On Dec 4, 2013, we reiterated our long-term Neutral recommendation on Apartment Investment & Management Co. (AIV), commonly known as Aimco. The decision was based on the company’s successful portfolio enhancement activity and improving apartment industry fundamentals. Yet, rising interest rates, increase in supply of apartment units supply and notable redevelopment pipeline remain matters of concern.
Why Neutral?
Driven by improved operating property performance, income earned on West Harlem property loans and lower interest expenses, Aimco’s third-quarter 2013 pro forma funds from operations (FFO) of 50 cents per share, came in line with the Zacks Consensus Estimate and surpassed the year-ago quarter figure by 4 cents. Additionally, the rise in demand for apartment properties driven by ‘echo boomers’ – children of the baby boomer generation – keeps us positive on the stock.
Moreover, Aimco is currently focusing on spinning off its Affordable portfolio and reinvesting the proceeds to boost its Conventional portfolio. This successful divestiture has helped the company to scale down its affordable assets to 79 at the third quarter end from 250 properties three years ago, which is encouraging.
However, rising interest rates and stiff competition from other housing alternatives remain our concerns. Moreover, the increase in supply in the Sunbelt region is anticipated to partly offset the overall growth in rents.
Additionally, Aimco’s huge redevelopment pipeline increases operational risks in the current volatile market and expose it to rising construction costs, entitlement delays and lease-up risks.
Over the last 30 days, the Zacks Consensus Estimate for 2013 remained stable at $2.03 per share. However, for 2014, it declined slightly (0.5%) to $2.18 per share. Hence, this apartment real estate investment trust (REIT) now carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Investors interested in REIT- Equity Trust – Residential industry may consider stocks like Education Realty Trust, Inc. (EDR), Independence Realty Trust, Inc. (IRT) and Spirit Realty Capital, Inc. (SRC). All of these carry a Zacks Rank #2 (Buy).
Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.
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