 compared to $1.5 million for the year ended December 31, 1996,
an increase of $3.9 million, or 260.0%. The increase in general and
administrative expenses is primarily due to the payment of incentive
compensation to members of senior management and other employees.
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred finance costs,
totaled $51.4 million for the year ended December 31, 1997, compared to $24.8
million for the year ended December 31, 1996, an increase of $26.6 million or
107.3%. The increase consists of the following (in thousands):
Interest expense on secured short-term and long-term indebtedness
incurred in connection with the 1996 Acquisitions................ $ 11,054
Interest expense on secured and unsecured short-term and long-term
indebtedness incurred in connection with the 1997 Acquisitions... 7,082
Interest expense on secured and unsecured short-term and long-term
indebtedness incurred in connection with the acquisition of
interests in the NHP Partnerships................................ 6,924
Increase in interest expense on the Credit Facility due to
borrowings used in connection with the refinancing of short-term
indebtedness and the acquisition of the NHP Real Estate Companies
in June 1997, net of decreased interest expense on existing
indebtedness due to principal amortization....................... 1,523
---------
Total increase..................................................... $ 26,583
---------
---------
INTEREST INCOME
Interest income totaled $8.7 million for the year ended December 31, 1997,
compared to $0.5 million for the year ended December 31, 1996. The increase is
primarily due to interest earned on general partner loans to unconsolidated real
estate partnerships acquired in 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
The Company recognized net income of $13.0 million for the year ended
December 31, 1996, all of which was attributable to common shareholders. For the
year ended December 31, 1995, the Company recognized net income of $13.4
million, of which $5.2 million was attributable to the holder of AIMCO's
mandatorily redeemable 1994 Cumulative Convertible Senior Preferred Stock
("Convertible Preferred Stock") and $8.2 million was attributable to common
shareholders. The increase in net income allocable to the common shareholders in
1996 of 58.5% was primarily the result of the 1996 Acquisitions offset by the
1996 Dispositions. The increase in net income is partially offset by increased
interest expense associated with debt which was incurred in June 1995 and
September 1995 upon the redemption of the Convertible Preferred Stock, increased
interest expense attributable to indebtedness assumed or incurred in connection
with the 1996 Acquisitions offset by decreased interest expense after the pay
down of the Credit Facility with proceeds from the 1996 Dispositions. These
factors are discussed in more detail in the following paragraphs.
RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the Company's Owned Properties
totaled $100.5 million for the year ended December 31, 1996, compared to $74.9
million for the year ended December 31, 1995, an
22
increase of $25.6 million, or 34.2%. Rental and other property revenues
consisted of the following (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
"Same store" properties................................ $ 69,268 $ 67,058
1996 Acquisitions...................................... 25,929 517
1996 Dispositions...................................... 3,363 5,272
Properties in lease-up after the completion of an
expansion or renovation.............................. 1,956 2,100
-------- -------
Total.................................................. $ 100,516 $ 74,947
-------- -------
-------- -------
Average monthly rent per occupied unit for these 42 properties at December
31, 1996 and 1995 was $546 and $531, respectively, an increase of 2.8%. Weighted
average physical occupancy for the 42 properties increased from 94.2% at
December 31, 1995 to 94.9% at December 31, 1996, a 0.7% increase.
Property operating expenses totaled $38.4 million for the year ended
December 31, 1996, compared to $30.2 million for the year ended December 31,
1995, an increase of $8.2 million, or 27.2%. Property operating expenses
consisted of the following (in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
"Same store" properties................................ $ 26,103 $ 25,615
1996 Acquisitions...................................... 9,652 218
1996 Dispositions...................................... 1,793 3,146
Properties in lease-up after the completion of an
expansion or renovation.............................. 852 1,171
-------- -------
Total.................................................. $ 38,400 $ 30,150
-------- -------
-------- -------
Owned property management expenses totaled $2.7 million for the year ended
December 31, 1996, compared to $2.3 million for the year ended December 31,
1995, an increase of $0.4 million or 17.4%. The increase is primarily due to the
acquisition of properties in 1996.
SERVICE COMPANY BUSINESS
The Company's share of income from the service company business was $1.7
million for the year ended December 31, 1996 compared to $2.0 million for the
year ended December 31, 1995. Management fees and other income totaled $8.4
million for the year ended December 31, 1996 compared to $8.1 million for the
year ended December 31, 1995, reflecting an increase of $0.3 million, or 3.7%.
Management and other expenses totaled $5.4 million for the year ended December
31, 1996 compared to $5.0 million for the year ended December 31, 1995,
reflecting an increase of $0.4 million, or 8.0%. Major sources of revenue
23
and expense before amortization of management company goodwill, corporate
overhead allocations, depreciation and amortization and minority interest are
described below.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
Properties managed for third parties and affiliates
Management fees and other income..................... $ 5,679 $ 4,878
Management and other expenses........................ (4,405) (3,620)
------- -------
1,274 1,258
------- -------
Commercial asset management
Management and other income.......................... 1,026 1,564
Management and other expenses........................ (339) (562)
------- -------
687 1,002
------- -------
Reinsurance operations
Revenues............................................. 1,267 1,193
Expenses............................................. (282) (432)
------- -------
985 761
------- -------
Brokerage and other
Revenues............................................. 395 497
Expenses............................................. (326) (339)
------- -------
69 158
------- -------
$ 3,015 $ 3,179
------- -------
------- -------
Income from the management of properties for third parties and affiliates
was $1.3 million for the years ended December 31, 1996 and 1995. Management fee
revenues increased from $4.9 million for the year ended December 31, 1995 to
$5.7 million for the year ended December 31, 1996, an increase of $0.8 million
or 16.4%, primarily as a result of the acquisition of properties in 1996. A
comparable increase in management expenses was also experienced in 1996.
Income from commercial asset management was $0.7 million for the year ended
December 31, 1996 compared to $1.0 million for the year ended December 31, 1995,
a decrease of $0.3 million or 30.0%. Commercial management revenues declined
from $1.6 million in 1995 to $1.0 million in 1996, primarily due to the
reduction in the number of properties managed. Commercial management expenses
declined from $0.6 million to $0.3 million as a result of fewer managed
properties. The asset management contracts expired on March 31, 1997.
Income from the reinsurance operations for the year ended December 31, 1996
increased by $0.2 million, or 29.4%, from the year ended December 31, 1995, due
to increased premiums collected from a larger work force, improved loss
experience and the closure of claims for less than the amounts previously
reserved.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $1.5 million for the year ended
December 31, 1996 compared to $1.8 million for the year ended December 31, 1995,
a decrease of $0.3 million or 16.7%. The amount presented for 1996 included $1.5
million for payroll, overhead and other costs associated with operating a public
company and $0.6 million for payroll and other costs incurred in the development
of new business offset by a corporate overhead allocation of $0.6 million to the
service company business. The amount presented for 1995 included $1.6 million
for payroll, overhead and other costs associated with
24
operating a public company, and $0.8 million for payroll and other costs
incurred in the development of new business offset by a corporate overhead
allocation of $0.6 million to the service company business. The net decrease in
general and administrative expenses for the year ended December 31, 1996 is
attributable to fewer personnel and a decrease in state income taxes paid in
1996 as a result of the restructuring in early 1995.
INTEREST EXPENSE
Interest expense totaled $24.8 million for the year ended December 31, 1996
compared to $13.3 million for the year ended December 31, 1995, an increase of
$11.5 million or 86.5%. The increase consists primarily of $5.7 million of
interest expense on secured long-term debt incurred in connection with
refinancings completed in June 1995 and September 1995 to refinance certain
secured notes payable, redeem the Convertible Preferred Stock and repurchase
513,514 unregistered shares of Class A Common Stock, and $5.6 million of
interest expense on long-term and short-term indebtedness incurred or assumed in
connection with the 1996 Acquisitions. Interest expense on secured tax-exempt
bond financing increased by $1.0 million, or 13.5%, due to an increase in
interest rate on the $48.1 million of tax-exempt bonds refinanced in June 1996
and the borrowing of $9.9 million in June 1996 (proceeds of which were used to
pay down the Company's Credit Facility). During the year ended December 31,
1996, the Company capitalized interest of $0.8 million as a result of increased
construction and renovation activities compared to $0.1 million which was
capitalized during the year ended December 31, 1995. Interest expense,
amortization of deferred financing costs and unused commitment fees on the
Credit Facility were $1.6 million for the years ended December 31, 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $37.1 million in cash and cash
equivalents and $24.2 million of restricted cash primarily consisting of
reserves and impounds held by lenders for capital expenditures, property taxes
and insurance. The Company's principal demands for liquidity include normal
operating activities, payments of principal and interest on outstanding debt,
capital improvements, acquisitions of or investments in properties, dividends
paid to its stockholders and distributions paid to minority limited partners in
the AIMCO Operating Partnership. The Company considers its cash provided by
operating activities to be adequate to meet short-term liquidity demands.
In May 1997, the Company increased its maximum amount available under the
Credit Facility from $50.0 million to $100.0 million. The outstanding balance
under the Credit facility was $33.5 million at December 31, 1997.
In January 1998, the Company replaced the Credit Facility with a new
unsecured $50 million revolving credit facility with Bank of America and
BankBoston, N.A. The interest rate under the New Credit Facility is based on
LIBOR or Bank of America's reference rate at the election of the Company, plus
an applicable margin, ranging from 0.6% to 1.0% for LIBOR based loans and 0.0%
to 0.5% for loans based on Bank of America's reference rate. The New Credit
Facility expires on January 26, 2000 unless extended for successive one-year
periods at the discretion of the lenders. The Company utilizes the New Credit
Facility for general corporate purposes and to fund investments on an interim
basis. As of March 18, 1998, there were no borrowings outstanding under the New
Credit Facility.
In February 1998, the Company entered into a five year secured credit
facility agreement with Washington Mortgage, which provides for a $50 million
revolving credit facility, a portion or all of which may be converted into a
base loan facility. At the AIMCO Operating Partnership's request, the commitment
amount may be increased to an amount not to exceed $250 million, subject to
consent of Washington Mortgage and FNMA in their sole and absolute discretion.
The AIMCO Operating Partnership and affiliates have pledged their ownership
interests in the Owners as security for their obligations under the WMF Credit
Facility. The guarantees of the Owners are secured by assets of the Owners,
including four
25
apartment properties and two mortgage notes. The interest rate on each advance
is determined by investor bids for such mortgage backed securities plus a fee
spread presently equal to 0.5%. The maturity date of each advance under the
revolving portion of the WMF Credit Facility is a date between three and nine
months from the closing date of the advance as selected by the AIMCO Operating
Partnership. Advances under the base facility mature at a date, selected by the
AIMCO Operating Partnership between ten and twenty years from the date of the
advance. The outstanding balance under the WMF Credit Faculty was $36.9 million
as of March 18, 1998.
The Company expects to meet its long-term liquidity requirements, such as
refinancing debt and property acquisitions, through long-term borrowings, both
secured and unsecured, the issuance of debt, OP Units or equity securities and
cash generated from operations. In May 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission with respect
to an aggregate of $1.0 billion of debt and equity securities. As of March 18,
1998, the amount remaining available under the shelf registration was $419.4
million. The Company expects to finance the pending acquisition of Ambassador
and other real estate interests, discussed previously in this report, with the
issuance of equity securities and debt.
As of December 31, 1997, 95% of the Company's Owned Properties and 67% of
its total assets were encumbered by debt, and the Company had total outstanding
indebtedness of $808.5 million, all of which was secured by Owned Properties and
other assets. The Company's indebtedness is comprised of $681.4 million of
secured long-term financing, $53.1 in secured short-term financing and $74.0
million of secured tax-exempt bonds. As of December 31, 1997, approximately 8%
of the Company's indebtedness bears interest at variable rates. General Motors
Acceptance Corporation has made 89 loans (the "GMAC Loans"), with an aggregate
outstanding principal balance of $398.6 million as of December 31, 1997, to
property owning partnerships of the Company, each of which is secured by the
underlying Owned Property of such partnership. Certain GMAC Loans are
cross-collateralized with certain other GMAC Loans. Other than certain GMAC
Loans, none of the Company's debt is subject to cross-collateralization
provisions. The weighted average interest rate on the Company's long-term
secured tax-exempt financing and secured notes payable was 8.1% with a weighted
average maturity of 9.7 years. The weighted average interest rate on the
Company's secured short-term financing was 7.5%.
CAPITAL EXPENDITURES
For the year ended December 31, 1997, the Company spent $7.4 million for
capital replacements (expenditures for routine maintenance of a property), $9.1
million for initial capital expenditures (expenditures at a property that have
been identified, at the time the property is acquired, as expenditures to be
incurred within one year of the acquisition), and $8.5 million for construction
and capital enhancements (amenities that add a material new feature or revenue
source at a property). These expenditures were funded by borrowings under the
Credit Facility, working capital reserves and net cash provided by operating
activities. During 1998, the Company will provide an allowance for capital
replacements of $300 per apartment unit. Initial capital expenditures and
capital enhancements will primarily be funded by cash from operating activities
and borrowings under the New Credit Facility.
26
The Company's accounting treatment of various capital and maintenance costs
is detailed in the following table:
DEPRECIABLE
ACCOUNTING LIFE IN
EXPENDITURE TREATMENT YEARS
- ------------------------------------------------------------------------- ---------------- -----------