Apartment Investment and Management Stocks: Slow and Steady Wins the Race (NYSE:AIV)
Apartment investment and management company (New York Stock Exchange: AIF(Aimco) also known as Aimco is a multifamily real estate development and asset management company throughout the United States. The company was established in 1975 and through a series of Acquisitions In the following three decades, in 2020, it spun off part of its rental housing communities AIR Communities (AIRC).
Today Aimco owns 39 properties. 23 properties are stable and income-generating properties, while the remaining properties are undergoing various degrees of development or redevelopment. Aimco generally seeks development and redevelopment opportunities where barriers to entry are high. With this investment thesis, Aimco has performed well in the multifamily segment. Its focus on high-end multifamily homes reaps long-term returns while minimizing downside risk.
Apartment investment, management and improvement company F-Score
In the F-Score review you analyze Financial Strength On a score of 1 to 9 (1 indicates a financially weak company and 9 indicates a financially strong company), Aimco’s most recent quarterly and annual F-Score is 6. A few years ago it was 3:
(Source: AIMCO financial statements)
In recent years, its long-term debt has been trending down, and its EBITDA has been trending higher. Some of the changes are driven by:
- In mid-2023, Aimco exited its investment and took a 25% loss on Parkmercd’s mezzanine loan. The divestment strategy was to move away from passive investments.
- Q1 2024 financials show portfolio-level stable investing improved and increased by 6.5% year-on-year
- Revenue increased by 5.4% year-on-year, while occupancy remained high at 97.9%.
- Current development projects are about $648 million under budget with the NOI expected to stabilize at $44 million annually. This approximates a cap rate of 6.7% when stabilized (full stabilization is expected by late 2026). The remaining cost to complete is $51 million.
Another reason Aimco stands out as an investable real estate company is its non-recourse loans. Non-recourse loans prevent lenders from calling in the loan and force the borrower to pay their debt obligations in full. In recent weeks, there have been news reports of lenders calling in their loans because the borrower was unable to repay:
- The US$16 million loan was defaulted on a development of more than 200 units by Hong Kong-based Zhuguang.
- A luxury condo, NEMA, may default because the property’s cash flow can no longer cover the monthly debt service
- A $29 million loan tied to a San Jose industrial campus defaults in early 2024
This does not mean that Aimco needs to worry about defaulting on its loans, the company has sufficient funds. As of March 31, 2024, Aimco has access to more than $290 million ($121.8 million of cash on hand, $18.6 million of restricted cash, and a $150 revolving credit facility). This is also enough cash to complete existing development projects costing approximately $51 million.
Apartment investment and management company with strong institutional ownership
Another reason why Aimco makes a good investment is that more than 70% of its investors are institutional investors:
(Source: institutional ownership on AIMCO website)
Institutional investors are investment managers who have done their homework in researching companies to invest in – at least that’s usually the case. The strong level of institutional ownership suggests there is a lot of support among “savvy” investors in this stock.
Despite its stock price consistently trading below $10, management has initiated a stock buyback plan in 2023. 6.2 million shares were repurchased at an average price of $7.33. This means that management may believe that its shares are undervalued and that it is a good time to buy back its shares.
Risk: Uncertainty in the US economy
Low interest rates usually drive the economy. Recently, it has been unclear whether the Fed will start cutting interest rates because inflation has remained stubbornly high. While interest rates remain high, businesses and consumers are reluctant to spend, and this leads to a spillover effect as businesses earn less income. This results in fewer hiring and full cycle starts, a continued slowdown in the economy, and negative downward pressure on Aimco’s finances.
Slow growth patient play
Aimco is not a get-rich-quick kind of stock. This is a real estate development company operating in an environment of barriers to entry. Its developments usually take a few years or even longer to stabilize. Aimco has its own rental business to generate a steady income but there are only marginal increases in rents each year here. Overall, the company is making money and is a steadily profitable enterprise as evidenced by its financial statements above.
Another point worth highlighting again is its strong institutional ownership here, Aimco works by trying to minimize risk (for example, it only takes out non-recourse loans), and strives to have enough funds for its business. These are good qualities to have in stock.
Passive investors who do not actively trade and do not mind holding for the long term should consider including it in their investment portfolio. While other real estate companies are struggling and defaulting on their loans, Aimco has been steadily bringing new rental products online and leasing its existing rentals at a 97.9% occupancy rate. This indicates management’s ability to run a tight business amidst other distressed real estate companies and those defaulting on their loans.
Buy slow and steady, I’m bullish on the apartment investment and management company.