Attached files
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EX-31.1 - EXHIBIT 31.1 - Apartment Income REIT, L.P. | c23301exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - Apartment Income REIT, L.P. | c23301exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Apartment Income REIT, L.P. | c23301exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Apartment Income REIT, L.P. | c23301exv32w1.htm |
EX-99.1 - EXHIBIT 99.1 - Apartment Income REIT, L.P. | c23301exv99w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Apartment Income REIT, L.P. | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
o | 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 0-24497
AIMCO Properties, L.P.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
84-1275621 (I.R.S. Employer Identification No.) |
|
4582 South Ulster Street Parkway, Suite 1100 Denver, Colorado (Address of principal executive offices) |
80237 (Zip Code) |
(303) 757-8101
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
(Former name, former address, and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The
number of Partnership Common Units outstanding as of October 26,
2011: 126,826,293
AIMCO PROPERTIES, L.P.
TABLE OF CONTENTS
FORM 10-Q
1
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
(In thousands)
(Unaudited)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Buildings and improvements |
$ | 6,959,172 | $ | 6,979,467 | ||||
Land |
2,097,137 | 2,084,987 | ||||||
Total real estate |
9,056,309 | 9,064,454 | ||||||
Less accumulated depreciation |
(2,876,389 | ) | (2,766,392 | ) | ||||
Net real estate ($805,411 and $846,081 related to VIEs) |
6,179,920 | 6,298,062 | ||||||
Cash and cash equivalents ($42,644 and $34,808 related to VIEs) |
75,831 | 111,325 | ||||||
Restricted cash ($51,694 and $55,076 related to VIEs) |
209,481 | 200,025 | ||||||
Accounts receivable, net |
40,848 | 49,855 | ||||||
Deferred financing costs, net |
46,670 | 46,454 | ||||||
Notes receivable, net |
114,630 | 116,726 | ||||||
Notes receivable from Aimco |
18,490 | 17,230 | ||||||
Investment in unconsolidated real estate partnerships ($39,043 and
$54,374 related to VIEs) |
62,811 | 58,151 | ||||||
Other assets |
250,222 | 199,812 | ||||||
Deferred income tax assets, net |
61,589 | 58,736 | ||||||
Assets held for sale |
| 238,720 | ||||||
Total assets |
$ | 7,060,492 | $ | 7,395,096 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Non-recourse property debt ($641,847 and $637,967 related to VIEs) |
$ | 5,233,525 | $ | 5,291,612 | ||||
Revolving credit facility borrowings |
26,200 | | ||||||
Total indebtedness |
5,259,725 | 5,291,612 | ||||||
Accounts payable |
24,999 | 27,322 | ||||||
Accrued liabilities and other ($81,901 and $94,656 related to VIEs) |
278,606 | 297,121 | ||||||
Deferred income |
150,357 | 150,453 | ||||||
Security deposits |
34,516 | 33,829 | ||||||
Liabilities related to assets held for sale |
| 168,029 | ||||||
Total liabilities |
5,748,203 | 5,968,366 | ||||||
Redeemable preferred units |
93,385 | 103,428 | ||||||
Commitments and contingencies (Note 8) |
| | ||||||
Partners Capital: |
||||||||
Preferred units |
656,015 | 657,601 | ||||||
General Partner and Special Limited Partner |
202,502 | 264,182 | ||||||
Limited Partners |
131,612 | 158,401 | ||||||
High Performance Units |
(47,976 | ) | (44,892 | ) | ||||
Investment in Aimco Class A Common Stock |
(4,195 | ) | (4,397 | ) | ||||
Partners capital attributable to the Partnership |
937,958 | 1,030,895 | ||||||
Noncontrolling interests in consolidated real estate partnerships |
280,946 | 292,407 | ||||||
Total partners capital |
1,218,904 | 1,323,302 | ||||||
Total liabilities and partners capital |
$ | 7,060,492 | $ | 7,395,096 | ||||
See notes to condensed consolidated financial statements.
2
Table of Contents
AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
REVENUES: |
||||||||||||||||
Rental and other property revenues |
$ | 269,525 | $ | 263,481 | $ | 805,749 | $ | 788,057 | ||||||||
Asset management and tax credit revenues |
11,885 | 9,711 | 28,772 | 24,208 | ||||||||||||
Total revenues |
281,410 | 273,192 | 834,521 | 812,265 | ||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
Property operating expenses |
119,903 | 116,786 | 356,634 | 362,784 | ||||||||||||
Investment management expenses |
2,386 | 2,609 | 7,604 | 10,979 | ||||||||||||
Depreciation and amortization |
97,321 | 101,704 | 287,739 | 305,066 | ||||||||||||
Provision for operating real estate impairment losses |
149 | | 149 | | ||||||||||||
General and administrative expenses |
12,664 | 12,096 | 36,162 | 39,015 | ||||||||||||
Other expenses, net |
4,870 | 4,416 | 13,952 | 2,173 | ||||||||||||
Total operating expenses |
237,293 | 237,611 | 702,240 | 720,017 | ||||||||||||
Operating income |
44,117 | 35,581 | 132,281 | 92,248 | ||||||||||||
Interest income |
4,097 | 2,578 | 9,031 | 8,079 | ||||||||||||
Recovery of (provision for) losses on notes receivable, net |
233 | (6 | ) | 180 | (284 | ) | ||||||||||
Interest expense |
(73,152 | ) | (74,544 | ) | (243,169 | ) | (225,305 | ) | ||||||||
Equity in losses of unconsolidated real estate partnerships |
(4,987 | ) | (15,653 | ) | (8,432 | ) | (11,799 | ) | ||||||||
Gain on dispositions of unconsolidated real estate and other |
3,095 | 883 | 5,115 | 5,368 | ||||||||||||
Loss before income taxes and discontinued operations |
(26,597 | ) | (51,161 | ) | (104,994 | ) | (131,693 | ) | ||||||||
Income tax benefit |
1,110 | 4,385 | 5,704 | 11,042 | ||||||||||||
Loss from continuing operations |
(25,487 | ) | (46,776 | ) | (99,290 | ) | (120,651 | ) | ||||||||
Income from discontinued operations, net |
30,968 | 18,510 | 50,959 | 65,881 | ||||||||||||
Net income (loss) |
5,481 | (28,266 | ) | (48,331 | ) | (54,770 | ) | |||||||||
Net (income) loss attributable to noncontrolling interests in
consolidated real estate partnerships |
(5,464 | ) | 11,213 | 4,612 | 1,795 | |||||||||||
Net income (loss) attributable to the Partnership |
17 | (17,053 | ) | (43,719 | ) | (52,975 | ) | |||||||||
Net income attributable to the Partnerships preferred unitholders |
(14,971 | ) | (13,492 | ) | (40,441 | ) | (39,918 | ) | ||||||||
Net income attributable to participating securities |
(58 | ) | (2 | ) | (169 | ) | | |||||||||
Net loss attributable to the Partnerships common unitholders |
$ | (15,012 | ) | $ | (30,547 | ) | $ | (84,329 | ) | $ | (92,893 | ) | ||||
Earnings (loss) per common unit basic and diluted (Note 9): |
||||||||||||||||
Loss from continuing operations attributable to the
Partnerships common unitholders |
$ | (0.26 | ) | $ | (0.35 | ) | $ | (0.91 | ) | $ | (1.10 | ) | ||||
Income from discontinued operations attributable to the
Partnerships common unitholders |
0.14 | 0.10 | 0.25 | 0.35 | ||||||||||||
Net loss attributable to the Partnerships common unitholders |
$ | (0.12 | ) | $ | (0.25 | ) | $ | (0.66 | ) | $ | (0.75 | ) | ||||
Weighted average common units outstanding, basic and diluted |
128,656 | 124,739 | 127,336 | 124,601 | ||||||||||||
Distributions declared per common unit |
$ | 0.12 | $ | 0.10 | $ | 0.36 | $ | 0.20 | ||||||||
See notes to condensed consolidated financial statements.
3
Table of Contents
AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (48,331 | ) | $ | (54,770 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
287,739 | 305,066 | ||||||
Equity in losses of unconsolidated real estate partnerships |
8,432 | 11,799 | ||||||
Gain on dispositions of unconsolidated real estate and other |
(5,115 | ) | (5,368 | ) | ||||
Discontinued operations |
(45,288 | ) | (44,957 | ) | ||||
Other adjustments |
(2,986 | ) | (553 | ) | ||||
Net changes in operating assets and operating liabilities |
(18,070 | ) | (21,048 | ) | ||||
Net cash provided by operating activities |
176,381 | 190,169 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of real estate and investments in unconsolidated real estate partnerships |
(63,853 | ) | | |||||
Capital expenditures |
(118,430 | ) | (130,790 | ) | ||||
Proceeds from dispositions of real estate |
187,737 | 143,719 | ||||||
Purchases of corporate assets |
(11,891 | ) | (6,782 | ) | ||||
Purchase of investments in debt securities (Note 4) |
(51,534 | ) | | |||||
Originations of notes receivable from unconsolidated real estate partnerships |
(641 | ) | (968 | ) | ||||
Proceeds
from collection of notes receivable |
9,995 | 1,691 | ||||||
Proceeds from sale of interests in and distributions from real estate partnerships |
11,342 | 11,792 | ||||||
Net increase in cash from consolidation and deconsolidation of entities |
| 13,118 | ||||||
Dividends received from Aimco |
202 | 168 | ||||||
Other investing activities |
19,031 | 9,745 | ||||||
Net cash (used in) provided by investing activities |
(18,042 | ) | 41,693 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds
from non-recourse property debt |
767,523 | 167,367 | ||||||
Principal
repayments on non-recourse property debt |
(905,791 | ) | (213,295 | ) | ||||
Payments on term loans |
| (90,000 | ) | |||||
Net borrowings on revolving credit facility |
26,200 | | ||||||
Proceeds from issuance of preferred units to Aimco |
19,028 | 96,110 | ||||||
Redemptions and repurchases of preferred units from Aimco |
(28,567 | ) | (7,000 | ) | ||||
Proceeds from issuance of common OP Units to Aimco |
72,012 | | ||||||
Proceeds from Aimco Class A Common Stock option exercises |
1,806 | 1,806 | ||||||
Payment of distributions to preferred units |
(42,402 | ) | (43,816 | ) | ||||
Payment of distributions to General Partner and Special Limited Partner |
(43,277 | ) | (35,195 | ) | ||||
Payment of distributions to Limited Partners |
(2,181 | ) | (1,808 | ) | ||||
Payment of distributions to High Performance Units |
(842 | ) | (702 | ) | ||||
Payment of distributions to noncontrolling interests |
(32,974 | ) | (37,635 | ) | ||||
Other financing activities |
(24,368 | ) | (3,892 | ) | ||||
Net cash used in financing activities |
(193,833 | ) | (168,060 | ) | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(35,494 | ) | 63,802 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
111,325 | 81,260 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 75,831 | $ | 145,062 | ||||
See notes to condensed consolidated financial statements.
4
Table of Contents
AIMCO PROPERTIES, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)
September 30, 2011
(Unaudited)
NOTE 1 Organization
AIMCO Properties, L.P., a Delaware limited partnership, or the Partnership, was formed on May
16, 1994 to conduct the business of acquiring, redeveloping, leasing, and managing multifamily
apartment properties. Our securities include Partnership common units, or common OP Units,
Partnership preferred units, or preferred OP Units, and high performance Partnership units, or High
Performance Units, which are collectively referred to as OP Units. Apartment Investment and
Management Company, or Aimco, is the owner of our general partner, AIMCO-GP, Inc., or the General
Partner, and special limited partner, AIMCO-LP Trust, or the Special Limited Partner. The General
Partner and Special Limited Partner hold common OP Units and are the primary holders of outstanding
preferred OP Units. Limited Partners refers to individuals or entities that are our limited
partners, other than Aimco, the General Partner or the Special Limited Partner, and own common OP
Units or preferred OP Units. Generally, after holding the common OP Units for one year, the
Limited Partners have the right to redeem their common OP Units for cash, subject to our prior
right to acquire some or all of the common OP Units tendered for redemption in exchange for shares
of Aimco Class A Common Stock. Common OP Units redeemed for Aimco Class A Common Stock are
generally exchanged on a one-for-one basis (subject to antidilution adjustments). Preferred OP
Units and High Performance Units may or may not be redeemable based on their respective terms, as
provided for in the Fourth Amended and Restated Agreement of Limited Partnership of AIMCO
Properties, L.P. as amended, or the Partnership Agreement.
At September 30, 2011, we had outstanding 126,866,035 common OP Units, 27,922,861 preferred OP
Units and 2,339,950 High Performance Units. At September 30, 2011, Aimco owned 120,916,144 of the
common OP Units and 24,861,411 of the preferred OP Units.
We, through our operating divisions and subsidiaries, hold substantially all of Aimcos assets
and manage the daily operations of Aimcos business and assets. Aimco is required to contribute
all proceeds from offerings of its securities to us. In addition, substantially all of Aimcos
assets must be owned through the Partnership; therefore, Aimco is generally required to contribute
all assets acquired to us. In exchange for the contribution of offering proceeds or assets, Aimco
receives additional interests in us with similar terms (e.g., if Aimco contributes proceeds of a
preferred stock offering, Aimco (through the General Partner and Special Limited Partner) receives
preferred OP Units with terms substantially similar to the preferred securities issued by Aimco).
Aimco frequently consummates transactions for our benefit. For legal, tax or other business
reasons, Aimco may hold title or ownership of certain assets until they can be transferred to us.
However, we have a controlling financial interest in substantially all of Aimcos assets in the
process of transfer to us. Except as the context otherwise requires, we, our and us refer to
the Partnership, and the Partnerships consolidated entities, collectively. Except as the context
otherwise requires, Aimco refers to Aimco and Aimcos consolidated entities, collectively.
Our principal financial objective is to provide predictable and attractive returns to our
unitholders. Our business plan to achieve this objective is to:
| own and operate a broadly diversified portfolio of primarily class B/B+ assets
(defined below) with properties concentrated in the 20 largest markets in the United States
(as measured by total apartment value, which is the estimated total market value of
apartment properties in a particular market); |
| improve our portfolio by selling assets with lower projected returns and reinvesting
those proceeds through the purchase of new assets or additional investment in existing
assets in our portfolio, including increased ownership or redevelopment; and |
| provide financial leverage primarily by the use of non-recourse, long-dated, fixed-rate
property debt and perpetual preferred units. |
As of September 30, 2011, we:
| owned an equity interest in 205 conventional real estate properties with 64,781 units; |
| owned an equity interest in 201 affordable real estate properties with 24,040 units; and |
||
| provided services for, or managed, 11,233 units in 159 properties, primarily pursuant to
long-term asset management agreements. In certain cases, we may indirectly own less than
one percent of the operations of such properties through a syndication or other fund. |
5
Table of Contents
Of these properties, we consolidated 199 conventional properties with 63,335 units and 160
affordable properties with 19,969 units. These conventional and affordable properties generated
87% and 13%, respectively, of our proportionate property net operating income (as defined in Note
11) during the nine months ended September 30, 2011. During the nine months ended September 30,
2011, as part of our ongoing effort to simplify our business, we resigned from our role providing
asset or property management services for approximately 100 properties with approximately 11,400
units.
For conventional assets, we focus on the ownership of primarily B/B+ assets. We measure
conventional property asset quality based on average rents of our units compared to local market
average rents as reported by a third-party provider of commercial real estate performance and
analysis, with A-quality assets earning rents greater than 125% of local market average, B-quality
assets earning rents 90% to 125% of local market average and C-quality assets earning rents less
than 90% of local market average. We classify as B/B+ those assets earning rents ranging from 100%
to 125% of local market average. Although some companies and analysts within the multifamily real
estate industry use asset class ratings of A, B and C, some of which are tied to local market rent
averages, the metrics used to classify asset quality as well as the timing for which local markets
rents are calculated may vary from company to company. Accordingly, our rating system for
measuring asset quality is neither broadly nor consistently used in the multifamily real estate
industry.
NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America, or GAAP,
have been condensed or omitted in accordance with such rules and regulations, although management
believes the disclosures are adequate to prevent the information presented from being misleading.
In the opinion of management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the three and nine
months ended September 30, 2011, are not necessarily indicative of the results that may be expected
for the year ending December 31, 2011.
The balance sheet at December 31, 2010, has been derived from the audited financial statements
at that date, but does not include all of the information and disclosures required by GAAP for
complete financial statements. For further information, refer to the financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.
Certain 2010 financial statement amounts have been reclassified to conform to the 2011
presentation, including adjustments for discontinued operations.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the
Partnership and its consolidated entities. Pursuant to a Management and Contribution Agreement
between the Partnership and Aimco, we have acquired, in exchange for interests in the Partnership,
the economic benefits of subsidiaries of Aimco in which we do not have an interest, and Aimco has
granted us a right of first refusal to acquire such subsidiaries assets for no additional
consideration. Pursuant to the Management and Contribution Agreement, Aimco has also granted us certain rights with respect to
the assets of such subsidiaries. We consolidate all variable interest entities for which we are the
primary beneficiary. Generally, we consolidate real estate partnerships and other entities that
are not variable interest entities when we own, directly or indirectly, a majority voting interest
in the entity or are otherwise able to control the entity. All significant intercompany balances
and transactions have been eliminated in consolidation.
Interests in consolidated real estate partnerships held by limited partners other than us are
reflected as noncontrolling interests in consolidated real estate partnerships. The assets of
consolidated real estate partnerships owned or controlled by Aimco or us generally are not
available to pay creditors of Aimco or the Partnership.
As used herein, and except where the context otherwise requires, partnership refers to a
limited partnership or a limited liability company and partner refers to a partner in a limited
partnership or a member in a limited liability company.
6
Table of Contents
Variable Interest Entities
We consolidate all variable interest entities for which we are the primary beneficiary.
Generally, a variable interest entity, or VIE, is an entity with one or more of the following
characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support; (b) as a group, the
holders of the equity investment at risk lack (i) the ability to make decisions about an entitys
activities through voting or similar rights, (ii) the obligation to absorb the expected losses of
the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the
equity investors have voting rights that are not proportional to their economic interests and
substantially all of the entitys activities either involve, or are conducted on behalf of, an
investor that has disproportionately few voting rights.
In determining whether we are the primary beneficiary of a VIE, we consider qualitative and
quantitative factors, including, but not limited to: which activities most significantly impact
the VIEs economic performance and which party controls such activities; the amount and
characteristics of our investment; the obligation or likelihood for us or other investors to
provide financial support; and the similarity with and significance to the business activities of
us and the other investors. Significant judgments related to these determinations include
estimates about the current and future fair values and performance of real estate held by these
VIEs and general market conditions. Refer to Note 5 for further discussion of our variable
interest entities.
Partners Capital (including Noncontrolling Interests)
The following table presents a reconciliation of our consolidated temporary capital accounts
from December 31, 2010 to September 30, 2011 (in thousands):
Redeemable | ||||
Preferred Units | ||||
Balance, December 31, 2010 |
$ | 103,428 | ||
Preferred distributions |
(5,012 | ) | ||
Redemption of preferred units |
(43 | ) | ||
Repurchase of preferred units from Aimco |
(10,000 | ) | ||
Net income |
5,012 | |||
Balance, September 30, 2011 |
$ | 93,385 | ||
The following table presents a reconciliation of our consolidated permanent capital
accounts from December 31, 2010 to September 30, 2011 (in thousands):
Noncontrolling | ||||||||||||
Partners | interests in | |||||||||||
capital | consolidated real | Total | ||||||||||
attributable to | estate | partners | ||||||||||
the Partnership | partnerships | capital | ||||||||||
Balance, December 31, 2010 |
$ | 1,030,895 | $ | 292,407 | $ | 1,323,302 | ||||||
Contributions |
| 12,358 | 12,358 | |||||||||
Issuance of common OP Units to Aimco |
72,012 | | 72,012 | |||||||||
Issuance of preferred units to Aimco |
19,028 | | 19,028 | |||||||||
Redemptions and repurchases of preferred
units from Aimco |
(18,567 | ) | | (18,567 | ) | |||||||
Preferred unit distributions |
(37,390 | ) | | (37,390 | ) | |||||||
Common distributions |
(46,096 | ) | (32,974 | ) | (79,070 | ) | ||||||
Repurchases of common units |
(4,831 | ) | | (4,831 | ) | |||||||
Amortization of Aimco stock based
compensation cost |
4,725 | | 4,725 | |||||||||
Common OP Units issued to Aimco in connection
with Aimco stock option exercises |
1,806 | | 1,806 | |||||||||
Effect of changes in ownership for
consolidated entities (Note 4) |
(28,258 | ) | 14,124 | (14,134 | ) | |||||||
Change in accumulated other comprehensive loss |
(6,840 | ) | (402 | ) | (7,242 | ) | ||||||
Other |
205 | 45 | 250 | |||||||||
Net loss |
(48,731 | ) | (4,612 | ) | (53,343 | ) | ||||||
Balance, September 30, 2011 |
$ | 937,958 | $ | 280,946 | $ | 1,218,904 | ||||||
7
Table of Contents
Comprehensive Income or Loss
As discussed in Note 4, we have investments classified as available for sale which are
measured at fair value with unrealized gains or losses recognized as an adjustment of accumulated
other comprehensive loss within partners capital. Additionally, as discussed in Note 6, we
recognize changes in the fair value of our cash flow hedges as changes in accumulated other
comprehensive loss within partners capital. Our consolidated comprehensive loss for the three
months ended September 30, 2011 and 2010, totaled $2.5 million and $30.1 million, respectively, and
for the nine months ended September 30, 2011 and 2010, totaled $55.6 million and $58.6 million,
respectively, before the effects of noncontrolling interests.
In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of
Comprehensive Income, or ASU 2011-05, which revises the manner in which companies present
comprehensive income. Under ASU 2011-05, companies may present comprehensive income, which is net
income adjusted for the components of other comprehensive income, either in a single, continuous
statement of comprehensive income or by using two separate but consecutive statements. Regardless
of the alternative chosen, companies must display adjustments for items reclassified from other
comprehensive income into net income within the presentation of both net income and other
comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after
December 15, 2011. We are currently evaluating the effect ASU
2011-05 will have on our
consolidated financial statements and have not yet determined which method of presentation we will
elect.
Concentration of Credit Risk
At September 30, 2011, we had total rate of return swap positions with two financial
institutions totaling $144.7 million. We periodically evaluate counterparty credit risk associated
with these arrangements. In the event either counterparty were to default under these
arrangements, loss of the net interest benefit we generally receive under these arrangements, which
is equal to the difference between the fixed rate we receive and the variable rate we pay, may
adversely impact our results of operations and operating cash flows. However, at the current time,
we have concluded we do not have material exposure.
Income Taxes
In March 2008, we were notified by the Internal Revenue Service, or the IRS, that it intended
to examine our 2006 Federal tax return. During June 2008, the IRS issued AIMCO-GP, Inc., our
general and tax matters partner, a summary report including the IRSs proposed adjustments to our
2006 Federal tax return. In addition, in May 2009, we were notified by the IRS that it intended to
examine our 2007 Federal tax return. During November 2009, the IRS issued AIMCO-GP, Inc. a summary
report including the IRSs proposed adjustments to our 2007
Federal tax return. These matters are
currently pending administratively before IRS Appeals and the IRS has made no determination. We do
not expect the 2006 or 2007 proposed adjustments to have any material effect on our unrecognized
tax benefits, financial condition or results of operations.
In October 2011, we were notified by the IRS that it intends to examine refund claims related
to the carry back of our taxable REIT subsidiarys 2009 net operating loss. We do not anticipate
that this examination will result in any material effect on our unrecognized tax benefits,
financial condition or results of operations.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts included in
the financial statements and accompanying notes thereto. Actual results could differ from those
estimates.
NOTE 3 Real Estate Dispositions
Real Estate Dispositions (Discontinued Operations)
We are currently marketing for sale certain real estate properties that are inconsistent with
our long-term investment strategy. At the end of each reporting period, we evaluate whether such
properties meet the criteria to be classified as held for sale, including whether such properties
are expected to be sold within 12 months. Additionally, certain properties that do not meet all of
the criteria to be classified as held for sale at the balance sheet date may nevertheless be sold
in the subsequent 12 months; thus, the number of properties
that may be sold during the subsequent 12 months could exceed the number classified as held for
sale at the particular balance sheet date. At September 30, 2011 we had no properties classified as
held for sale. At December 31,
2010, we had 39 properties with an aggregate of 6,701 units classified as held
for sale. Amounts classified as held for sale in the accompanying condensed consolidated
balance sheets are as follows (in thousands):
December 31, | ||||
2010 | ||||
Real estate, net |
$ | 235,674 | ||
Other assets |
3,046 | |||
Assets held for sale |
$ | 238,720 | ||
Property debt |
$ | 166,171 | ||
Other liabilities |
1,858 | |||
Liabilities related to assets held for sale |
$ | 168,029 | ||
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During the nine months ended September 30, 2011 and 2010, we sold or disposed of 39
properties and 31 properties with an aggregate of 6,701 units and 5,048 units, respectively.
During the year ended December 31, 2010, we disposed of 51 consolidated properties with an
aggregate of 8,189 units. Discontinued operations for all periods
presented includes the results of operations for the periods prior to the date of
disposition for all properties disposed on or before September 30, 2011.
The following is a summary of the components of income from discontinued operations and the
related amounts of income from discontinued operations attributable to the Partnership and to
noncontrolling interests for the three and nine months ended September 30, 2011 and 2010 (in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Rental and other property revenues |
$ | 3,428 | $ | 21,202 | $ | 23,917 | $ | 77,596 | ||||||||
Property operating expenses |
(2,816 | ) | (12,489 | ) | (13,355 | ) | (42,761 | ) | ||||||||
Depreciation and amortization |
(931 | ) | (6,340 | ) | (7,695 | ) | (21,909 | ) | ||||||||
Provision for operating real estate impairment losses |
(5,522 | ) | (1,429 | ) | (11,829 | ) | (9,550 | ) | ||||||||
Operating (loss) income |
(5,841 | ) | 944 | (8,962 | ) | 3,376 | ||||||||||
Interest income |
44 | 111 | 361 | 298 | ||||||||||||
Interest expense |
(862 | ) | (4,082 | ) | (5,252 | ) | (14,209 | ) | ||||||||
Loss before gain on dispositions of real estate
and income tax |
(6,659 | ) | (3,027 | ) | (13,853 | ) | (10,535 | ) | ||||||||
Gain on dispositions of real estate |
37,467 | 21,084 | 64,901 | 74,406 | ||||||||||||
Income tax benefit (expense) |
160 | 453 | (89 | ) | 2,010 | |||||||||||
Income from discontinued operations, net |
$ | 30,968 | $ | 18,510 | $ | 50,959 | $ | 65,881 | ||||||||
Income from discontinued operations
attributable to noncontrolling interests in
consolidated real estate partnerships |
$ | (12,734 | ) | $ | (5,205 | ) | $ | (18,689 | ) | $ | (21,372 | ) | ||||
Income from discontinued operations attributable to
the Partnership |
$ | 18,234 | $ | 13,305 | $ | 32,270 | $ | 44,509 | ||||||||
Gain on dispositions of real estate is reported net of incremental direct costs incurred
in connection with the transactions, including any prepayment penalties incurred upon repayment of
property loans collateralized by the properties being sold. Such prepayment penalties totaled $2.6
million and $7.6 million for the three and nine months ended September 30, 2011, respectively, and
$0.6 million and $3.8 million for the three and nine months ended September 30, 2010, respectively.
We classify interest expense related to property debt within discontinued operations when the
related real estate asset is sold or classified as held for sale.
In connection with properties sold or classified as held for sale during the three and nine
months ended September 30, 2011, we allocated $1.0 million and $2.7 million, respectively, of
goodwill related to our conventional and affordable segments to the carrying amounts of the
properties sold or classified as held for sale. Of these amounts, $0.9 million and $2.2 million,
respectively, were recognized as a reduction of gain on dispositions of real estate and $0.1
million and $0.5 million, respectively, were recognized as an adjustment of impairment losses
during the three and nine months ended September 30, 2011. In connection with properties sold or
classified as held for sale during the three and nine months ended September 30, 2010, we allocated
$0.5 million and $3.3 million, respectively, of goodwill related to our conventional and affordable
segments to the carrying amounts of the properties sold or classified as held for sale. Of these
amounts, $0.3
million and $2.9 million, respectively, were treated as a reduction of gain on dispositions of
real estate and $0.2 million and $0.4 million, respectively, were treated as an adjustment of
impairment losses during the three and nine months ended September 30, 2010. The amounts of
goodwill allocated to these properties were based on the relative fair values of the properties
sold or classified as held for sale and the retained portions of the reporting units to which the
goodwill was allocated.
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In connection with our real estate dispositions during the nine months ended September 30,
2011 and 2010, the purchasers assumed approximately
$95.4 million and $120.9 million, respectively,
of non-recourse property debt.
NOTE 4 Other Significant Transactions
Investments in Real Estate Properties
During the three months ended September 30, 2011, we acquired a vacant, 126-unit property
located in San Franciscos Marin County submarket. We intend to redevelop the property, increasing
our total investment in the property to approximately $65.0 million upon completion. Additionally,
during the nine months ended September 30, 2011, we acquired noncontrolling interests
(approximately 50%) in entities that own four contiguous properties with 142 units located in La
Jolla, California (near San Diego).
Property Loan Securitization Transactions
During
the nine months ended September 30, 2011, we completed a series
of related financing
transactions that repaid $625.7 million of non-recourse property loans that were scheduled to
mature between the years 2012 and 2016 with proceeds from new long-term, fixed-rate, non-recourse
property loans, or the New Loans. The New Loans, which total $673.8 million, were closed in three
parts; $218.6 million closed during the three months ended December 31, 2010, $120.6 million closed
during the three months ended March 31, 2011, and $334.6 million closed during the three months
ended June 30, 2011. All of the New Loans have ten year terms, with principal scheduled to
amortize over 30 years. Subsequent to origination, the New Loans were sold to Federal Home Loan
Mortgage Corp, or Freddie Mac, which then securitized the New Loans. The securitization trust
holds only the New Loans referenced above and the trust securities trade under the label FREMF
2011K-AIV. In connection with the refinancings, during the nine months ended September 30, 2011,
we recognized a loss on debt extinguishment of $23.0 million in interest expense, consisting of
$20.7 million in prepayment penalties and a $2.3 million write off of previous deferred loan costs.
During the nine months ended September 30, 2011, as part of the securitization transaction, we
purchased for $51.5 million the first loss and mezzanine positions in the securitization trust,
which have a face value of $100.9 million and stated maturity dates corresponding to the terms of
the loans held by the trust. We designated these investments as available for sale securities and
they are included in other assets in our condensed consolidated balance sheet at September 30,
2011. These investments were initially recognized at their purchase
price and the discount to the
face value will be accreted into interest income over the expected term of the securities. Based
on their classification as available for sale securities, we measure these investments at fair
value with changes in their fair value, other than the changes attributed to the accretion
described above, recognized as an adjustment of accumulated other comprehensive income or loss
within partners capital.
Common and Preferred Unit Transactions with Aimco
During the three months ended September 30, 2011, Aimco issued approximately 823,800 shares of
its 7.00% Class Z Cumulative Preferred Stock, par value $0.01 per share, in an underwritten public
offering and subsequent offerings through an at-the-market, or ATM, offering program, for net
proceeds per share of $23.11 (reflecting an average price to the public of $24.21 per share, less
an underwriting discount, commissions and transaction costs of approximately $1.10 per share). The
offerings generated net proceeds of $19.0 million. Aimco contributed the net proceeds from these
issuances to us in exchange for a corresponding number of our 7.00% Class Z Cumulative Preferred
Partnership Units.
Also during the three months ended September 30, 2011, primarily using the proceeds from its
Class Z Cumulative Preferred Stock issuances, Aimco redeemed 862,500 shares (25% of the amount outstanding) of
its Class V Cumulative Preferred Stock. This redemption was for cash at a price equal to $25.00
per share, or $21.6 million in aggregate, plus accumulated and unpaid dividends of approximately
$0.2 million. Concurrent with this redemption, we redeemed a corresponding number of our Class V
Cumulative Preferred Units held by Aimco. In connection with the redemption, $0.8 million of
issuance costs previously recorded as a reduction of partners capital attributable to the
Partnership were reflected as an increase in net income attributable to preferred unitholders for
purposes of calculating earnings per unit for the three and nine months ended September 30, 2011.
During
the three and nine months ended September 30, 2011, Aimco sold
0.1 million and 2.9 million shares of Class A Common Stock
under its common stock ATM offering program, generating
$3.0 million and $73.6 million of gross proceeds, or
$2.8 million and $72.0
million, respectively, net of commissions. Aimco
contributed the net proceeds to us in exchange for an equivalent number of common OP Units.
We used the net proceeds primarily to fund the prepayment penalties and investments discussed
above.
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Acquisitions of Noncontrolling Partnership Interests
During the nine months ended September 30, 2011, we acquired the remaining noncontrolling
limited partnership interests in six consolidated real estate partnerships that own nine properties
and in which our affiliates serve as general partner, for a total cost of $13.6 million. We
recognized the excess of the cost over the carrying amount of the noncontrolling interests acquired
as an adjustment of partners capital. During the nine months ended September 30, 2010, there were no
comparable acquisitions of noncontrolling limited partnership interests.
NOTE 5 Variable Interest Entities
As of September 30, 2011, we were the primary beneficiary of, and therefore consolidated,
approximately 124 VIEs, which owned 84 apartment properties with 12,982 units. Real estate with a
carrying value of $805.4 million collateralized $641.8 million of debt of those VIEs. Any
significant amounts of assets and liabilities related to our consolidated VIEs are identified
parenthetically on our accompanying condensed consolidated balance sheets. The creditors of the
consolidated VIEs do not have recourse to our general credit.
As of September 30, 2011, we also held variable interests in 215 VIEs for which we were not
the primary beneficiary. Those VIEs consist primarily of partnerships that are engaged, directly
or indirectly, in the ownership and management of 268 apartment properties with 15,818 units. We
are involved with those VIEs as an equity holder, lender, management agent, or through other
contractual relationships. The majority of our investments in unconsolidated VIEs, or
approximately $33.4 million at September 30, 2011, are held through consolidated investment
partnerships that are VIEs and in which we generally hold a 1% or less general partner or
equivalent interest. Accordingly, substantially all of the investment balances related to these
unconsolidated VIEs are attributed to the noncontrolling interests in the consolidated investment
partnerships that hold the investments in these unconsolidated VIEs. Our maximum risk of loss
related to our investment in these VIEs is generally limited to our equity interest in the
consolidated investment partnerships, which is insignificant. The remainder of our investment in
unconsolidated VIEs, or approximately $5.6 million at September 30, 2011, is held through
consolidated tax credit funds that are VIEs and in which we hold substantially all of the economic
interests. Our maximum risk of loss related to our investment in these VIEs is limited to our $5.6
million recorded investment in such entities.
In addition to our investments in unconsolidated VIEs discussed above, at September 30, 2011,
we had in aggregate $99.7 million of receivables from these unconsolidated VIEs and we had a
contractual obligation to advance funds to certain unconsolidated VIEs totaling $3.2 million. Our
maximum risk of loss associated with our lending and management activities related to these
unconsolidated VIEs is limited to these amounts. We may be subject to additional losses to the
extent of any receivables relating to future provision of services to these entities or financial
support that we voluntarily provide.
As discussed in Note 8, noncompliance with applicable requirements related to our consolidated
and unconsolidated tax credit partnerships, substantially all of which are VIEs, could result in
projected tax credits not being realized and require a refund of investor contributions already
received or a reduction of future investor contributions. We have not historically had, nor do we
anticipate, any material refunds or reductions of investor capital contributions in connection with
these arrangements.
NOTE 6 Derivative Financial Instruments
We have limited exposure to derivative financial instruments. We primarily use long-term,
fixed-rate and self-amortizing non-recourse debt to avoid, among other things, risk related to
fluctuating interest rates. For our variable rate debt, we are sometimes required by our lenders
to limit our exposure to interest rate fluctuations by entering into interest rate swap agreements,
which moderate our exposure to interest rate risk by effectively converting the interest on
variable rate debt to a fixed rate. The fair values of the interest rate swaps are reflected as
assets or liabilities in the balance sheet, and periodic changes in fair value are included in
interest expense or partners capital, as appropriate.
At September 30, 2011 and December 31, 2010, we had interest rate swaps with aggregate
notional amounts of $52.3 million, and recorded fair values of $6.6 million and $2.7 million,
respectively, reflected in accrued liabilities and other in our condensed consolidated balance
sheets. At September 30, 2011, these interest rate swaps had a weighted average term of 9.4 years.
We have designated these interest rate swaps as cash flow hedges and recognize any changes in
their fair value as an adjustment of accumulated other comprehensive loss within partners capital
to the extent of their effectiveness. Changes in the fair value of these instruments and the
related amounts of such changes that were reflected as an adjustment
of accumulated other comprehensive loss within partners capital and as an adjustment of
earnings (ineffectiveness) are identified in the recurring fair value measurements table in Note 7.
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If the forward rates at September 30, 2011 remain constant, we estimate that during the next
twelve months, we would reclassify into earnings approximately $1.6 million of the unrealized
losses in accumulated other comprehensive loss. If market interest rates increase above the 3.43%
weighted average fixed rate under these interest rate swaps we will benefit from a lower effective
rate than the underlying variable rates on this debt.
We have entered into total rate of return swaps on various fixed-rate property debt to convert
these borrowings from a fixed rate to a variable rate and provide an efficient financing product to
lower our cost of borrowing. In exchange for our receipt of a fixed rate generally equal to the
underlying borrowings interest rate, the total rate of return swaps require that we pay a variable
rate, equivalent to one of several indices, plus a risk spread. The underlying borrowings are
generally callable at our option, with no prepayment penalty, with 30 days advance notice, and the
swaps mature in 2012. We designate total rate of return swaps as hedges of the risk of overall
changes in the fair value of the underlying borrowings. At each reporting period, we estimate the
fair value of these borrowings and the total rate of return swaps and recognize any changes therein
as an adjustment of interest expense.
As of September 30, 2011 and December 31, 2010, we had borrowings payable subject to total
rate of return swaps with aggregate outstanding principal balances of $144.3 million and $276.9
million, respectively. We reduced by $132.0 million the amount of debt subject to certain total
rate of return swaps and terminated the associated swaps during the nine months ended September 30,
2011, in connection with our refinancing of the underlying debt. We repaid this debt at par and,
accordingly, no payments were required upon termination of the swaps. The remaining reduction in
the outstanding principal balance during the nine months ended September 30, 2011 was due to other
principal amortization. At September 30, 2011, the weighted average fixed receive rate under the
total return swaps was 6.3% and the weighted average variable pay rate was 1.8%, based on the
applicable index rates effective as of that date. Information regarding the fair value of these
instruments at September 30, 2011 and December 31, 2010, is included in the recurring fair value
measurements table in Note 7.
NOTE 7 Fair Value Measurements
We measure certain assets and liabilities in our consolidated financial statements at fair
value, both on a recurring and nonrecurring basis. Certain of these fair value measurements are
based on significant unobservable inputs classified within Level 3 of the valuation hierarchy
defined in FASB ASC Topic 820. When a determination is made to classify a fair value measurement
within Level 3 of the valuation hierarchy, the determination is based upon the significance of the
unobservable factors to the overall fair value measurement. However, Level 3 fair value
measurements typically also include observable components that can be validated to observable
external sources; accordingly, the changes in fair value in the table below are due in part to
observable factors that are part of the valuation methodology.
The table below presents information regarding significant items measured in our condensed
consolidated financial statements at fair value on a recurring basis, consisting of investments in
securities classified as available for sale (AFS), interest rate swaps (IR swaps), total rate of
return swaps (TRR swaps) and debt subject to TRR swaps (TRR debt) (in thousands):
Level 2 | Level 3 | |||||||||||||||||||
IR | TRR | TRR | ||||||||||||||||||
AFS (1) | swaps (2) | swaps (3) | debt (4) | Total | ||||||||||||||||
Fair value at December 31, 2009 |
$ | | $ | (1,596 | ) | $ | (24,307 | ) | $ | 24,307 | $ | (1,596 | ) | |||||||
Unrealized gains (losses) included in earnings (5) |
| (35 | ) | 5,771 | (5,771 | ) | (35 | ) | ||||||||||||
Realized gains (losses) included in earnings |
| | | | | |||||||||||||||
Unrealized gains (losses) included in
partners capital |
| (3,806 | ) | | | (3,806 | ) | |||||||||||||
Fair value at September 30, 2010 |
$ | | $ | (5,437 | ) | $ | (18,536 | ) | $ | 18,536 | $ | (5,437 | ) | |||||||
Fair value at December 31, 2010 |
$ | | $ | (2,746 | ) | $ | (19,542 | ) | $ | 19,542 | $ | (2,746 | ) | |||||||
Purchases |
51,534 | | | | 51,534 | |||||||||||||||
Investment accretion (see Note 4) |
939 | | | | 939 | |||||||||||||||
Unrealized gains (losses) included in earnings (5) |
| (36 | ) | 11,772 | (11,772 | ) | (36 | ) | ||||||||||||
Realized gains (losses) included in earnings |
| | | | | |||||||||||||||
Unrealized gains (losses) included in
partners capital |
(3,428 | ) | (3,814 | ) | | | (7,242 | ) | ||||||||||||
Fair value at September 30, 2011 |
$ | 49,045 | $ | (6,596 | ) | $ | (7,770 | ) | $ | 7,770 | $ | 42,449 | ||||||||
12
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(1) | The fair value of investments classified as available for sale is estimated using an
income and market approach with primarily observable inputs, including yields and other
information regarding similar types of investments, and adjusted for certain unobservable
inputs specific to these investments. The discount to the face value of the
investments is accreted into interest income over the expected term of the investments.
The amortized cost of these investments was $52.5 million at
September 30, 2011. Although
the amortized cost exceeded the fair value of these investments at September 30, 2011, there are
no requirements for us to sell these investments prior to their maturity dates and we
believe we will fully recover the investments. Accordingly, we believe the impairment in
the fair value of these investments is temporary and we have not
recognized any of the loss in value in earnings. Refer to Note 4 for further discussion of these investments. |
|
(2) | The fair value of interest rate swaps is estimated using an income approach with
primarily observable inputs including information regarding the hedged variable cash flows
and forward yield curves relating to the variable interest rates on which the hedged cash
flows are based. |
|
(3) | Total rate of return swaps have contractually-defined termination values generally equal
to the difference between the fair value and the counterpartys purchased value of the
underlying borrowings. We calculate the termination value, which we believe is
representative of the fair value, of total rate of return swaps using a market approach by
reference to estimates of the fair value of the underlying borrowings, which are discussed
below, and an evaluation of potential changes in the credit quality of the counterparties to
these arrangements. |
|
(4) | This represents changes in fair value of debt subject to total rate of return swaps. We
estimate the fair value of debt instruments using an income and market approach, including
comparison of the contractual terms to observable and unobservable inputs such as market
interest rate risk spreads, collateral quality and loan-to-value ratios on similarly
encumbered assets within our portfolio. These borrowings are collateralized and
non-recourse to us; therefore, we believe changes in our credit rating will not materially
affect a market participants estimate of the borrowings fair value. |
|
(5) | Unrealized gains (losses) for the TRR swaps and TRR debt relate to periodic revaluations
of fair value, including revaluations resulting from repayment of the debt at par, and have
not resulted from the settlement of a swap position as we have not historically incurred any
termination payments upon settlement. These unrealized gains (losses) are included in
interest expense in the accompanying condensed consolidated statements of operations. |
The table below presents information regarding amounts measured at fair value in our
condensed consolidated financial statements on a nonrecurring basis during the nine months ended
September 30, 2011 and 2010, all of which were based, in part, on significant unobservable inputs
classified within Level 3 of the valuation hierarchy (in thousands):
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||
Fair value | Total | Fair value | Total | |||||||||||||
measurement | gain (loss) | measurement | gain (loss) | |||||||||||||
Real estate (impairment losses) (1)(3) |
$ | 59,547 | $ | (10,522 | ) | $ | 43,961 | $ | (8,341 | ) | ||||||
Real estate (newly consolidated) (2)(3) |
| | 117,083 | 1,104 | ||||||||||||
Property debt (newly consolidated) (2)(4) |
| | 83,890 | |
(1) | During the nine months ended September 30, 2011 and 2010, we reduced the aggregate
carrying amounts of $70.1 million and $52.3 million, respectively, for real estate assets
classified as held for sale to their estimated fair value, less estimated costs to sell.
These impairment losses recognized generally resulted from a reduction in the estimated
holding period for these assets. In periods prior to their classification as held for sale,
we evaluated the recoverability of their carrying amounts based on an analysis of the
undiscounted cash flows over the anticipated expected holding period. |
|
(2) | In connection with our adoption of revised accounting guidance regarding consolidation of
VIEs and reconsideration events during the nine months ended September 30, 2010, we
consolidated 17 partnerships at fair value. With the exception of such partnerships
investments in real estate properties and related non-recourse property debt obligations, we
determined the carrying amounts of the related assets and liabilities approximated their
fair values. The difference between our recorded investments in such partnerships and the
fair value of the assets and liabilities recognized in consolidation resulted in an
adjustment of consolidated partners capital (allocated between the Partnership and
noncontrolling interests) for those partnerships consolidated in connection with our
adoption of the revised accounting guidance for VIEs. For the partnerships we consolidated
at fair value due to reconsideration events during the nine months ended September 30, 2010,
the difference between our recorded investments in such partnerships and the fair value of
the assets, liabilities and noncontrolling interests recognized upon consolidation
resulted in our recognition of a gain, which is included in gain on disposition of
unconsolidated real estate and other in our condensed consolidated statement of operations
for the nine months ended September 30, 2010. |
|
(3) | We estimate the fair value of real estate using income and market valuation techniques
using information such as broker estimates, purchase prices for recent transactions on
comparable assets and net operating income capitalization analyses using observable and
unobservable inputs such as capitalization rates, asset quality grading, geographic location
analysis, and local supply and demand observations. |
|
(4) | Refer to the recurring fair value measurements table for an explanation of the valuation
techniques we use to estimate the fair value of debt. |
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We believe that the aggregate fair value of our cash and cash equivalents, receivables,
payables and short-term debt approximates their aggregate carrying amounts at September 30, 2011
and December 31, 2010, due to their relatively short-term nature and high probability of
realization. We estimate fair value for our notes receivable and long-term debt instruments using
present value techniques that include income and market valuation approaches using observable
inputs such as market rates for debt with the same or similar terms and unobservable inputs such as
collateral quality and loan-to-value ratios on similarly encumbered assets. Because of the
significance of unobservable inputs to these fair value measurements, we classify them within Level
3 of the fair value hierarchy. Present value calculations vary depending on the assumptions used,
including the discount rate and estimates of future cash flows. In many cases, the fair value
estimates may not be realizable in immediate settlement of the instruments. The estimated
aggregate fair value of our notes receivable (including notes receivable from unconsolidated real
estate partnerships, which we classify within other assets in our condensed consolidated balance
sheets) was approximately $112.3 million and $116.0 million at September 30, 2011 and December 31,
2010, respectively, as compared to their carrying amounts of
$124.2 million and $127.6 million, respectively. The estimated aggregate fair value of our consolidated debt (including amounts reported in
liabilities related to assets held for sale) was approximately $5.8 billion and $5.5 billion at
September 30, 2011 and December 31, 2010, respectively, as compared to aggregate carrying amounts
of $5.3 billion and $5.5 billion, respectively. The fair values of our derivative instruments at
September 30, 2011 and December 31, 2010, are included in the recurring fair value measurements
table above.
In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04. ASU
2011-04 amended ASC 820, Fair Value Measurements and Disclosures, to converge the fair value
measurement guidance in GAAP and International Financial Reporting Standards. The amendments, which
primarily require additional fair value disclosures, are to be applied prospectively for annual
periods beginning after December 15, 2011. We are currently evaluating the effect ASU 2011-04 will
have on our consolidated financial statements.
NOTE 8 Commitments and Contingencies
Commitments
In connection with our redevelopment and capital improvement activities, we have commitments
of approximately $19.3 million related to construction projects, most of which we expect to incur
during the remainder of 2011 and during 2012. Additionally, we enter into certain commitments for
future purchases of goods and services in connection with the operations of our properties. Those
commitments generally have terms of one year or less and reflect expenditure levels comparable to
our historical expenditures.
We have committed to fund an additional $3.2 million in loans on certain unconsolidated
properties in West Harlem in New York City. Additionally, in certain circumstances, the obligor
under these notes has the ability to put the properties to us, which would result in a cash payment
of approximately $31.2 million and the assumption of $118.0 million in property debt. The
obligors right to exercise the put depends upon the achievement of specified operating performance
thresholds.
Aimco has an agreement that allows the holder of some of its Series A Community Reinvestment
Act Preferred Stock, or the CRA Preferred Stock, to require Aimco to repurchase $10.0 million in
liquidation preference of the CRA Preferred Stock at a 30% discount, during the three months ending
June 30, 2012. If the holder requires Aimco to make this repurchase, we will repurchase from Aimco
an equivalent amount of our Series A Community Reinvestment Act Preferred Units, or the CRA
Preferred Units, held by Aimco. Based on the holders ability to require Aimco to repurchase this
amount and our obligation to purchase from Aimco a corresponding amount of CRA Preferred Units, the
$10.0 million in liquidation preference of our CRA Preferred Units, or the maximum redemption value
of such preferred units, is classified within temporary capital in our condensed consolidated
balance sheet at September 30, 2011.
Tax Credit Arrangements
We are required to manage certain consolidated real estate partnerships in compliance with
various laws, regulations and contractual provisions that apply to our historic and low-income
housing tax credit syndication arrangements. In some instances, noncompliance with applicable
requirements could result in projected tax benefits not being realized and require a refund or
reduction of investor capital contributions, which are reported as deferred income in our
consolidated balance sheet, until such time as our obligation to deliver tax benefits is relieved.
The remaining compliance periods for our tax credit syndication arrangements range from less than
one year to 15 years. We do not anticipate that any material refunds or reductions of investor
capital contributions will be required in connection with these arrangements.
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Legal Matters
In addition to the matters described below, we are a party to various legal actions and
administrative proceedings arising in the ordinary course of business, some of which are covered by
our general liability insurance program, and none of which we expect to have a material adverse
effect on our consolidated financial condition, results of operations or cash flows.
Limited Partnerships
In connection with our acquisitions of interests in real estate partnerships, we are sometimes
subject to legal actions, including allegations that such activities may involve breaches of
fiduciary duties to the partners of such real estate partnerships or violations of the relevant
partnership agreements. We may incur costs in connection with the defense or settlement of such
litigation. We believe that we comply with our fiduciary obligations and relevant partnership
agreements. Although the outcome of any litigation is uncertain, we do not expect any such legal
actions to have a material adverse effect on our consolidated financial condition, results of
operations or cash flows.
During the three months ended June 30, 2011, we mediated the previously disclosed dispute with respect to mergers
completed earlier in 2011 in which we acquired the remaining noncontrolling interests in six consolidated real estate
partnerships. As a result of the mediation we agreed to pay the limited partners additional consideration of $7.5
million for their partnership units. During the three months ended September 30, 2011, claims and stipulations of
settlement were filed in Colorado State Court, District of Denver and with the American Arbitration Association. The
parties are currently seeking approval of the settlements in the respective venues.
Environmental
Various Federal, state and local laws subject property owners or operators to liability for
management, and the costs of removal or remediation, of certain potentially hazardous materials
present on a property, including lead-based paint, asbestos, polychlorinated biphenyls,
petroleum-based fuels, and other miscellaneous materials. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the release or presence of
such materials. The presence of, or the failure to manage or remedy properly, these materials may
adversely affect occupancy at affected apartment communities and the ability to sell or finance
affected properties. In addition to the costs associated with investigation and remediation actions
brought by government agencies, and potential fines or penalties imposed by such agencies in
connection therewith, the improper management of these materials on a property could result in
claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various
laws also impose liability for the cost of removal, remediation or disposal of these materials
through a licensed disposal or treatment facility. Anyone who arranges for the disposal or
treatment of these materials is potentially liable under such laws. These laws often impose
liability whether or not the person arranging for the disposal ever owned or operated the disposal
facility. In connection with the ownership, operation and management of properties, we could
potentially be responsible for environmental liabilities or costs associated with our properties or
properties we acquire or manage in the future.
We have determined that our legal obligations to remove or remediate certain potentially hazardous
materials may be conditional asset retirement obligations, as defined in GAAP. Except in limited
circumstances where the asset retirement activities are expected to be performed in connection with
a planned construction project or property casualty, we believe that the fair value of our asset
retirement obligations cannot be reasonably estimated due to significant uncertainties in the
timing and manner of settlement of those obligations. Asset retirement obligations that are
reasonably estimable as of September 30, 2011, are immaterial to our consolidated financial
condition, results of operations and cash flows.
15
Table of Contents
NOTE 9 Earnings (Loss) per Unit
We calculate earnings (loss) per unit based on the weighted average number of common OP Units,
participating securities, common OP Unit equivalents and dilutive convertible securities
outstanding during the period. We consider both common OP Units and High Performance Units, which
have identical rights to distributions and undistributed earnings, to be common units for purposes
of the earnings per unit data presented below. The following table illustrates the calculation of
basic and diluted earnings (loss) per unit for the three and nine months ended September 30, 2011
and 2010 (in thousands, except per unit data):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Loss from continuing operations |
$ | (25,487 | ) | $ | (46,776 | ) | $ | (99,290 | ) | $ | (120,651 | ) | ||||
Loss from continuing operations attributable to
noncontrolling interests |
7,270 | 16,418 | 23,301 | 23,167 | ||||||||||||
Income attributable to the Partnerships preferred
unitholders |
(14,971 | ) | (13,492 | ) | (40,441 | ) | (39,918 | ) | ||||||||
Income attributable to participating securities |
(58 | ) | (2 | ) | (169 | ) | | |||||||||
Loss from continuing operations attributable
to the Partnerships common unitholders |
$ | (33,246 | ) | $ | (43,852 | ) | $ | (116,599 | ) | $ | (137,402 | ) | ||||
Income from discontinued operations |
$ | 30,968 | $ | 18,510 | $ | 50,959 | $ | 65,881 | ||||||||
Income from discontinued operations attributable to
noncontrolling interests |
(12,734 | ) | (5,205 | ) | (18,689 | ) | (21,372 | ) | ||||||||
Income from discontinued operations attributable to
the Partnerships common unitholders |
$ | 18,234 | $ | 13,305 | $ | 32,270 | $ | 44,509 | ||||||||
Net income (loss) |
$ | 5,481 | $ | (28,266 | ) | $ | (48,331 | ) | $ | (54,770 | ) | |||||
(Income) loss attributable to noncontrolling interests |
(5,464 | ) | 11,213 | 4,612 | 1,795 | |||||||||||
Income attributable to the Partnerships preferred
unitholders |
(14,971 | ) | (13,492 | ) | (40,441 | ) | (39,918 | ) | ||||||||
Income attributable to participating securities |
(58 | ) | (2 | ) | (169 | ) | | |||||||||
Net loss attributable to the Partnerships
common unitholders |
$ | (15,012 | ) | $ | (30,547 | ) | $ | (84,329 | ) | $ | (92,893 | ) | ||||
Denominator: |
||||||||||||||||
Denominator for basic earnings per unit weighted
average number of common units outstanding |
||||||||||||||||
Common OP Units |
126,316 | 122,399 | 124,996 | 122,261 | ||||||||||||
High Performance Units |
2,340 | 2,340 | 2,340 | 2,340 | ||||||||||||
Total common units |
128,656 | 124,739 | 127,336 | 124,601 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Dilutive potential common units |
| | | | ||||||||||||
Denominator for diluted earnings per unit |
128,656 | 124,739 | 127,336 | 124,601 | ||||||||||||
Earnings (loss) per common unit basic and diluted: |
||||||||||||||||
Loss from continuing operations attributable to the
Partnerships common unitholders |
$ | (0.26 | ) | $ | (0.35 | ) | $ | (0.91 | ) | $ | (1.10 | ) | ||||
Income from discontinued operations attributable to
the Partnerships common unitholders |
0.14 | 0.10 | 0.25 | 0.35 | ||||||||||||
Net loss attributable to the Partnerships common
unitholders |
$ | (0.12 | ) | $ | (0.25 | ) | $ | (0.66 | ) | $ | (0.75 | ) | ||||
As of September 30, 2011 and 2010, the common unit equivalents that could potentially dilute
basic earnings per unit in future periods totaled 6.3 million and 7.2 million, respectively. These
securities represent options to purchase shares of Aimco Class A Common Stock, which, if exercised,
would result in our issuance to Aimco of common OP Units corresponding to the number of shares
purchased under the options. They have been excluded from the earnings (loss) per unit
computations for the three and nine months ended September 30, 2011 and 2010, because their effect
would have been anti-dilutive. Participating securities, consisting of unvested restricted shares
of Aimco Class A Common Stock and shares of Aimco Class A Common Stock purchased pursuant to
officer loans, receive dividends similar to shares of Aimco Class A Common Stock and common OP
Units and totaled 0.5 million and 0.6 million at September 30, 2011 and 2010, respectively. The
effect of participating securities is included in basic and diluted earnings (loss) per unit
computations for the periods presented above using the two-class method of allocating distributed
and undistributed earnings.
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Various classes of redeemable preferred OP Units are outstanding. Depending on the terms of
each class, these preferred OP Units are convertible into common OP Units or redeemable for cash
or, at our option, shares of Aimco Class A Common Stock, and are paid distributions varying from
1.8% to 8.8% per annum per unit, or equal to the dividends paid on Aimco
Class A Common Stock based on the conversion terms. As of September 30, 2011, a total of 3.1
million preferred OP Units were outstanding with redemption values of $82.5 million and were
potentially redeemable for approximately 3.7 million shares of Aimco Class A Common Stock (based on
the period end market price), or cash at our option. We have a redemption policy that requires
cash settlement of redemption requests for the preferred OP Units, subject to limited exceptions.
The potential dilutive effect of these securities would have been antidilutive in the periods
presented. Additionally, based on our cash redemption policy, they may also be excluded from
future earnings (loss) per unit computations in periods during which their effect is dilutive.
NOTE 10 Notes Receivable
Our notes receivable have stated maturity dates and may require current payments of principal
and interest. Repayment of our notes is subject to a number of variables, including the
performance and value of the underlying real estate properties and the claims of unaffiliated
mortgage lenders, which are generally senior to our claims. Our notes receivable consist of two
classes: loans extended by us that we carry at the face amount plus accrued interest, which we
refer to as par value notes; and discounted notes, which includes loans extended by
predecessors whose positions we generally acquired at a discount and loans extended by us that were
discounted at origination.
We record interest income on par value notes as earned in accordance with the terms of the
related loan agreements. We discontinue the accrual of interest on such notes when the notes are
impaired, as discussed below, or when there is otherwise significant uncertainty as to the
collection of interest. We record income on such nonaccrual loans using the cost recovery method,
under which we apply cash receipts first to the recorded amount of the loan; thereafter, any
additional receipts are recognized as income.
We recognize interest income on discounted notes receivable based upon whether the amount and
timing of collections are both probable and reasonably estimable. We consider collections to be
probable and reasonably estimable when the borrower has closed or entered into certain pending
transactions (which include real estate sales, refinancings, foreclosures and rights offerings)
that provide a reliable source of repayment. In such instances, we recognize accretion income, on
a prospective basis using the effective interest method over the estimated remaining term of the
notes, equal to the difference between the carrying amount of the discounted notes and the
estimated collectible value. We record income on all other discounted notes using the cost
recovery method.
We assess the collectibility of notes receivable on a periodic basis, which assessment
consists primarily of an evaluation of cash flow projections of the borrower to determine whether
estimated cash flows are sufficient to repay principal and interest in accordance with the
contractual terms of the note. We update our cash flow projections of the borrowers annually, and
more frequently for certain loans depending on facts and circumstances. We recognize provisions
for losses on notes receivable when it is probable that principal and interest will not be received
in accordance with the contractual terms of the loan. Factors that affect this assessment include
the fair value of the partnerships real estate, pending transactions to refinance the
partnerships senior obligations or sell the partnerships real estate, and market conditions
(current and forecasted) related to a particular asset. The amount of the provision to be
recognized generally is based on the fair value of the partnerships real estate that represents
the primary source of loan repayment. In certain instances where other sources of cash flow are
available to repay the loan, the provision is measured by discounting the estimated cash flows at
the loans original effective interest rate.
The following table summarizes our notes receivable as of September 30, 2011 and December 31,
2010 (in thousands):
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Par value notes |
$ | 19,657 | $ | 17,899 | ||||
Discounted notes |
94,973 | 98,827 | ||||||
Allowance for loan losses |
| | ||||||
Total notes receivable |
$ | 114,630 | $ | 116,726 | ||||
Face value of discounted notes |
$ | 103,291 | $ | 108,621 |
Notes receivable have various annual interest rates ranging between 2.1% and 8.8% and
averaging 4.1%. Included in the notes receivable at September 30, 2011 and December 31, 2010 are
$97.5 million and $103.9 million, respectively, in notes that were secured by interests in real
estate or interests in real estate partnerships.
During the nine months ended September 30, 2011, there have been no significant changes in the
carrying amounts, our average recorded investment in or unpaid principal balances for impaired
loans. During the three and nine months ended
September 30, 2011 and 2010, we did not recognize any significant amounts of interest income
related to impaired or non-impaired notes receivable.
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We recognize interest income as earned on the $19.7 million of our par value notes receivable
at September 30, 2011 that are estimated to be collectible and have not been impaired. Of our
total par value notes outstanding at September 30, 2011, notes with balances of $19.0 million have
stated maturity dates and the remainder have no stated maturity dates and are governed by the terms
of the partnership agreements pursuant to which the loans were extended. At September 30, 2011,
none of the par value notes with stated maturity dates were past due.
Notes Receivable from Aimco
In addition to the notes receivable discussed above, as of September 30, 2011 we had notes
receivable that we received in exchange for the sale of certain real estate assets to Aimco in
December 2000. The notes bore interest at 5.7% per annum and had original principal amounts of
$10.1 million. On October 14, 2011, Aimco repaid the then outstanding $18.5 million of outstanding
principal and interest due on these notes, using its share of proceeds from a $19.7 million
distribution we declared and paid to holders of common OP Units and High Performance Units on that
date.
NOTE 11 Business Segments
We have two reportable segments: conventional real estate operations and affordable real
estate operations. Our conventional real estate operations consist of market-rate apartments with
rents paid by the resident and included 205 properties with 64,781 units at September 30, 2011.
Our affordable real estate operations consisted of 201 properties with 24,040 units at September
30, 2011, with rents that are generally paid, in whole or part, by a government agency.
Our chief executive officer, who is our chief operating decision maker, uses various generally
accepted industry financial measures to assess the performance and financial condition of the
business, including: Net Asset Value, which is the estimated fair value of our assets, net of
liabilities and preferred units; Pro forma Funds From Operations, which is Funds From Operations
excluding operating real estate impairment losses and preferred unit redemption related amounts;
Adjusted Funds From Operations, which is Pro forma Funds From Operations less spending for Capital
Replacements; property net operating income, which is rental and other property revenues less
direct property operating expenses, including real estate taxes; proportionate property net
operating income, which reflects our share of property net operating income of our consolidated and
unconsolidated properties; same store property operating results; Free Cash Flow, which is net
operating income less spending for Capital Replacements; Free Cash Flow internal rate of return;
financial coverage ratios; and leverage as shown on our balance sheet. Our chief operating
decision maker emphasizes proportionate property net operating income as a key measurement of
segment profit or loss.
The following tables present the revenues, net operating income (loss) and income (loss) from
continuing operations of our conventional and affordable real estate operations segments on a
proportionate basis for the three and nine months ended September 30, 2011 and 2010 (in thousands):
Corporate and | ||||||||||||||||||||
Conventional | Affordable | Amounts Not | ||||||||||||||||||
Real Estate | Real Estate | Proportionate | Allocated to | |||||||||||||||||
Operations | Operations | Adjustments (1) | Segments | Consolidated | ||||||||||||||||
Three Months Ended September 30, 2011: |
||||||||||||||||||||
Rental and other property revenues (2) |
$ | 206,115 | $ | 32,715 | $ | 30,501 | $ | 194 | $ | 269,525 | ||||||||||
Asset management and tax credit revenues |
| | | 11,885 | 11,885 | |||||||||||||||
Total revenues |
206,115 | 32,715 | 30,501 | 12,079 | 281,410 | |||||||||||||||
Property operating expenses (2) |
79,514 | 13,373 | 13,495 | 13,521 | 119,903 | |||||||||||||||
Investment management expenses |
| | | 2,386 | 2,386 | |||||||||||||||
Depreciation and amortization (2) |
| | | 97,321 | 97,321 | |||||||||||||||
Provision for operating real estate
impairment losses (2) |
| | | 149 | 149 | |||||||||||||||
General and administrative expenses |
| | | 12,664 | 12,664 | |||||||||||||||
Other expenses, net |
| | | 4,870 | 4,870 | |||||||||||||||
Total operating expenses |
79,514 | 13,373 | 13,495 | 130,911 | 237,293 | |||||||||||||||
Net operating income (loss) |
126,601 | 19,342 | 17,006 | (118,832 | ) | 44,117 | ||||||||||||||
Other items included in continuing
operations |
| | | (69,604 | ) | (69,604 | ) | |||||||||||||
Income (loss) from continuing operations |
$ | 126,601 | $ | 19,342 | $ | 17,006 | $ | (188,436 | ) | $ | (25,487 | ) | ||||||||
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Corporate and | |||||||||||||||||||||
Conventional | Affordable | Amounts Not | |||||||||||||||||||
Real Estate | Real Estate | Proportionate | Allocated to | ||||||||||||||||||
Operations | Operations | Adjustments (1) | Segments | Consolidated | |||||||||||||||||
Three Months Ended September 30, 2010: |
|||||||||||||||||||||
Rental and other property revenues (2) |
$ | 200,667 | $ | 31,573 | $ | 30,591 | $ | 650 | $ | 263,481 | |||||||||||
Asset management and tax credit revenues |
| | | 9,711 | 9,711 | ||||||||||||||||
Total revenues |
200,667 | 31,573 | 30,591 | 10,361 | 273,192 | ||||||||||||||||
Property operating expenses (2) |
76,467 | 13,765 | 13,562 | 12,992 | 116,786 | ||||||||||||||||
Investment management expenses |
| | | 2,609 | 2,609 | ||||||||||||||||
Depreciation and amortization (2) |
| | | 101,704 | 101,704 | ||||||||||||||||
General and administrative expenses |
| | | 12,096 | 12,096 | ||||||||||||||||
Other expenses, net |
| | | 4,416 | 4,416 | ||||||||||||||||
Total operating expenses |
76,467 | 13,765 | 13,562 | 133,817 | 237,611 | ||||||||||||||||
Net operating income (loss) |
124,200 | 17,808 | 17,029 | (123,456 | ) | 35,581 | |||||||||||||||
Other items included in continuing
operations |
| | | (82,357 | ) | (82,357 | ) | ||||||||||||||
Income (loss) from continuing operations |
$ | 124,200 | $ | 17,808 | $ | 17,029 | $ | (205,813 | ) | $ | (46,776 | ) | |||||||||
Nine Months Ended September 30, 2011: |
|||||||||||||||||||||
Rental and other property revenues (2) |
$ | 613,688 | $ | 97,947 | $ | 93,065 | $ | 1,049 | $ | 805,749 | |||||||||||
Asset management and tax credit revenues |
| | | 28,772 | 28,772 | ||||||||||||||||
Total revenues |
613,688 | 97,947 | 93,065 | 29,821 | 834,521 | ||||||||||||||||
Property operating expenses (2) |
233,126 | 40,488 | 41,075 | 41,945 | 356,634 | ||||||||||||||||
Investment management expenses |
| | | 7,604 | 7,604 | ||||||||||||||||
Depreciation and amortization (2) |
| | | 287,739 | 287,739 | ||||||||||||||||
Provision for operating real estate
impairment losses (2) |
| | | 149 | 149 | ||||||||||||||||
General and administrative expenses |
| | | 36,162 | 36,162 | ||||||||||||||||
Other expenses, net |
| | | 13,952 | 13,952 | ||||||||||||||||
Total operating expenses |
233,126 | 40,488 | 41,075 | 387,551 | 702,240 | ||||||||||||||||
Net operating income (loss) |
380,562 | 57,459 | 51,990 | (357,730 | ) | 132,281 | |||||||||||||||
Other items included in continuing
operations |
| | | (231,571 | ) | (231,571 | ) | ||||||||||||||
Income (loss) from continuing operations |
$ | 380,562 | $ | 57,459 | $ | 51,990 | $ | (589,301 | ) | $ | (99,290 | ) | |||||||||
Nine Months Ended September 30, 2010: |
|||||||||||||||||||||
Rental and other property revenues (2) |
$ | 600,640 | $ | 93,847 | $ | 91,530 | $ | 2,040 | $ | 788,057 | |||||||||||
Asset management and tax credit revenues |
| | | 24,208 | 24,208 | ||||||||||||||||
Total revenues |
600,640 | 93,847 | 91,530 | 26,248 | 812,265 | ||||||||||||||||
Property operating expenses (2) |
235,612 | 42,331 | 41,820 | 43,021 | 362,784 | ||||||||||||||||
Investment management expenses |
| | | 10,979 | 10,979 | ||||||||||||||||
Depreciation and amortization (2) |
| | | 305,066 | 305,066 | ||||||||||||||||
General and administrative expenses |
| | | 39,015 | 39,015 | ||||||||||||||||
Other expenses, net |
| | | 2,173 | 2,173 | ||||||||||||||||
Total operating expenses |
235,612 | 42,331 | 41,820 | 400,254 | 720,017 | ||||||||||||||||
Net operating income (loss) |
365,028 | 51,516 | 49,710 | (374,006 | ) | 92,248 | |||||||||||||||
Other items included in continuing
operations |
| | | (212,899 | ) | (212,899 | ) | ||||||||||||||
Income (loss) from continuing operations |
$ | 365,028 | $ | 51,516 | $ | 49,710 | $ | (586,905 | ) | $ | (120,651 | ) | |||||||||
(1) | Represents adjustments for the noncontrolling interests in consolidated real estate
partnerships share of the results of our consolidated properties, which are excluded from
our measurement of segment performance but included in the related consolidated amounts, and
our share of the results of operations of our unconsolidated real estate partnerships, which
are included in our measurement of segment performance but excluded from the related
consolidated amounts. |
|
(2) | Proportionate property net operating income, our key measurement of segment profit or loss,
excludes provision for operating real estate impairment losses, property management revenues
(which are included in rental and other property revenues), property management expenses and
casualty gains and losses (which are included in property operating expenses) and
depreciation and amortization. Accordingly, we do not allocate these amounts to our
segments. |
For the nine months ended September 30, 2011 and 2010, capital additions related to our
conventional segment totaled $111.2 million and $104.9 million, respectively, and capital additions
related to our affordable segment totaled $12.2 million and $24.0 million, respectively.
19
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ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward Looking Statements
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
contains or may contain information that is forward-looking, within the meaning of the federal
securities laws, including, without limitation, statements regarding our ability to maintain
current or meet projected occupancy, rental rates and property operating results and the effect of
acquisitions and redevelopments. Actual results may differ materially from those described in these
forward-looking statements and, in addition, will be affected by a variety of risks and factors,
some of which are beyond our control, including, without limitation: financing risks, including
the availability and cost of financing and the risk that our cash flows from operations may be
insufficient to meet required payments of principal and interest; earnings may not be sufficient to
maintain compliance with debt covenants; real estate risks, including fluctuations in real estate
values and the general economic climate in the markets in which we operate and competition for
residents in such markets; national and local economic conditions, including the pace of job growth
and the level of unemployment; the terms of governmental regulations that affect us and
interpretations of those regulations; the competitive environment in which we operate; the timing
of acquisitions and dispositions; insurance risk, including the cost of insurance; natural
disasters and severe weather such as hurricanes; litigation, including costs associated with
prosecuting or defending claims and any adverse outcomes; energy costs; and possible environmental
liabilities, including costs, fines or penalties that may be incurred due to necessary remediation
of contamination of properties presently owned or previously owned by us. In addition, Aimcos
current and continuing qualification as a real estate investment trust involves the application of
highly technical and complex provisions of the Internal Revenue Code and depends on its ability to
meet the various requirements imposed by the Internal Revenue Code, through actual operating
results, distribution levels and diversity of stock ownership. Readers should carefully review our
financial statements and the notes thereto, as well as the section entitled Risk Factors
described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, and
the other documents we file from time to time with the Securities and Exchange Commission. As used
herein and except as the context otherwise requires, we, our, us and the Partnership refer
to AIMCO Properties, L.P. and the Partnerships consolidated corporate subsidiaries and
consolidated real estate partnerships, collectively.
Executive Overview
We are the operating partnership for Aimco, which is a self-administered and self-managed real
estate investment trust, or REIT. Our principal financial objective is to provide predictable and
attractive returns to our unitholders. Our business plan to achieve this objective is to:
| own and operate a broadly diversified portfolio of primarily class B/B+ assets (as
defined in Note 1 to the condensed consolidated financial statements in Item 1) with
properties concentrated in the 20 largest markets in the United States (as measured by
total apartment value, which is the estimated total market value of apartment properties in
a particular market); |
| improve our portfolio by selling assets with lower projected returns and reinvesting
those proceeds through the purchase of new assets or additional investment in existing
assets in our portfolio, including increased ownership or redevelopment; and |
| provide financial leverage primarily by the use of non-recourse, long-dated, fixed-rate
property debt and perpetual preferred units. |
Our owned real estate portfolio includes 205 conventional properties with 64,781 units and 201
affordable properties with 24,040 units. These conventional and affordable properties generated
87% and 13%, respectively, of our proportionate property net operating income (as defined in Note
11 to the condensed consolidated financial statements in Item 1) during the nine months ended
September 30, 2011. For the three months ended September 30, 2011, our conventional portfolio
monthly rents averaged $1,112 and provided 61% operating margins. These average rents increased
from $1,079 for the three months ended June 30, 2011. During the three months ended September 30,
2011, on average, conventional new lease rates were 6.1% higher than expiring lease rates, compared
to rates that were 5.1% higher than expiring lease rates in the three months ended June 30, 2011.
During the three months ended September 30, 2011, conventional renewal rates were 5.6% higher than
expiring lease rates, compared to rates that were 3.6% higher than expiring lease rates in the
three months ended June 30, 2011.
Our geographic allocation strategy focuses on the 20 largest markets in the United States to
reduce volatility in and our dependence on particular areas of the country. We believe these
markets are deep, relatively liquid and possess desirable
long-term growth characteristics. They are primarily coastal markets, and also include a
number of Sun Belt cities and Chicago, Illinois. We may also invest in other markets on an
opportunistic basis.
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Our portfolio strategy also focuses on asset type and quality. Our target allocation of
capital to conventional and affordable properties is 90% and 10%, respectively, of our total
property net asset value, which is the estimated fair value of our properties and related assets,
net of liabilities. Our conventional and affordable properties comprised approximately 88% and
12%, respectively, of our total property net asset value, at September 30, 2011.
For conventional assets, we focus on the ownership of primarily B/B+ assets. Refer to Note 1
to the condensed consolidated financial statements in Item 1 for an explanation of our rating
system for measuring asset quality. We upgrade the quality of our portfolio through the sale of
assets with lower projected returns, which are often in markets less desirable than our target
markets, and reinvest these proceeds through the purchase of new assets or additional investment in
existing assets in our portfolio, through increased ownership or redevelopment. We prefer the
redevelopment of select properties in our existing portfolio to ground-up development, as we
believe it provides superior risk adjusted returns with lower volatility. During the nine months
ended September 30, 2011, we increased our allocation of capital to our target markets by:
| disposing of seven conventional properties located outside of our target markets for
$61.5 million; |
| investing $63.9 million to purchase interests in conventional properties located within
our target markets; |
| investing $35.5 million in redevelopment of conventional properties included in
continuing operations; and |
| increasing to 100% our ownership in nine conventional properties owned through consolidated real
estate partnerships for a total cost of $13.6 million. The gross
estimated fair value of the real estate corresponding to the interests we acquired totaled $84.9 million. |
During the nine months ended September 30, 2011, we also disposed of eleven conventional
properties located in less desirable locations within our target markets and 15 affordable
properties.
Our leverage strategy focuses on increasing financial returns while minimizing risk. On a
consolidated basis, at September 30, 2011, approximately 87% of our leverage consisted of
property-level, non-recourse, long-dated, fixed-rate, amortizing debt and 13% consisted of
perpetual preferred units, a combination which helps to limit our refunding and re-pricing risk.
At September 30, 2011, we had $26.2 million of corporate level debt, consisting of borrowings on
our revolving credit facility. Our leverage strategy limits refunding risk on our property-level
debt. During the nine months ended September 30, 2011, exclusive of property debt reductions
related to discontinued operations, we reduced our net leverage by approximately $130.4 million,
inclusive of refinancing activity, regularly scheduled property debt amortization, loan pay-downs
and our $51.5 million investment in the first loss and mezzanine positions in the securitization
trust discussed in Note 4 to the condensed consolidated financial statements in Item 1. At
September 30, 2011, the weighted average maturity of our property-level debt was 8.2 years, with
0.1% of our debt maturing during the remainder of 2011 and on average approximately 5.0% maturing
in each of 2012, 2013, 2014 and 2015. Long duration, fixed-rate liabilities provide a hedge
against increases in interest rates and inflation. Approximately 94% of our property-level debt is
fixed-rate. We continue to focus on refinancing our property debt maturing during the period from
2012 through 2015, to extend maturities and lock in current low interest rates.
As of September 30, 2011, we had the capacity to borrow $247.8 million pursuant to our $300.0
million credit facility (after giving effect to $26.2 million of outstanding borrowings and $26.0
million outstanding for undrawn letters of credit issued under the revolving credit facility). The
revolving credit facility matures May 1, 2013, and may be extended for an additional year, subject
to certain conditions.
The key financial indicators that we use in managing our business and in evaluating our
financial condition and operating performance are: Net Asset Value; Pro forma Funds From
Operations, which is Funds From Operations excluding operating real estate impairment losses and
preferred unit redemption related amounts; Adjusted Funds From Operations, which is Pro forma Funds
From Operations less spending for Capital Replacements; property net operating income, which is
rental and other property revenues less direct property operating expenses, including real estate
taxes; proportionate property net operating income, which reflects our share of property net
operating income of our consolidated and unconsolidated properties; same store property operating
results; Free Cash Flow, which is net operating income less spending for Capital Replacements; Free
Cash Flow internal rate of return; financial coverage ratios; and leverage as shown on our balance
sheet. Funds From Operations represents net income or loss, computed in accordance with accounting
principles generally accepted in the United States of America, or GAAP, excluding gains from sales
of depreciable property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. The key macro-economic
factors and non-financial indicators that affect our financial condition and operating
performance are: household formations; rates of job growth; single-family and multifamily housing
starts; interest rates; and availability and cost of financing.
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Because our operating results depend primarily on income from our properties, the supply and
demand for apartments influences our operating results. Additionally, the level of expenses
required to operate and maintain our properties and the pace and price at which we redevelop,
acquire and dispose of our apartment properties affect our operating results. Our cost of capital
is affected by the conditions in the capital and credit markets and the terms that we negotiate for
our equity and debt financings.
Highlights of our results of operations for the three months ended September 30, 2011, are
summarized below:
| Total Same Store revenues and expenses for the three months ended September 30, 2011,
increased by 3.5% and 3.1%, respectively, as compared to the three months ended September
30, 2010, resulting in a 3.8% increase in net operating income; |
| Average daily occupancy for our Conventional Same Store properties remained high at
95.2% for the three months ended September 30, 2011; and |
| Conventional Same Store revenues and expenses for the three months ended September 30,
2011, increased by 3.5% and 4.3%, respectively, as compared to the three months ended
September 30, 2010, resulting in a 3.0% increase in net operating income. |
The following discussion and analysis of the results of our operations and financial condition
should be read in conjunction with the accompanying condensed consolidated financial statements in
Item 1.
Results of Operations
Overview
Three months ended September 30, 2011 compared to September 30, 2010
We reported net income attributable to the Partnership of less than $0.1 million and net loss
attributable to the Partnerships common unitholders of $15.0 million for the three months ended
September 30, 2011, compared to net loss attributable to the Partnership of $17.1 million and net
loss attributable to the Partnerships common unitholders of $30.5 million for the three months
ended September 30, 2010, decreases in losses of $17.1 million and $15.5 million, respectively.
These decreases in net loss were principally due to the following items, all of which are
discussed in further detail below:
| an increase in net operating income of our properties included in continuing operations,
reflecting improved operations; |
| an increase in income from discontinued operations (net of amounts allocated to
noncontrolling interests), primarily related to an increase in gains on dispositions of
real estate in 2011 as compared to 2010; and |
| a decrease in depreciation and amortization expense, primarily attributable to
short-lived real estate assets that became fully depreciated in 2010 and adjustments of
depreciation recognized during 2011 related to revisions of the estimated useful lives of
certain real estate assets. |
Nine months ended September 30, 2011 compared to September 30, 2010
For the nine months ended September 30, 2011, we reported net loss attributable to the
Partnership of $43.7 million and net loss attributable to the Partnerships common unitholders of
$84.3 million, compared to net loss attributable to the Partnership of $53.0 million and net loss
attributable to the Partnerships common unitholders of $92.9 million for the nine months ended
September 30, 2010, decreases in losses of $9.3 million and $8.6 million, respectively.
These decreases in net loss were principally due to the following items, all of which are
discussed in further detail below:
| an increase in net operating income of our properties included in continuing operations,
reflecting improved operations; and |
| a decrease in depreciation and amortization expense, primarily attributable to
short-lived real estate assets that became fully depreciated in 2010 and adjustments of
depreciation recognized during 2011 related to revisions of the estimated useful lives of
certain real estate assets. |
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The effects of these items on our operating results were partially offset by: |
| an increase in interest expense, primarily due to prepayment penalties incurred in
connection with a series of financing transactions completed in 2011 that extended
maturities and reduced the effective interest rate on a group of non-recourse property
loans; and |
| a decrease in income from discontinued operations (net of amounts allocated to
noncontrolling interests), primarily due to decreases in gains on dispositions of real
estate and decreases in the net operating income of properties classified within
discontinued operations due to the timing of sales. |
The following paragraphs discuss these and other items affecting the results of our operations in
more detail. |
Real Estate Operations
Our real estate portfolio is comprised of two business components: conventional real estate
operations and affordable real estate operations, which also represent our two reportable segments.
Our conventional real estate operations consist of market-rate apartments with rents paid by the
resident and include 205 properties with 64,781 units. Our affordable real estate operations
consist of 201 properties with 24,040 units, with rents that are generally paid, in whole or part,
by a government agency. Our conventional and affordable properties contributed 87% and 13%,
respectively, of proportionate property net operating income during the three and nine months ended
September 30, 2011.
In accordance with accounting principles generally accepted in the United States of America,
or GAAP, we consolidate certain properties in which we hold an insignificant economic interest and
in some cases we do not consolidate other properties in which we have a significant economic
interest. Due to the diversity of our economic ownership interests in our properties, our chief
operating decision maker emphasizes proportionate property net operating income, which reflects our
share of the net operating income of our consolidated and unconsolidated properties, as a key
measurement of segment profit or loss. Accordingly, the results of operations of our conventional
and affordable segments discussed below are presented on a proportionate basis.
We exclude property management revenues and expenses and casualty related amounts from our
definition of proportionate property operating income and therefore from our assessment of segment
performance. Accordingly, these items are not included in the following discussion of our segment
results. The effects of these items on our real estate operations results are discussed below on a
consolidated basis, that is, before adjustments for noncontrolling interests or our interests in
unconsolidated real estate partnerships.
The tables and discussions below reflect the proportionate results of our conventional and
affordable segments and the consolidated results related to our real estate operations not
allocated to segments for the three and nine months ended September 30, 2011 and 2010 (in
thousands). The tables and discussions below exclude the results of operations for properties sold
or classified as held for sale through September 30, 2011. Refer to Note 11 in the condensed
consolidated financial statements in Item 1 for further discussion regarding our reportable
segments, including a reconciliation of these proportionate amounts to consolidated rental and
other property revenues and property operating expenses.
Total Same Store Portfolio
Our conventional and affordable segments each include properties we classify as same store.
Same store properties are properties we manage and that have reached and maintained a stabilized
level of occupancy (greater than 90%) during the current and prior year comparable period. We
consider total same store results as a meaningful measure of the performance of the results of
operations of the properties we own and operate. For the three and nine months ended September 30,
2011, our total same store portfolio comprised 93% and 91%, respectively, of our total
proportionate property net operating income.
For the three months ended September 30, 2011, as compared to the three months ended September
30, 2010, our total same store portfolios proportionate property revenues and expenses increased
by 3.5% and 3.1%, respectively, resulting in a 3.8% increase in net operating income, and our total
same store operating margin increased by approximately ten basis points, from 61.8% during the
three months ended September 30, 2010, to 61.9% during the three months ended September 30, 2011.
For the nine months ended September 30, 2011, as compared to the nine months ended September 30,
2010, our total same store portfolios proportionate property revenues and expenses increased by
2.7% and decreased by 2.0%, respectively, resulting in a 5.8% increase in net operating income, and
our total same store operating margin increased by approximately 180 basis points, from 60.7%
during the nine months ended September 30, 2010 to 62.5% during the nine months ended September 30,
2011.
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The results of operations of our conventional and affordable same store properties are
discussed further in the discussion of segment results below.
Conventional Real Estate Operations
Our conventional segment consists of conventional properties that we classify as either same
store, redevelopment or other conventional properties. Redevelopment properties are those in which
a substantial number of available units have been vacated for major renovations or have not been
stabilized in occupancy for at least one year as of the earliest period presented, or for which
other significant non-unit renovations are underway or have been complete for less than one year.
Other conventional properties may include conventional properties that have significant rent
control restrictions, acquisition properties, university housing properties and properties that are
not multifamily, such as commercial properties or fitness centers. Our definitions of same store
and redevelopment properties may result in these portfolios for the three month periods differing
from such portfolios for the nine month periods for the purpose of comparing 2011 to 2010 results.
During the three months ended September 30, 2011, our conventional same store portfolio and
our other conventional portfolio consisted of 162 and 43 properties with 57,209 and 7,572 units,
respectively. During the nine months ended September 30, 2011, our conventional same store
portfolio decreased on a net basis by 16 properties and 4,188 units. These changes consisted of:
| the removal of 17 properties, with 4,464 units that were sold or classified as held for
sale through September 30, 2011 and for which the results have been reclassified into
discontinued operations; |
| the inclusion of two properties with 551 units that were previously classified as
redevelopment properties; and |
| the removal of three properties with 1,360 units that experienced significant casualty
losses and were moved from the same store classification into the other conventional
classification, partially offset by the reintroduction of two properties with 1,084 units into the
same store classification. |
Three Months Ended September 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Rental and other property revenues: |
||||||||||||||||
Conventional same store |
$ | 186,710 | $ | 180,420 | $ | 6,290 | 3.5 | % | ||||||||
Other Conventional |
19,405 | 20,247 | (842 | ) | (4.2 | %) | ||||||||||
Total |
206,115 | 200,667 | 5,448 | 2.7 | % | |||||||||||
Property operating expenses: |
||||||||||||||||
Conventional same store |
70,131 | 67,245 | 2,886 | 4.3 | % | |||||||||||
Other Conventional |
9,383 | 9,222 | 161 | 1.7 | % | |||||||||||
Total |
79,514 | 76,467 | 3,047 | 4.0 | % | |||||||||||
Property net operating income: |
||||||||||||||||
Conventional same store |
116,579 | 113,175 | 3,404 | 3.0 | % | |||||||||||
Other Conventional |
10,022 | 11,025 | (1,003 | ) | (9.1 | %) | ||||||||||
Total |
$ | 126,601 | $ | 124,200 | $ | 2,401 | 1.9 | % | ||||||||
For
the three months ended September 30, 2011, as compared to the
three months ended September 30, 2010, our conventional segments
proportionate property net operating income increased
$2.4 million, or 1.9%.
For the three months ended September 30, 2011, as compared to the three months ended September
30, 2010, conventional same store net operating income increased by $3.4 million. This increase was
partially attributable to a $6.3 million increase in revenue, primarily due to higher average rent
(approximately $33 per unit) and increases in miscellaneous income and utilities reimbursements,
partially offset by an 80 basis point decrease in average physical occupancy. Rental rates on new
leases transacted during the three months ended September 30, 2011, were 6.1% higher than expiring
lease rates and renewal rates were 5.6% higher than expiring lease rates. The increase in
conventional same store net operating income was partially offset by a $2.9 million increase in expense,
primarily due to an increase in real estate taxes (due to refunds received in 2010 that related to
prior tax years) and higher utility, contract services, repair and maintenance, administrative and
personnel expenses.
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Our other conventional net operating income (which includes conventional redevelopment and
newly acquired properties) decreased by $1.0 million, due to a decrease in revenue of approximately
$0.8 million and an increase in expense of $0.2 million. The net decrease in revenue was primarily
due to an increase in the number of vacant units resulting from
our redevelopment activities during 2011, and was partially offset by
a $0.4 million increase
in revenues related to properties acquired in 2011. The increase in expenses of our other
conventional properties was primarily due to the properties we acquired in 2011.
Nine Months Ended September 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Rental and other property revenues: |
||||||||||||||||
Conventional same store |
$ | 547,984 | $ | 534,563 | $ | 13,421 | 2.5 | % | ||||||||
Other Conventional |
65,704 | 66,077 | (373 | ) | (0.6 | %) | ||||||||||
Total |
613,688 | 600,640 | 13,048 | 2.2 | % | |||||||||||
Property operating expenses: |
||||||||||||||||
Conventional same store |
202,015 | 204,735 | (2,720 | ) | (1.3 | %) | ||||||||||
Other Conventional |
31,111 | 30,877 | 234 | 0.8 | % | |||||||||||
Total |
233,126 | 235,612 | (2,486 | ) | (1.1 | %) | ||||||||||
Property net operating income: |
||||||||||||||||
Conventional same store |
345,969 | 329,828 | 16,141 | 4.9 | % | |||||||||||
Other Conventional |
34,593 | 35,200 | (607 | ) | (1.7 | %) | ||||||||||
Total |
$ | 380,562 | $ | 365,028 | $ | 15,534 | 4.3 | % | ||||||||
Our conventional same store and other conventional property populations for the nine month
period were substantially consistent with the populations for the three month period. For the nine
months ended September 30, 2011, as compared to the nine months
ended September 30, 2010, our conventional segments proportionate property net
operating income increased $15.5 million, or 4.3%.
For the nine months ended September 30, 2011, as compared to the nine months ended September
30, 2010, conventional same store net operating income increased by $16.1 million. This increase
was attributable to a $13.4 million increase in revenue, primarily due to higher average rent
(approximately $19 per unit) and increases in miscellaneous income and utilities reimbursements,
partially offset by a seven basis point decrease in average physical occupancy. Rental rates on
new leases transacted during the nine months ended September 30, 2011, were 4.7% higher than
expiring lease rates and renewal rates were 4.4% higher than expiring lease rates. The increase in
same store net operating income was also attributable to a $2.7 million decrease in expense,
primarily due to reductions in contract services, marketing, insurance and personnel and related
costs.
Our other conventional net operating income (which includes conventional redevelopment and
newly acquired properties) decreased by $0.6 million, due to a
$0.4 million decrease in revenue and
a $0.2 million increase in expense. The net decrease in revenue was primarily due to an increase
in the number of vacant units resulting from our redevelopment activities during 2011, and was
partially offset by a $0.4 million increase in revenues related to properties acquired in 2011.
The increase in expenses of our other conventional properties was primarily due to the properties
we acquired in 2011.
Affordable Real Estate Operations
Our affordable segment consists of properties we classify as same store or other. Our
criteria for classifying affordable properties as same store or other are consistent with those for
our conventional properties described above. Our definitions of same store and other properties
may result in these portfolios for the three month periods differing from such portfolios for the
nine month periods for the purpose of comparing 2011 to 2010 results.
For the three months ended September 30, 2011, our affordable same store portfolio and other
affordable portfolio consisted of 144 and 57 properties with 18,212 and 5,828 units, respectively.
During the nine months ended September 30, 2011, our affordable same store portfolio decreased on a
net basis by nine properties, consisting of:
| the removal of 16 properties, with 1,541 units that were sold or classified as held for
sale through September 30, 2011 and for which the results have been reclassified into
discontinued operations; and |
| the inclusion of seven properties with 1,395 units that were previously classified as
redevelopment properties. |
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We did not have a significant economic ownership in any of the properties classified as other
affordable properties for the three months ended September 30, 2011 and 2010; accordingly this
portfolio is excluded from the discussion of proportionate results for the three month periods
shown below.
Three Months Ended September 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Affordable same store: |
||||||||||||||||
Rental and other property revenues |
$ | 32,715 | $ | 31,573 | $ | 1,142 | 3.6 | % | ||||||||
Property operating expenses |
13,373 | 13,765 | (392 | ) | (2.8 | %) | ||||||||||
Property net operating income |
$ | 19,342 | $ | 17,808 | $ | 1,534 | 8.6 | % | ||||||||
For the three months ended September 30, 2011, as compared to the three months ended September
30, 2010, the proportionate property net operating income of our affordable same store properties
increased $1.5 million, or 8.6%. This increase in net operating income consisted of a $1.1 million
increase in revenue and a $0.4 million decrease in expense. Affordable same store revenue
increased partially due to higher average rent ($28 per unit), partially offset by lower average
physical occupancy (15 basis points). Affordable same store expenses decreased primarily due to
reductions in insurance and real estate tax expenses.
The seven properties discussed above that were reclassified from other affordable
(redevelopment) to affordable same store during 2011 did not meet the same store requirements for
either of the full nine month periods ended September 30 and accordingly these properties are
included in other affordable in the following comparison of the results of operations of our
affordable segment for the nine months ended September 30, 2011 and 2010.
Nine Months Ended September 30, | ||||||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||||||
Rental and other property revenues: |
||||||||||||||||
Affordable same store |
$ | 87,130 | $ | 83,618 | $ | 3,512 | 4.2 | % | ||||||||
Other Affordable |
10,817 | 10,229 | 588 | 5.7 | % | |||||||||||
Total |
97,947 | 93,847 | 4,100 | 4.4 | % | |||||||||||
Property operating expenses: |
||||||||||||||||
Affordable same store |
36,086 | 38,190 | (2,104 | ) | (5.5 | %) | ||||||||||
Other Affordable |
4,402 | 4,141 | 261 | 6.3 | % | |||||||||||
Total |
40,488 | 42,331 | (1,843 | ) | (4.4 | %) | ||||||||||
Property net operating income: |
||||||||||||||||
Affordable same store |
51,044 | 45,428 | 5,616 | 12.4 | % | |||||||||||
Other Affordable |
6,415 | 6,088 | 327 | 5.4 | % | |||||||||||
Total |
$ | 57,459 | $ | 51,516 | $ | 5,943 | 11.5 | % | ||||||||
For the nine months ended September 30, 2011, as compared to the nine months ended September
30, 2010, the proportionate property net operating income of our affordable segment increased $5.9
million, or 11.5%. Affordable same store net operating income increased by $5.6 million, consisting
of a $3.5 million increase in revenue and a $2.1 million decrease in expense. Affordable same
store revenue increased primarily due to higher average rent ($31 per unit) and higher average
physical occupancy (seven basis points) at our affordable same store properties. The increase in
average rent was partially due to retroactive rent increases awarded in 2011 under government
subsidy programs at certain of our affordable properties, $0.2 million of which relates to previous
years. Affordable same store expenses decreased primarily due to reductions in personnel and
related costs, insurance and real estate tax expenses, the majority of which relates to
revaluations associated with 2010 and prior years. The increase in our affordable segments
proportionate property net operating income was also due to higher net operating income of our
other affordable properties of $0.3 million.
Non-Segment Real Estate Operations
Real estate operations net operating income amounts not attributed to our conventional or
affordable segments include property management revenues and expenses and casualty losses, reported
in consolidated amounts, which we do not allocate to our conventional or affordable segments for
purposes of evaluating segment performance (see Note 11 to the condensed consolidated financial
statements in Item 1).
For the three months ended September 30, 2011, as compared to 2010, property management
revenues decreased by $0.5 million, from $0.7 million to $0.2 million, primarily due to a reduction
in the number of properties managed for third parties. For the three months ended September 30,
2011, as compared to 2010, property operating expenses not allocated to our conventional or
affordable segments, including property management expenses and casualty losses, increased by $0.5
million. Casualty losses increased by $1.0 million, from $1.8 million to $2.8 million, primarily
due to a higher volume of
small claim losses during 2011 than in 2010 as well as an increase in larger dollar losses in
2011. Property management expenses decreased by $0.5 million, from $11.2 million to $10.7 million,
due to a reduction in personnel and related expenses, which in part resulted from fewer properties
managed for third parties.
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For the nine months ended September 30, 2011, as compared to 2010, property management
revenues decreased by $1.0 million, from $2.0 million to $1.0 million, due to a reduction in the
number of properties managed for third parties. For the nine months ended September 30, 2011, as
compared to 2010, property operating expenses not allocated to our conventional or affordable
segments, including property management expenses and casualty losses, decreased by $1.1 million.
Property management expenses decreased by $3.6 million, from
$35.4 million to $31.8 million, due to a
reduction in personnel and related expenses resulting from a reduction in the number of properties
managed for third parties. Casualty losses increased by $2.5 million, from $7.6 million to $10.1
million, primarily due to $4.6 million of losses in 2011 from severe snow storms in the Northeast
that damaged several properties.
Asset Management and Tax Credit Revenues
We perform activities and services for consolidated and unconsolidated real estate
partnerships, including portfolio strategy, capital allocation, joint ventures, tax credit
syndication, acquisitions and dispositions. These activities are conducted in part by our taxable
subsidiaries, and the related net operating income may be subject to income taxes.
For the three months ended September 30, 2011, compared to the three months ended September
30, 2010, asset management and tax credit revenues increased $2.2 million. This increase is
attributable to a $3.4 million increase in general partner transactional fees and $1.0 million of
income recognized in 2011 upon the syndication of a low-income housing tax credit partnership,
partially offset by a decrease of $2.4 million of promote income, which is income earned in connection with
the disposition of properties owned by our consolidated joint ventures, recognized on properties
that were sold in 2010 for which no similar income was recognized in
2011.
For the nine months ended September 30, 2011, compared to the nine months ended September 30,
2010, asset management and tax credit revenues increased $4.6 million. This increase is primarily
attributable to a $2.1 million increase in general partner transactional fees and $1.0 million of
income recognized in 2011 upon the syndication of a low-income housing tax credit partnership.
Asset management and tax credit revenues during the nine months ended September 30, 2011 also
includes the recognition of $1.3 million of asset management fees in connection with a transaction
with the principals of a portfolio of properties for which we provided asset management and other
services. As part of our ongoing effort to simplify our business, we resigned from our role
providing asset or property management services for approximately 100 properties and we agreed to
receive a reduced payment on asset management and other fees owed to us, a portion of which was not
previously recognized based on concerns regarding collectibility. We received cash and notes
receivable that are guaranteed by a principal in the portfolio and that have a security interest in
distributable proceeds from the sale of certain properties in the portfolio.
Investment Management Expenses
Investment management expenses consist primarily of the costs of personnel who perform asset
management and tax credit activities. For the three and nine months ended September 30, 2011,
compared to the three and nine months ended September 30, 2010, investment management expenses
decreased $0.2 million and $3.4 million, respectively.
These decreases were primarily due to our write
off during 2010 of previously deferred costs on tax credit projects we abandoned and a reduction in
personnel and related costs.
Depreciation and Amortization
For the three and nine months ended September 30, 2011, compared to the three and nine months
ended September 30, 2010, depreciation and amortization decreased $4.4 million, or 4.3%, and $17.3
million, or 5.7%, respectively. These decreases were primarily due to short-lived real estate
assets that became fully depreciated in 2010 and adjustments of depreciation recognized during 2011
related to revisions of the estimated useful lives of certain real estate assets.
General and Administrative Expenses
For the three months ended September 30, 2011, compared to the three months ended September
30, 2010, general and administrative expenses increased $0.6 million, or 4.7%. For the nine months
ended September 30, 2011, compared to the nine months ended September 30, 2010, general and
administrative expenses decreased $2.9 million, or 7.3%, primarily due to net reductions in
personnel and related expenses.
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Other Expenses (Income), Net
Other expenses (income), net includes franchise taxes, risk management activities, partnership
administration expenses and certain non-recurring items. For the three and nine months ended
September 30, 2011, compared to the three and nine months ended September 30, 2010, other expenses,
net increased by $0.5 million and by $11.8 million, respectively. The net increases
during the nine months ended September 30, 2011, were primarily attributable to the favorable
settlement of certain litigation matters during 2010, for which there was no comparable activity in
2011.
Interest Income
Interest income consists primarily of interest on notes receivable from non-affiliates and
unconsolidated real estate partnerships, interest on cash and restricted cash accounts, and
accretion of discounts on certain notes receivable from unconsolidated real estate partnerships.
Transactions that result in accretion may occur infrequently and thus accretion income may vary
from period to period.
For the three months ended September 30, 2011, compared to the three months ended September
30, 2010, interest income increased by $1.5 million, or 58.9%. This increase is primarily due to
accretion of income on our investment during the three months ended September 30, 2011, in the
first loss and mezzanine positions in a securitization trust that holds certain of our property
loans payable and an increase in interest on our notes receivable from Aimco, which are discussed
in Note 10 to the condensed consolidated financial statements in Item 1.
For the nine months ended September 30, 2011, compared to the nine months ended September 30,
2010, interest income increased by $1.0 million, or 11.8%. This increase is primarily due to the
investment accretion discussed above and an increase in interest on our notes receivable from
Aimco, partially offset by a decrease in accretion recognized on notes receivable.
Interest Expense
For the three months ended September 30, 2011, compared to the three months ended September
30, 2010, interest expense, which includes the amortization of deferred financing costs, decreased
by $1.4 million, or 1.9%, primarily due to decreases in property level interest due to lower
average balances outstanding during 2011.
For the nine months ended September 30, 2011, compared to the nine months ended September 30,
2010, interest expense increased by $17.9 million, or 7.9%. This increase was primarily
attributable to our recognition of $20.7 million of prepayment penalties and the write off of $2.3
million of deferred loan costs in connection with the completion of a series of financing
transactions that are discussed further in Note 4 to the condensed consolidated financial
statements in Item 1. These increases were partially offset by decreases in property and corporate
level interest due to lower average balances outstanding during 2011.
Equity in (Losses) Earnings of Unconsolidated Real Estate Partnerships
Equity in (losses) earnings of unconsolidated real estate partnerships includes our share of
the net earnings or losses of our unconsolidated real estate partnerships, which may include
impairment losses, gains or losses on the disposition of real estate assets or depreciation
expense, which generally exceeds the net operating income recognized by such unconsolidated
partnerships. We generally own a nominal economic interest in the consolidated investment
partnerships that hold the majority of our investments in unconsolidated subsidiaries, accordingly
the equity in earnings and losses recognized by these entities are attributed to noncontrolling
interests and had no significant effect on the amounts of net loss attributable to Aimco.
Gain on Dispositions of Unconsolidated Real Estate and Other
Gain on dispositions of unconsolidated real estate and other includes gains on disposition of
interests in unconsolidated real estate partnerships, gains on dispositions of land and other
non-depreciable assets and certain costs related to asset disposal activities. Changes in the
level of gains recognized from period to period reflect the changing level of disposition activity
from period to period. Additionally, gains on properties sold are determined on an individual
property basis or in the aggregate for a group of properties that are sold in a single transaction,
and are not comparable period to period.
For the three and nine months ended September 30, 2011, compared to the three and nine months
ended September 30, 2010, gain on dispositions of unconsolidated real estate and other increased
$2.2 million and decreased $0.3 million, respectively. The increase in gains during the three
months ended September 30, 2011 is primarily attributable to our disposition of interests in
unconsolidated real estate partnerships during the three months ended
September 30, 2011. The
majority of these gains were attributed to the noncontrolling interests in the consolidated
partnerships that held these investments and accordingly these gains had no significant effect on
net loss attributed to Aimco.
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Income Tax Benefit
Certain of our operations or a portion thereof, including property management, asset
management and risk management are conducted through taxable REIT subsidiaries, each of which we
refer to as a TRS. A TRS is a C-corporation that has not elected REIT status and, as such, is
subject to United States Federal corporate income tax. We use TRS entities to facilitate our
ability to offer certain services and activities to our residents and investment partners that
cannot be offered directly by a REIT. We also use TRS entities to hold investments in certain
properties. Income taxes related to the results of continuing operations of our TRS entities are
included in income tax benefit in our consolidated statements of operations.
For the three and nine months ended September 30, 2011, compared to the three and nine months
ended September 30, 2010, income tax benefit decreased by $3.3 million and $5.3 million,
respectively, primarily due to decreases in losses of our TRS entities.
Income from Discontinued Operations, Net
The results of operations for consolidated properties sold during the period or designated as
held for sale at the end of the period are generally required to be classified as discontinued
operations for all periods presented. The components of net earnings that are classified as
discontinued operations include all property-related revenues and operating expenses, depreciation
expense recognized prior to the classification as held for sale, property-specific interest expense
and debt extinguishment gains and losses to the extent there is secured debt on the property. In
addition, any impairment losses on assets held for sale and the net gain or loss on the eventual
disposal of properties held for sale are reported in discontinued operations.
For the three months ended September 30, 2011 and 2010, income from discontinued operations
totaled $31.0 million and $18.5 million, respectively. The $12.5 million increase in income from
discontinued operations was principally due to a $16.4 million increase in gain on dispositions of
real estate, net of income taxes, and a $3.2 million decrease in interest expense, partially offset
by a $6.8 million decrease in operating income (inclusive of a $4.1 million increase in real estate
impairment losses).
For the nine months ended September 30, 2011 and 2010, income from discontinued operations
totaled $51.0 million and $65.9 million, respectively. The $14.9 million decrease in income from
discontinued operations was principally due to a $10.7 million decrease in gain on dispositions of
real estate, net of income taxes, and a $12.3 million decrease in operating income (inclusive of a
$2.3 million increase in real estate impairment losses), partially offset by a $9.0 million
decrease in interest expense.
During the three months ended September 30, 2011, we sold or disposed of 12 consolidated
properties for gross proceeds of $154.5 million and net proceeds of $63.9 million, resulting in a
net gain of approximately $37.5 million (which includes less than $0.1 million of related income
taxes). During the three months ended September 30, 2010, we sold eight consolidated properties
for gross proceeds of $98.7 million and net proceeds of $33.2 million, resulting in a net gain of
approximately $21.1 million (which included less than $0.1 million of related income taxes).
During the nine months ended September 30, 2011, we sold or disposed of 39 consolidated
properties for gross proceeds of $293.2 million and net proceeds of $105.6 million, resulting in a
net gain of approximately $64.7 million (which is net of $0.2 million of related income taxes).
During the nine months ended September 30, 2010, we sold 31 consolidated properties for gross
proceeds of $283.5 million and net proceeds of $80.6 million, resulting in a net gain of
approximately $75.3 million (which includes $0.9 million of related income taxes).
The weighted average net operating income capitalization rates for our conventional and
affordable property sales, which are calculated using the trailing twelve month net operating
income prior to sale, less a 3.5% management fee, divided by gross proceeds, were 7.2% and 8.4%,
respectively, for sales during the nine months ended September 30, 2011, and 8.0% and 8.5%,
respectively, for sales during the nine months ended September 30, 2010.
For the three and nine months ended September 30, 2011 and 2010, income from discontinued
operations includes the operating results of the properties sold or classified as held for sale as
of September 30, 2011.
Changes in the level of gains recognized from period to period reflect the changing level of
our disposition activity from period to period. Additionally, gains on properties sold are
determined on an individual property basis or in the aggregate
for a group of properties that are sold in a single transaction, and are not comparable period
to period (see Note 3 to the condensed consolidated financial statements in Item 1 for additional
information on discontinued operations).
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Noncontrolling Interests in Consolidated Real Estate Partnerships
Noncontrolling interests in consolidated real estate partnerships reflects the non-Aimco
partners, or noncontrolling partners, share of operating results of consolidated real estate
partnerships, as well as the noncontrolling partners share of property management fees, interest
on notes and other amounts that we charge to such partnerships.
For the three months ended September 30, 2011, we allocated net income of $5.5 million to
noncontrolling interests in consolidated real estate partnerships, as compared to $11.2 million of
net losses allocated to these noncontrolling interests during the nine months ended September 30,
2010, or a variance of $16.7 million. This change was primarily due to a $7.5 million increase in
the noncontrolling interest partners share of income from discontinued operations and a $9.2
million increase in the noncontrolling interest partners share of income from continuing
operations, which is primarily attributable to the noncontrolling interest partners share of
equity in impairment losses recognized during 2010.
For the nine months ended September 30, 2011 and 2010, we allocated net losses of $4.6
million, and $1.8 million, respectively, to noncontrolling interests in consolidated real estate
partnerships, or a variance of $2.8 million. This change was primarily due to a $2.7 million
decrease in the noncontrolling interest partners share of income from discontinued operations.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP, which requires us to
make estimates and assumptions. We believe that the following critical accounting policies involve
our more significant judgments and estimates used in the preparation of our consolidated financial
statements.
Impairment of Long-Lived Assets
Real estate and other long-lived assets to be held and used are stated at cost, less
accumulated depreciation and amortization, unless the carrying amount of the asset is not
recoverable. If events or circumstances indicate that the carrying amount of a property may not be
recoverable, we make an assessment of its recoverability by comparing the carrying amount to our
estimate of the undiscounted future cash flows, excluding interest charges, of the property. If the
carrying amount exceeds the estimated aggregate undiscounted future cash flows, we recognize an
impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.
From time to time, we have non-revenue producing properties that we hold for future
redevelopment. We assess the recoverability of the carrying amount of these redevelopment
properties by comparing our estimate of undiscounted future cash flows based on the expected
service potential of the redevelopment property upon completion to the carrying amount. In certain
instances, we use a probability-weighted approach to determine our estimate of undiscounted future
cash flows when alternative courses of action are under consideration.
Real estate investments are subject to varying degrees of risk. Several factors may adversely
affect the economic performance and value of our real estate investments. These factors include:
| the general economic climate; |
| competition from other apartment communities and other housing options; |
| local conditions, such as loss of jobs or an increase in the supply of apartments, that
might adversely affect apartment occupancy or rental rates; |
| changes in governmental regulations and the related cost of compliance; |
| increases in operating costs (including real estate taxes) due to inflation and other
factors, which may not be offset by increased rents; |
| changes in tax laws and housing laws, including the enactment of rent control laws or
other laws regulating multifamily housing; and |
| changes in interest rates and the availability of financing. |
Any adverse changes in these and other factors could cause an impairment of our long-lived
assets, including real estate and investments in unconsolidated real estate partnerships. During
the next twelve months, we expect to market for sale certain real estate properties that are
inconsistent with our long-term investment strategy. For any properties that are sold or meet the
criteria to be classified as held for sale during the next twelve months, the reduction in the
estimated holding period
for these assets or the requirement to reduce the carrying amounts of properties that become
held for sale by the estimated costs to sell the assets may result in additional impairment losses.
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Based on periodic tests of recoverability of long-lived assets, for the three and nine months
ended September 30, 2011, we recognized $0.1 million of impairment losses related to properties to
be held and used. We recognized no similar impairment losses for properties to be held and used in
2010. During the three months ended September 30, 2011 and 2010, we recognized impairment losses
of $5.5 million and $1.4 million, respectively, and during the nine months ended September 30, 2011
and 2010, we recognized impairment losses of $11.8 million and $9.6 million, respectively, for
properties included in discontinued operations, primarily due to reductions in the estimated
holding periods for assets sold during these periods or our reduction of the carrying amounts of
assets that were classified as held for sale by the estimated costs to sell the assets.
Other assets in our condensed consolidated balance sheet in Item 1 include $64.4 million of
goodwill related to our conventional and affordable reportable segments as of September 30, 2011.
We annually evaluate impairment of intangible assets using an impairment test that compares the
fair value of the reporting units with the carrying amounts, including goodwill. We performed our
last annual impairment analysis during the three months ended September 30, 2011 and concluded no
impairment was necessary. We will perform our next impairment analysis during the second half of
2012, and do not anticipate recognizing an impairment of goodwill in connection with this analysis.
As further discussed in Note 3 to the condensed consolidated financial statements in Item 1, we
allocate goodwill to real estate properties when they are sold or classified as held for sale,
based on the relative fair values of these properties and the retained properties in each
reportable segment.
Notes Receivable and Interest Income Recognition
Our notes receivable have stated maturity dates and may require current payments of principal
and interest. Repayment of our notes is subject to a number of variables, including the
performance and value of the underlying real estate properties and the claims of unaffiliated
mortgage lenders, which are generally senior to our claims. Our notes receivable consist of two
classes: loans extended by us that we carry at the face amount plus accrued interest, which we
refer to as par value notes; and discounted notes, which includes loans extended by
predecessors whose positions we generally acquired at a discount and loans extended by us that were
discounted at origination.
We record interest income on par value notes as earned in accordance with the terms of the
related loan agreements. We discontinue the accrual of interest on such notes when the notes are
impaired, as discussed below, or when there is otherwise significant uncertainty as to the
collection of interest. We record income on such nonaccrual loans using the cost recovery method,
under which we apply cash receipts first to the recorded amount of the loan; thereafter, any
additional receipts are recognized as income.
We recognize interest income on discounted notes receivable based upon whether the amount and
timing of collections are both probable and reasonably estimable. We consider collections to be
probable and reasonably estimable when the borrower has closed or entered into certain pending
transactions (which include real estate sales, refinancings, foreclosures and rights offerings)
that provide a reliable source of repayment. In such instances, we recognize accretion income, on
a prospective basis using the effective interest method over the estimated remaining term of the
notes, equal to the difference between the carrying amount of the discounted notes and the
estimated collectible value. We record income on all other discounted notes using the cost
recovery method.
Provision for Losses on Notes Receivable
We assess the collectibility of notes receivable on a periodic basis, which assessment
consists primarily of an evaluation of cash flow projections of the borrower to determine whether
estimated cash flows are sufficient to repay principal and interest in accordance with the
contractual terms of the note. We update our cash flow projections of the borrowers annually, and
more frequently for certain loans depending on facts and circumstances. We recognize provisions
for losses on notes receivable when it is probable that principal and interest will not be received
in accordance with the contractual terms of the loan. Factors that affect this assessment include
the fair value of the partnerships real estate, pending transactions to refinance the
partnerships senior obligations or sell the partnerships real estate, and market conditions
(current and forecasted) related to a particular asset. The amount of the provision to be
recognized generally is based on the fair value of the partnerships real estate that represents
the primary source of loan repayment. In certain instances where other sources of cash flow are
available to repay the loan, the provision is measured by discounting the estimated cash flows at
the loans original effective interest rate.
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During the three months ended September 30, 2011, we recognized a net recovery of previously
recognized provisions for losses on notes receivable of $0.2 million, as compared to less than $0.1
million of net provisions for losses on notes
receivable during the three months ended September 30, 2010. During the nine months ended
September 30, 2011, we recognized a net recovery of previously recognized provisions for losses on
notes receivable of $0.2 million, as compared to $0.3 million of net provisions for losses on notes
receivable during the nine months ended September 30, 2010. We will continue to evaluate the
collectibility of these notes, and we will adjust related allowances in the future due to changes
in market conditions and other factors.
Capitalized Costs
We capitalize costs, including certain indirect costs, incurred in connection with our capital
additions activities, including redevelopment and construction projects, other tangible property
improvements and replacements of existing property components. Included in these capitalized costs
are payroll costs associated with time spent by site employees in connection with the planning,
execution and control of all capital additions activities at the property level. We characterize
as indirect costs an allocation of certain department costs, including payroll, at the area
operations and corporate levels that clearly relate to capital additions activities. We capitalize
interest, property taxes and insurance during periods in which redevelopment and construction
projects are in progress. We charge to expense as incurred costs that do not relate to capital
additions activities, including ordinary repairs, maintenance, resident turnover costs and general
and administrative expenses.
For the three months ended September 30, 2011 and 2010, for continuing and discontinued
operations, we capitalized $3.5 million and $3.2 million of interest costs, respectively, and $6.0
million and $5.9 million of site payroll and indirect costs, respectively. For the nine months
ended September 30, 2011 and 2010, for continuing and discontinued operations, we capitalized $9.9
million and $8.6 million of interest costs, respectively, and $18.7 million and $18.7 million of
site payroll and indirect costs, respectively.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations. Our primary source
of liquidity is cash flow from our operations. Additional sources are proceeds from property sales,
proceeds from refinancings of existing property loans, borrowings under new property loans and
borrowings under our revolving credit facility.
Our principal uses for liquidity include normal operating activities, payments of principal
and interest on outstanding property debt, capital expenditures, distributions paid to unitholders
and distributions paid to noncontrolling interest partners and acquisitions of, and investments in,
properties. We use our cash and cash equivalents and our cash provided by operating activities to
meet short-term liquidity needs. In the event that our cash and cash equivalents and cash provided
by operating activities are not sufficient to cover our short-term liquidity needs, we have
additional means, such as short-term borrowing availability and proceeds from property sales and
refinancings, to help us meet our short-term liquidity needs. We may use our revolving credit
facility for general corporate purposes and to fund investments on an interim basis. We expect to
meet our long-term liquidity requirements, such as debt maturities and property acquisitions,
through long-term borrowings, primarily secured, the issuance of equity securities (including OP
Units), the sale of properties and cash generated from operations.
The availability of credit and its related effect on the overall economy may affect our
liquidity and future financing activities, both through changes in interest rates and access to
financing. Currently, interest rates are low compared to historical levels and many lenders have
reentered the market. However, any adverse changes in the lending environment could negatively
affect our liquidity. We believe we mitigate this exposure through our continued focus on reducing
our short and intermediate term maturity risk, by refinancing such loans with long-dated,
fixed-rate property loans. If property financing options become unavailable for our debt needs, we
may consider alternative sources of liquidity, such as reductions in certain capital spending or
proceeds from asset dispositions.
As further discussed in Item 3, Quantitative and Qualitative Disclosures About Market Risk, we
are subject to interest rate risk associated with certain variable rate liabilities and preferred
units. At September 30, 2011, we estimate that a 1.0% increase in 30-day LIBOR with constant
credit risk spreads would reduce our net income (or increase our net loss) attributable to the
Partnerships common unitholders by approximately $3.2 million, or $0.02 per common unit, on an
annual basis. The effect of an increase in 30-day LIBOR may be mitigated by the effect of our
variable rate assets.
As further discussed in Note 6 to our condensed consolidated financial statements in Item 1,
we use total rate of return swaps as a financing product to lower our cost of borrowing through
conversion of fixed-rate debt to variable-rates. The cost of financing through these arrangements
is generally lower than the fixed rate on the debt. As of September 30, 2011, we had total rate of
return swap positions with two financial institutions with notional amounts totaling $144.7
million. Swaps with notional amounts of $130.5 million and $14.2 million have maturity dates in
May 2012 and October 2012,
respectively. During the three and nine months ended September 30, 2011, we received net cash
receipts of $1.1 million and $8.8 million, respectively, under the total return swaps, which
positively affected our liquidity. To the extent interest rates increase above the fixed rates on
the underlying borrowings, our obligations under the total return swaps will negatively affect our
liquidity.
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During 2011 and 2010, we refinanced certain of the underlying borrowings subject to total rate
of return swaps with long-dated, fixed-rate property debt, and we expect to do the same with
certain of the underlying borrowings in the remainder of 2011 and in early 2012 prior to the swap
maturity dates. The average effective interest rate associated with our borrowings subject to the
total rate of return swaps was 1.8% at September 30, 2011. To the extent we are successful in
refinancing additional of the borrowings subject to the total rate of return swaps, we anticipate
the interest cost associated with these borrowings will increase, which would negatively affect our
liquidity.
We periodically evaluate counterparty credit risk associated with these arrangements. In the
event a counterparty were to default under these arrangements, loss of the net interest benefit we
generally receive under these arrangements, which is equal to the difference between the fixed rate
we receive and the variable rate we pay, may adversely affect our liquidity. However, at the
current time, we have concluded we do not have material exposure.
The total rate of return swaps require specified loan-to-value ratios. In the event the
values of the real estate properties serving as collateral under these agreements decline or if we
sell properties in the collateral pool with low loan-to-value ratios, certain of our consolidated
subsidiaries have an obligation to pay down the debt or provide additional collateral pursuant to
the swap agreements, which may adversely affect our cash flows. The obligation to provide
collateral is limited to these subsidiaries and is non-recourse to us. As of September 30, 2011,
these subsidiaries had provided $12.1 million of cash collateral pursuant to the swap agreements to
satisfy the loan-to-value requirements.
As of September 30, 2011, the amount available under our revolving credit facility was $247.8
million (after giving effect to $26.2 million of outstanding borrowings and $26.0 million
outstanding for undrawn letters of credit issued under the revolving credit facility).
At September 30, 2011, we had $75.8 million in cash and cash equivalents, a decrease of $35.5
million from December 31, 2010. At September 30, 2011, we had $209.5 million of restricted cash, an
increase of $9.5 million from December 31, 2010. Restricted cash primarily consists of reserves
and escrows held by lenders for bond sinking funds, capital additions, property taxes and
insurance. In addition, cash, cash equivalents and restricted cash are held by partnerships that
are not presented on a consolidated basis. The following discussion relates to changes in cash due
to operating, investing and financing activities, which are presented in our condensed consolidated
statements of cash flows in Item 1.
Operating Activities
For the nine months ended September 30, 2011, our net cash provided by operating activities of
$176.4 million was primarily related to operating income from our consolidated properties, which is
affected primarily by rental rates, occupancy levels and operating expenses related to our
portfolio of properties, in excess of payments of operating accounts payable and accrued
liabilities. Cash provided by operating activities for the nine months ended September 30, 2011
decreased by $13.8 million as compared to the nine months ended September 30, 2010, primarily due
to the prepayment penalties incurred during 2011 in connection with a series of property financing
transactions.
Investing Activities
For the nine months ended September 30, 2011, our net cash used in investing activities of
$18.0 million consisted primarily of capital expenditures, purchases of real estate (including our
acquisition of a redevelopment property and our investments in unconsolidated real estate
partnerships), and our purchase of the first loss and mezzanine positions in a securitization trust
that holds some of our property loans payable, substantially offset by proceeds from disposition of
real estate and capital improvement escrows released in connection with refinancing of the related
property debt.
Although we hold all of our properties for investment, we sell properties when they do not
meet our investment criteria or are located in areas that we believe do not justify our continued
investment when compared to alternative uses for our capital. During the nine months ended
September 30, 2011, we sold or disposed of 39 consolidated properties for an aggregate sales price
of $293.2 million, generating proceeds totaling $273.9 million, after the payment of transaction
costs and debt prepayment penalties. The $273.9 million is inclusive of debt assumed by buyers.
Net cash proceeds from property sales were used primarily to repay property debt and for other
corporate purposes.
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Capital expenditures totaled $118.4 million during the nine months ended September 30, 2011,
and consisted primarily of Capital Replacements and Capital Improvements, and, to a lesser extent,
spending for redevelopment projects and casualties. Capital Replacements represent the share of
capital additions that are deemed to replace the consumed portion of acquired capital assets and
Capital Improvements represent non-redevelopment capital additions that are made to enhance the
value of capital assets.
Financing Activities
For the nine months ended September 30, 2011, net cash used in financing activities of $193.8
million was primarily attributed to debt principal payments, distributions paid to common and
preferred unitholders, distributions to noncontrolling interests and redemptions and repurchases of
preferred units from Aimco. Proceeds from property loans and our issuance of common and preferred OP Units to
Aimco partially offset the cash outflows.
Property Debt
At September 30, 2011 and December 31, 2010, we had $5.2 billion and $5.5 billion,
respectively, in consolidated property debt outstanding. During the nine months ended September
30, 2011, we refinanced $761.9 million of property loans on 34 properties and closed two new loans
on one property, generating $767.5 million of proceeds from borrowings with a weighted average
interest rate of 4.85% (before the adjustment for the interest income to be received on our
investments in the first loss and mezzanine positions in the securitization trust that holds
certain of our property loans discussed below). After payment of transaction costs and
distributions to limited partners, these refinancing resulted in an $13.9 million net use of cash,
which we funded using proceeds from property sales and available cash. We intend to continue to
refinance property debt primarily as a means of extending current and near term maturities and to
finance certain capital projects.
During
the nine months ended September 30, 2011, we completed a series of financing
transactions that repaid $625.7 million of non-recourse property loans that were scheduled to
mature between the years 2012 and 2016 with $673.8 million of new non-recourse property loans. All
of the new loans have a ten year term, with principal scheduled to amortize over 30 years, and the
loans have a weighted average interest rate of 5.49%. Subsequent to origination, the new loans
were sold to Federal Home Loan Mortgage Corp, or Freddie Mac, which then securitized the new loans.
As part of the securitization transaction, we purchased for $51.5 million the first loss and
mezzanine positions in the securitization trust, which have a face value of $100.9 million and
stated maturity dates corresponding to the terms of the loans held by the trust. By acquiring the
first loss and mezzanine positions, we will be receiving interest income generated from our own
property debt obligations and we have, in effect, reduced our property loan balances by $100.9
million, furthering our goal to lower leverage and improve coverages. The net interest rate of the
loans, which represents the weighted average interest rate of the new loans, less the interest
income that will be earned from the first loss position and mezzanine positions from the
securitization trust, is 5.19%.
Credit Facility
We have an Amended and Restated Senior Secured Credit Agreement, as amended, with a syndicate
of financial institutions, which we refer to as the Credit Agreement, which provides for $300.0
million of revolving loan commitments. Borrowings under the revolving credit facility bear
interest based on a pricing grid determined by leverage (currently either LIBOR plus 4.25% with a
LIBOR floor of 1.50% or, at our option, a base rate equal to the Prime rate plus a spread of
3.00%). The revolving credit facility matures May 1, 2013, and may be extended for one year,
subject to certain conditions, including payment of a 35.0 basis point fee on the total revolving
commitments.
The amount available under the revolving credit facility at September 30, 2011, was $247.8
million (after giving effect to $26.2 million of outstanding borrowings and $26.0 million
outstanding for undrawn letters of credit issued under the revolving credit facility). The
proceeds of revolving loans are generally used to fund working capital and for other corporate
purposes.
Our Credit Agreement requires us to satisfy covenant ratios of earnings before interest, taxes
and depreciation and amortization to debt service and earnings to fixed charges of 1.40:1 and
1.20:1, respectively. For the twelve months ended September 30, 2011, as calculated based on the
provisions in our Credit Agreement, we had a ratio of earnings before interest, taxes and
depreciation and amortization to debt service of 1.60:1 and a ratio of earnings to fixed charges of
1.36:1. We expect to remain in compliance with these covenants during the next twelve months. In
the three months ending March 31, 2012, the covenant ratios of earnings before interest, taxes and
depreciation and amortization to debt service and earnings to fixed charges required by our Credit
Agreement will increase to 1.50:1 and 1.30:1, respectively.
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Partners Captial Transactions
During the nine months ended September 30, 2011, we paid cash distributions totaling $42.4
million and $46.3 million to preferred unitholders and common unitholders, respectively.
During the nine months ended September 30, 2011, we paid cash distributions of $33.0 million
to noncontrolling interests in consolidated real estate partnerships, primarily related to property
sales during 2011 and late 2010.
During the three months ended September 30, 2011, Aimco issued approximately 823,800 shares of
its 7.00% Class Z Cumulative Preferred Stock, par value $0.01 per share, in an underwritten public
offering and subsequent offerings through an at-the-market, or ATM, offering program, for net
proceeds per share of $23.11 (reflecting an average price to the public of $24.21 per share, less
an underwriting discount, commissions and transaction costs of approximately $1.10 per share). The
offerings generated net proceeds of $19.0 million. Aimco contributed the net proceeds from these
issuances to us in exchange for a corresponding number of our 7.00% Class Z Cumulative Preferred
Partnership Units.
Also during the three months ended September 30, 2011, primarily using the proceeds from its
Class Z Cumulative Preferred Stock issuances, Aimco redeemed 862,500 shares (25% of the amount outstanding) of
its Class V Cumulative Preferred Stock. This redemption was for cash at a price equal to $25.00
per share, or $21.6 million in aggregate, plus accumulated and unpaid dividends of approximately
$0.2 million. Concurrent with this redemption, we redeemed a corresponding number of our Class V
Cumulative Preferred Units held by Aimco.
During
the three and nine months ended September 30, 2011, Aimco sold
0.1 million and 2.9 million shares of Class A Common Stock
under its common stock ATM offering program, generating
$3.0 million and $73.6 million of gross proceeds, or
$2.8 million and $72.0
million, respectively, net of commissions. Aimco contributed the net proceeds to us in exchange for an equivalent
number of common OP Units. We used the net proceeds primarily to fund the prepayment penalties and
investments discussed in Note 4 to the condensed consolidated financial statements in Item 1.
Pursuant to Aimcos ATM offering programs, Aimco may issue up to 3.5 million and 4.0 million
additional shares of its Common Stock and Class Z Cumulative Preferred Stock, respectively. In the event of
any such issuances by Aimco, we would issue to Aimco a corresponding number of common OP Units or
Class Z Cumulative Preferred Units in exchange for the proceeds. Additionally, we and Aimco have a shelf
registration statement that provides for the issuance of debt securities by us and equity
securities by Aimco.
During the nine months ended September 30, 2011, we acquired the remaining noncontrolling
limited partnership interests in six consolidated real estate partnerships that own nine properties
and in which our affiliates serve as general partner, for a total cost of $13.6 million.
Future Capital Needs
We expect to fund any future acquisitions, redevelopment projects, Capital Improvements and
Capital Replacements principally with proceeds from property sales (including tax-free exchange
proceeds), short-term borrowings, debt and equity financing (including tax credit equity) and
operating cash flows.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our primary market risk exposure relates to changes in base interest rates, credit risk
spreads and availability of credit. We are not subject to any other material market rate or price
risks. We use predominantly long-term, fixed-rate non-recourse property debt in order to avoid the
refunding and repricing risks of short-term borrowings. We use short-term debt financing and
working capital primarily to fund short-term uses and acquisitions and generally expect to
refinance such borrowings with cash from operating activities, property sales proceeds, long-term
debt or equity financings. We use total rate-of-return swaps to obtain the benefit of variable
rates on certain of our fixed-rate debt instruments. We make limited use of other derivative
financial instruments and we do not use them for trading or other speculative purposes.
We had $355.5 million of floating rate debt and $47.0 million of floating rate preferred OP
Units outstanding at September 30, 2011. Of the total floating rate debt, the major components
were floating rate tax-exempt bond financing ($268.0 million) and floating rate secured notes
($52.8 million). Floating rate tax-exempt bond financing is benchmarked against the SIFMA rate,
which since 1991 has averaged 75% of the 30-day LIBOR rate. If this historical relationship
continues, we estimate that an increase in 30-day LIBOR of 100 basis
points (75 basis points for
tax-exempt interest rates) with constant credit risk spreads would result in net income and net
income attributable to the Partnerships common
unitholders being reduced (or the amounts of net loss and net loss attributable to the
Partnerships common unitholders being increased) by $2.9 million and $3.2 million, respectively,
on an annual basis.
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At September 30, 2011, we had approximately $400.0 million in cash and cash equivalents,
restricted cash and notes receivable, a portion of which bear interest at variable rates, and which
may mitigate the effect of an increase in variable rates on our variable-rate indebtedness and
preferred units discussed above.
The estimated aggregate fair value and carrying amount of our consolidated debt (including
amounts reported in liabilities related to assets held for sale was approximately $5.8 billion and $5.3 billion, respectively
at September 30, 2011. If market rates for our fixed-rate debt were higher by 1.0% with constant
credit risk spreads, the estimated fair value of our debt discussed above would decrease from $5.8
billion to $5.4 billion. If market rates for our debt discussed above were lower by 1.0% with
constant credit risk spreads, the estimated fair value of our fixed-rate debt would increase from
$5.8 billion to $6.2 billion.
ITEM 4. | Controls and Procedures |
Disclosure Controls and Procedures
The Partnerships management, with the participation of the chief executive officer and chief
financial officer of the General Partner, who are the equivalent of the Partnerships chief
executive officer and chief financial officer, respectively, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on such evaluation, the chief executive officer and chief financial
officer of the General Partner have concluded that, as of the end of such period, our disclosure
controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2011 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1A. | Risk Factors |
As of the date of this report, there have been no material changes from the risk factors in
our Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Unregistered Sales of Equity Securities. During the three months ended September 30,
2011, we issued to Aimco 0.4 million common OP Units in exchange for net proceeds of $11.0 million
in connection with Aimcos sale of a corresponding number of registered shares of its Class A
Common Stock under its ATM offering program. The issuance of the common OP Units to Aimco was
exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.
(c) Repurchases of Equity Securities. Our Partnership Agreement generally provides that after
holding the common OP Units for one year, our Limited Partners have the right to redeem their
common OP Units for cash, subject to our prior right to cause Aimco to acquire some or all of the
common OP Units tendered for redemption in exchange for shares of Aimco Class A Common Stock.
Common OP Units redeemed for Aimco Class A Common Stock are generally exchanged on a one-for-one
basis (subject to antidilution adjustments). During the three months ended September 30, 2011, no
common OP Units were redeemed in exchange for shares of Aimco Class A Common Stock. The following
table summarizes repurchases of our equity securities for the three months ended September 30,
2011.
Maximum | ||||||||||||||||
Number | ||||||||||||||||
Total Number of | of Units that | |||||||||||||||
Units Purchased | May Yet Be | |||||||||||||||
Total | Average | as Part of | Purchased | |||||||||||||
Number | Price | Publicly | Under the | |||||||||||||
of Units | Paid | Announced Plans | Plans or | |||||||||||||
Period | Purchased | per Unit | or Programs (1) | Programs (2) | ||||||||||||
July 1 July 31, 2011 |
32,882 | $ | 26.12 | N/A | N/A | |||||||||||
August 1 August 31, 2011 |
4,413 | 27.22 | N/A | N/A | ||||||||||||
September 1 September
30, 2011 |
19,667 | 25.48 | N/A | N/A | ||||||||||||
Total |
56,962 | $ | 25.98 | |||||||||||||
(1) | The terms of our Partnership Agreement do not provide for a maximum number of units that
may be repurchased, and other than the express terms of our Partnership Agreement, we have
no publicly announced plans or programs of repurchase. However, whenever Aimco repurchases
shares of its Class A Common Stock, it is expected that Aimco will fund the repurchase with
proceeds from a concurrent repurchase by us of common OP Units held by Aimco at a price per
unit that is equal to the price per share paid for its Class A Common Stock. |
|
(2) | Aimcos board of directors has, from time to time, authorized Aimco to repurchase shares
of its Class A Common Stock. As of September 30, 2011, Aimco was authorized to repurchase
approximately 19.3 million additional shares. This authorization has no expiration date.
These repurchases may be made from time to time in the open market or in privately
negotiated transactions. |
Distribution Payments. Our Credit Agreement includes customary covenants, including a
restriction on distributions and other restricted payments, but permits distributions during any
12-month period in an aggregate amount of up to 95% of our Funds From Operations, subject to
certain non-cash adjustments, for such period or such amount as may be necessary for Aimco to
maintain its REIT status.
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ITEM 6. | Exhibits |
The following exhibits are filed with this report:
EXHIBIT NO. (1)
31.1 | Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
99.1 | Agreement Regarding Disclosure of Long-Term Debt Instruments |
|||
101 | XBRL (Extensible Business Reporting Language). The following
materials from AIMCO Properties L.P.s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2011, formatted in
XBRL: (i) condensed consolidated balance sheets, (ii) condensed
consolidated statements of operations, (iii) condensed consolidated
statements of cash flows, and (iv) notes to condensed consolidated
financial statements tagged as bocks of text (2) |
(1) | Schedules and supplemental materials to the exhibits have been omitted but will be
provided to
the Securities and Exchange Commission upon request. |
|
(2) | As provided in Rule 406T of Regulation S-T, this information is
furnished and not filed for purposes of Sections 11 and 12 of the Securities
Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AIMCO PROPERTIES, L.P. By: AIMCO-GP, Inc., its general partner |
||||
By: | /s/ ERNEST M. FREEDMAN | |||
Ernest M. Freedman | ||||
Executive Vice President and
Chief Financial Officer (duly authorized officer and principal financial officer) |
||||
By: | /s/ PAUL BELDIN | |||
Paul Beldin | ||||
Senior Vice President and Chief Accounting Officer |
Date: October 28, 2011
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