Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS O F 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 Quarterly Report on Form 10-Q contains or may contain information that is forward-looking within the meaning of the federal securities laws. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief, or expectations. Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding: our future plans and goals, including our pipeline investments and projects, our plans to eliminate certain near term debt maturities, our estimated value creation and potential, our timing, scheduling and budgeting, projections regarding lease growth, our plans to form joint ventures, our plans for new acquisitions or dispositions, our strategic partnerships and value added therefrom, the potential for adverse economic and geopolitical conditions, which negatively impact our operations, including on our ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, developments, and redevelopments; our ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to our development and redevelopment investments; expectations regarding sales of our apartment communities and the use of proceeds thereof; the availability and cost of corporate debt; and our ability to comply with debt covenants, including financial coverage ratios.
These forward-looking statements are based on management’s judgment as of this date, which is subject to risks and uncertainties that could cause actual results to differ materially from our expectations, including, but not limited to: geopolitical events which may adversely affect the markets in which our securities trade, and other macro-economic conditions, including, among other things, rising interest rates and inflation, which heightens the impact of the other risks and factors described herein; real estate and operating 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 amount, location and quality of competitive new housing supply; the timing and effects of acquisitions, dispositions, developments and redevelopments; expectations regarding sales of apartment communities and the use of proceeds thereof; insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; supply chain disruptions, particularly with respect to raw materials such as lumber, steel, and concrete; financing risks, including the availability and cost of financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; the risk that earnings may not be sufficient to maintain compliance with debt covenants, including financial coverage ratios; legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of laws and governmental regulations that affect us and interpretations of those laws and regulations; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently owned by us.
In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and depends on our ability to meet the various requirements imposed by the 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 Item 1A. Risk Factors in Part II of this report. These risk factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Readers should also carefully review the section entitled “Risk Factors” described in Item 1A of Apartment Investment and Management Company’s and Aimco OP L.P.’s combined Annual Report on Form 10-K for the year ended December 31, 2023, and subsequent documents we file from time to time with the SEC.
As used herein and except as the context otherwise requires, “we,” “our,” and “us” refer to Apartment Investment and Management Company (which we refer to as Aimco), Aimco OP L.P. (which we refer to as Aimco Operating Partnership) and their consolidated entities, collectively.
Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted in the United States (“GAAP”). These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading.
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Executive Overview
Our mission is to make real estate investments, primarily focused on the multifamily sector within targeted U.S. markets, where outcomes are enhanced through our human capital and substantial value is created for investors, teammates, and the communities in which we operate.
Our value proposition includes our:
• Platform, consisting of a cohesive, talented, and tenured team with diverse real estate industry experience combined with a disciplined and proven investment process;
• Diversified portfolio, consisting of value-add investments, a pipeline of land held for potential future development, a national portfolio of stabilized multifamily real estate and limited indirect and passive investments; and
• Capital redeployment plan which includes the prudent recycling of capital, reallocating our equity to higher returning investments, and return of capital to stockholders when appropriate.
Our primary goal is outsized risk adjusted returns and accelerating growth for our stockholders. We are focused on providing superior total-return performance to stockholders, primarily through capital appreciation driven by accretive investment and active portfolio management over multi-year periods. We do not presently intend to pay a regular quarterly cash dividend, but may periodically pay dividends for REIT tax purposes or to return a portion of profits to stockholders.
Our financial objectives are to create value and produce superior, asset level, risk-adjusted returns on equity as measured by the investment period Internal Rate of Return (“IRR”) and the project-level Multiple on Invested Capital (“MOIC”). We measure broader performance based on Net Asset Value (“NAV”) growth over time.
Our capital allocation strategy is designed to leverage our investment platform and optimize risk-adjusted returns for our stockholders.
We target a balanced allocation, which includes investments in “Value Add” and “Opportunistic” multifamily real estate, primarily located in Southeast Florida, the Washington, D.C. Metro Area and Colorado's Front Range, plus investment in a geographically diversified portfolio of "Core" and "Core-Plus" apartment communities.
In addition, we currently hold select alternative assets, consisting primarily of indirect, real estate related debt and equity investments. We have reduced our allocation to these investments and plan to continue to significantly reduce our allocation over time.
We have policies in place that support our stated strategy, guide our investment allocations, and manage risk, including to hold at all times a sizable portion of our net equity in stabilized cash-flowing assets and to require cash or committed credit necessary for completion of development and redevelopment projects prior to their commencement.
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Given our stated strategy, it is expected that at any point in time the value-creation process will be ongoing at numerous of our investments. Over time, we expect our enterprise to produce superior returns on equity on a risk-adjusted basis and it is our plan to do so by:
• Benefiting from a national platform while leveraging local and regional expertise
We have corporate headquarters in Denver, Colorado and Washington, D.C. Our investment platform is managed by experienced professionals based in three regions, where we will focus our new investment activity: Southeast Florida, the Washington, D.C. Metro Area and Colorado's Front Range. By regionalizing this platform, we are able to leverage the in-depth local market knowledge of each regional leader, creating a comparative advantage when sourcing, evaluating, and executing investment opportunities.
• Owning a portfolio of stabilized core and core plus real estate
Our entire portfolio of operating properties includes 25 apartment communities (21 consolidated properties and four unconsolidated properties) with average rents in line with local market averages (generally defined as B class). We also own one commercial office building that is part of an assemblage with an adjacent apartment building. The target composition of our stabilized portfolio will continue to include primarily B multifamily assets, spread across a geographically diversified portfolio, with a bias toward long established residential neighborhoods that rank highly in regard to schools, employment fundamentals and state and regional governance. Core-Plus opportunities offer the opportunity for incremental capital investment while maintaining stabilized cashflow to accelerate income growth and improve asset values.
• Managing and investing in value-add and opportunistic real estate
Our dedicated team will source and execute development and redevelopment projects, and various other direct investment strategies. Our development and redevelopment portfolio currently includes projects in construction and lease-up. In addition, our team has secured significant, high-quality, future development opportunities, including total potential of more than 11 million gross square feet, located in high-growth markets. Generally, we seek direct investment opportunities in locations where barriers to entry are high, target customers can be clearly defined and where we have a comparative advantage over others in the market. From time to time, we may choose to monetize certain pipeline assets prior to vertical construction in an effort to maximize value and risk adjusted returns. In any time period, the amount of our capital that is allocated to development activities may vary based on market conditions and other factors.
• Maintaining sufficient liquidity and utilizing safe financial leverage
We will guard our liquidity at all times by maintaining sufficient cash and committed credit.
From time to time, we will allocate capital to financial assets designed to mitigate risks. Existing examples include our use of interest rate caps to provide protection against increases in interest rates on in-place loans.
We expect to capitalize our activities through a combination of non-recourse property debt, non-recourse construction loans, third-party equity, and the recycling of our equity, including retained earnings. We plan to limit the use of recourse leverage, with a strong preference towards non-recourse property-level debt to limit risk to our enterprise. When warranted, we plan to seek equity capital from joint venture partners to improve our cost of capital, further leverage our equity, reduce exposure to a single investment and, in certain cases, for strategic benefits.
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The results from the execution of our business plan during the three and nine months ended September 30, 2024 are further described below.
Financial Results and Recent Highlights
• For the three months ended September 30, 2024, net loss attributable to Aimco common stockholders per share, on a fully dilutive basis, was ($0.16), due primarily to higher net contributions from multifamily property operations offset by increases in interest expense and depreciation related to advancing and completing development projects. For the same period in 2023, net loss attributable to Aimco common stockholders per share, on a fully dilutive basis, was ($0.02).
• For the three months ended September 30, 2024, revenue and net operating income from our Operating segment were up 4.1% and 1.6% respectively, year-over-year, due primarily to higher average monthly revenue per apartment home of $2,415, up $57 year-over-year, and a 160-basis point increase in Average Daily Occupancy to 96.8%.
• During the three months ended September 30, 2024, we substantially completed construction on our Strathmore Square project located in Bethesda, Maryland and began construction on an ultra-luxury residential tower located at 640 34th Street ("34th Street") in the Edgewater neighborhood of Miami, Florida.
Operating Property Results
We own a diversified portfolio of stabilized apartment communities located in eight major U.S. markets with average rents in line with local market averages (generally defined as B class). We also own a commercial office building that is part of an assemblage with an adjacent apartment building.
Highlights for the three months ended September 30, 2024 include:
• Revenue for our Operating segment was $39.3 million, up 4.1% year-over-year, resulting from a $57 increase in average monthly revenue per apartment home to $2,415 and a 160-basis point increase in Average Daily Occupancy to 96.8%.
• Expenses for our Operating segment were $11.9 million, up 10.6% year-over-year primarily from higher real estate taxes and insurance.
• Net operating income for our Operating segment was $27.4 million, up 1.6% year-over-year.
Value Add, Opportunistic & Alternative Investments
Development and Redevelopment
We generally seek development and redevelopment opportunities where barriers to entry are high, target customers can be clearly defined, and where we have a comparative advantage over others in the market. Our Value Add and Opportunistic investments may also target portfolio acquisitions, operational turnarounds, and re-entitlements.
As of September 30, 2024, we had two multifamily development projects under construction, two multifamily communities that have been substantially completed and are now in lease-up, and a hotel that was completed in 2023 and is being stabilized. These projects remain on track, as measured by construction budget and lease-up metrics. Additionally, we have a pipeline of future value-add opportunities in our target markets of Southeast Florida, the Washington, D.C. Metro Area, and Colorado's Front Range.
During the three and nine months ended September 30, 2024, $29.6 million and $102.2 million of capital was invested in development and redevelopment activities, respectively, primarily funded through construction loan draws, compared to $74.4 million and $220.4 million, respectively, during the same periods in 2023.
Highlights for the three months ended September 30, 2024 include:
• In the third quarter, construction began in Miami’s Edgewater neighborhood on 34th Street, an ultra-luxury waterfront residential tower that will include a highly tailored amenity package and approximately 7,000 square feet of ground floor retail space. The rental homes will average more than 2,500 square feet, feature 9 – 10 foot ceilings, oversized private terraces, top-of-the-line finishes, and unobstructed views of Biscayne Bay.
• In Upper Northwest Washington, D.C., construction is substantially complete at Upton Place. As of September 30, 2024, we have delivered all 689 apartment homes with 284 units leased or pre-leased at rental rates greater than underwriting. Additionally, as of September 30, 2024, 90% of the project's 105,000 square feet of retail space has been leased.
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• In Bethesda, Maryland, construction is substantially complete at the first phase of Strathmore Square. As of September 30, 2024, we have delivered all 220 highly tailored apartment homes with 64 units leased or preleased with rents ahead of our initial projections, and 46 homes were occupied.
• In Corte Madera, CA, construction is ongoing at Oak Shore where 16 luxury single family rental homes and eight accessory dwelling units are being developed. As of September 30, 2024, 19 residences had been delivered with 14 leased or pre-leased at rental rates greater than underwriting.
• In the third quarter of 2024, we invested $0.4 million into programming, design, documentation, and entitlement efforts related to select pipeline projects located in South Florida and on the Anschutz Medical Campus in Aurora, Colorado.
Investment and Disposition Activity
We are focused on prudently allocating capital and delivering strong investment returns. Consistent with our capital allocation philosophy, we monetize the value within our assets when accretive uses of the proceeds are identified and invest when the risk adjusted returns are superior to other uses of capital. In the three months ended September 30, 2024, no new investment or disposition activity occurred.
Balance Sheet and Financing Activities
We are highly focused on maintaining a strong balance sheet, including having at all times ample liquidity. As of September 30, 2024, we had access to $260.4 million in liquidity, including $82.6 million of cash on hand, $27.8 million of restricted cash, and the capacity to borrow up to $150.0 million on our revolving credit facility. Refer to the Liquidity and Capital Resources section for additional information regarding our leverage.
Financial Results of Operations
We have three segments: (i) Development and Redevelopment, (ii) Operating, and (iii) Other.
Our Development and Redevelopment segment consists of rental communities that are under construction or have not achieved and maintained stabilization throughout the current year and comparable period in the prior year, as well as land assemblages that are being held for future development. Our Operating segment includes 21 residential apartment communities that have achieved stabilized levels of operations as of January 1, 2023, and maintained it throughout the current year and comparable period in the prior year. Our Other segment consists of properties that are not included in our Development and Redevelopment or Operating segments.
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 included in Item 1.
Results of Operations for the three and nine months ended September 30, 2024 and 2023
Net income attributable to Aimco common stockholders decreased by $19.7 million and $78.0 million, respectively, for the three and nine months ended September 30, 2024, compared to the same periods in 2023, as described more fully below.
Property Results
As of September 30, 2024, our Development and Redevelopment segment includes 10 properties, including two of which were under construction and two substantially completed and in lease-up. Our Operating segment includes 21 residential apartment communities with approximately 5,600 apartment homes, and our Other segment includes 1001 Brickell Bay Drive, our only office building, and The Benson Hotel, our only hotel.
During the first quarter of 2024, we revised the information regularly reviewed by our chief operating decision maker ("CODM") to assess our operating performance. As a result, we reclassified The Benson Hotel from the Development and Redevelopment segment to the Other segment. In addition, during the first quarter of 2024, we disposed of St. George Villas, which was previously reported within our Other segment. Prior period segment information has been recast based upon our current segment population, and is consistent with how our CODM evaluates the business. The recast conforms with our reportable segment classification as of September 30, 2024.
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We use proportionate property net operating income to assess the operating performance of our segments. Proportionate property net operating income is defined as our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements, for the consolidated communities; but
• excluding the results of four apartment communities with an aggregate 142 apartment homes that we neither manage nor consolidate, our investment in IQHQ, the Mezzanine Investment, and investments in real estate technology funds; and
• excluding property management costs and casualty gains or losses, reported in consolidated amounts, in our assessment of segment performance.
Please refer to Note 8 to the condensed consolidated financial statements in Item 1 for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses.
Proportionate Property Net Operating Income
The results of our segments for the three months ended September 30, 2024 and 2023, as presented below, are based on segment classifications as of September 30, 2024 ( dollars in thousands ).
Three Months Ended September 30,
2024
2023
$ Change
% Change
Rental and other property revenues, before utility reimbursements:
Development and Redevelopment
$
6,631
$
3,650
$
2,981
81.7
%
Operating
39,281
37,722
1,559
4.1
%
Other
4,979
4,567
412
9.0
%
Total
50,891
45,939
4,952
10.8
%
Property operating expenses, net of utility reimbursements:
Development and Redevelopment
3,940
1,206
2,734
100.0
%
Operating
11,883
10,745
1,138
10.6
%
Other
3,829
2,923
906
31.0
%
Total
19,652
14,874
4,778
32.1
%
Proportionate property net operating income:
Development and Redevelopment
2,691
2,444
247
10.1
%
Operating
27,398
26,977
421
1.6
%
Other
1,150
1,644
(494
)
(30.0
%)
Total
$
31,239
$
31,065
$
174
0.6
%
For the three months ended September 30, 2024, compared to the same period in 2023:
• Development and Redevelopment proportionate property net operating income increased by $0.2 million, or 10.1%, due primarily to the delivery and initial lease-up of Upton Place and Strathmore Square.
• Operating proportionate property net operating income increased by $0.4 million, or 1.6%. The increase was attributable primarily to a $1.6 million, or 4.1% increase in rental and other property revenues due to a $57 increase in average monthly revenue per apartment home to $2,415, and a 160-basis point increase in Average Daily Occupancy to 96.8%.
• Other proportionate property net operating income decreased by $0.5 million, or 30.0%. The decrease was due primarily to vacated space at 1001 Brickell Bay Drive.
The results of our segments for the nine months ended September 30, 2024 and 2023, as presented below, are based on segment classifications as of September 30, 2024 ( dollars in thousands ).
Nine Months Ended September 30,
2024
2023
$ Change
% Change
Rental and other property revenues, before utility reimbursements:
Development and Redevelopment
$
16,799
$
9,092
$
7,707
84.8
%
Operating
116,622
111,404
5,218
4.7
%
Other
14,762
12,053
2,709
22.5
%
Total
148,183
132,549
15,634
11.8
%
Property operating expenses, net of utility reimbursements:
Development and Redevelopment
9,689
3,971
5,718
100.0
%
Operating
35,538
33,428
2,110
6.3
%
Other
10,087
7,554
2,533
33.5
%
Total
55,314
44,953
10,361
23.0
%
Proportionate property net operating income:
Development and Redevelopment
7,110
5,121
1,989
38.8
%
Operating
81,084
77,976
3,108
4.0
%
Other
4,675
4,499
176
3.9
%
Total
$
92,869
$
87,596
$
5,273
6.0
%
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For the nine months ended September 30, 2024, compared to the same period in 2023:
• Development and Redevelopment proportionate property net operating income increased by $2.0 million, or 38.8%, due primarily to the lease up of delivered apartment homes.
• Operating proportionate property net operating income increased by $3.1 million, or 4.0%. The increase was attributable primarily to a $5.2 million, or 4.7% increase in rental and other property revenues due to a $93 increase in average monthly revenue per apartment home to $2,385.
• Other proportionate property net operating income increased by $0.2 million, or 3.9%. The increase was due primarily to additional revenue in 2024 at The Benson Hotel partially offset by lower revenue at 1001 Brickell Bay Drive.
Non-Segment Real Estate Operations
Operating income amounts not attributed to our segments include property management costs, casualty losses, and, if applicable, the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.
Depreciation and Amortization
For the three months ended September 30, 2024, compared to the same period in 2023, Depreciation and amortization expense increased by $5.7 million, or 32.2% due primarily to the substantial completion of Upton Place and Strathmore Square in 2024. For the nine months ended September 30, 2024, compared to the same period in 2023, Depreciation and amortization expense increased $14.0 million, or 27.4% due primarily to the substantial completion of Upton Place and Strathmore Square, as well as the completion of The Benson Hotel during the second quarter of 2023.
General and Administrative Expenses
For the three and nine months ended September 30, 2024, compared to the same periods in 2023, General and administrative expenses decreased by $0.4 million, or 5.5%, and $0.6 million, or 2.5%, respectively, due primarily to a decrease in expenses for consulting services per the Master Services Agreement with AIR, which concluded at December 31, 2023.
Interest Income
For the three months ended September 30, 2024, compared to the same period in 2023, Interest income decreased by $0.2 million, or 7.5%. For the nine months ended September 30, 2024, compared to the same period in 2023, Interest income increased by $0.5 million, or 6.6%. These changes were primarily due to interest earned on seller financing provided in connection with the sale of a land parcel in December 2023, partially offset by a reduction in invested cash.
Interest Expense
For the three and nine months ended September 30, 2024, compared to the same periods in 2023, Interest expense increased by $10.8 million and $21.6 million, respectively, due primarily to increased non-recourse construction loan draws and reduced capitalization as development projects are advanced and completed, partially offset by the repayment of certain non-recourse property debt in 2023 .
Realized and Unrealized Gains (Losses) on Interest Rate Contracts
We are required to adjust our interest rate contracts to fair value on a quarterly basis. As a result of the mark-to-market adjustments, we recorded unrealized losses of $2.6 million and $4.1 million, respectively, for the three and nine months ended September 30, 2024, compared to unrealized losses of $0.5 million and unrealized gains of $0.1 million, respectively, for the same periods in 2023. In addition, we realized gains of $1.5 million and $5.3 million for the three and nine months ended September 30, 2024, respectively, compared to realized gains of $1.5 million and $3.2 million, respectively, for the same periods in 2023.
Realized and Unrealized Gains (Losses) on Equity Investments
We measure our investments in stock based on its market price at period end and our investments in property technology funds at NAV as a practical expedient. In addition, we measure our investment in IQHQ at cost, less impairment if any needed, with subsequent adjustments for observable price changes of identical or similar investments of the same issuer since it does not have a readily determinable fair value. As a result of changes in the values of these investments, we recorded unrealized losses of $0.6 million and $48.1 million, respectively, for the three and nine months ended September 30, 2024. During the second
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quarter of 2024, we recognized a $47.0 million non-cash impairment on our investment in IQHQ. For the same periods in 2023, we recorded unrealized losses of $1.1 million and unrealized gains of $0.2 million, respectively.
Other Income (Expense), Net
Other income (expense), net , includes costs associated with our risk management activities, partnership administration expenses, fee income, and certain non-recurring items, as well as activity related to our Mezzanine Investment and Unconsolidated real estate partnerships. For the three months ended September 30, 2024, compared to the same period in 2023, Other income (expense), net changed by $1.9 million, or 95.0%, primarily due to a non-cash other than temporary impairment recognized on our investment in an unconsolidated investment in land held for development in the current period. For the nine months ended September 30, 2024, compared to the same period in 2023, Other income (expense), net changed by $0.1 million, or 0.8%, primarily due to the incremental expense associated with pre-existing long-term incentive partnership units recorded upon the resignation of one of our board members in the prior period, partially offset by a non-cash other than temporary impairment recognized on our investment in an unconsolidated investment in land held for development in the current period.
Income Tax Benefit (Expense)
Certain aspects of our operations, including our development and redevelopment activities, are conducted through TRS entities. Additionally, our TRS entities hold investments in one of our apartment communities and 1001 Brickell Bay Drive.
Our income tax benefit (expense) calculated in accordance with GAAP includes income taxes associated with the income or loss of our TRS entities. Income taxes, as well as changes in valuation allowance and incremental deferred tax items in conjunction with intercompany asset transfers and internal restructurings (if applicable), are included in Income tax benefit (expense) in our Condensed Consolidated Statements of Operations .
Consolidated GAAP income or loss subject to tax consists of pretax income or loss of our taxable entities and income and gains retained by the REIT. For the three and nine months ended September 30, 2024, we had consolidated net losses subject to tax of $9.7 million and $21.6 million, respectively, compared to consolidated net losses subject to tax of $5.0 million and $12.4 million, respectively, for the same periods in 2023.
For the three months ended September 30, 2024, we recognized an income tax benefit of $3.8 million, compared to an income tax benefit of $6.2 million for the same period in 2023. The decrease is due primarily to a change in estimate associated with finalizing the 2022 tax returns in the third quarter of 2023.
For the nine months ended September 30, 2024, we recognized an income tax benefit of $8.7 million, compared to an income tax benefit of $10.8 million for the same period in 2023. The decrease is due primarily to a change in estimate associated with finalizing the 2022 tax returns in third quarter of 2023, partially offset by the tax effect of fewer gains, increased depreciation, and interest expense associated with properties owned by, and activities of, our TRS entities.
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Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. Our critical accounting estimates that involve our more significant judgments and estimates used in the preparation of our consolidated financial statements are detailed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of Aimco’s and Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes in our critical accounting estimates from those reported in our Form 10-K, other than as noted in our Form 10-Q for the period ended June 30, 2024, and we believe that the related judgments and assessments have been consistently applied and produce financial information that fairly depicts the financial condition, results of operations, and cash flows for all periods presented.
Non-GAAP Measures
We use EBITDAre and Adjusted EBITDAre in managing our business and in evaluating our financial condition and operating performance. These key financial indicators are non-GAAP measures and are defined and described below. We provide reconciliations of the non-GAAP financial measures to the most comparable financial measure computed in accordance with GAAP.
Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization for Real Estate ("EBITDAre")
EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and allow for comparison of our credit strength to different companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income (loss) as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. Nareit defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation, and amortization expense, further adjusted for:
• gains and losses on the dispositions of depreciated property;
• impairment write-downs of depreciated property;
• impairment write-downs of investments in unconsolidated partnerships caused by a decrease in the value of the depreciated property in such partnerships; and
• adjustments to reflect our share of EBITDAre of investments in unconsolidated entities.
EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted to exclude the effect of the following items:
• net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests;
• realized and unrealized (gains) losses on interest rate contracts, which we believe allow investors to compare a measure of our earnings before the effects of our capital structure and indebtedness with that of other companies in the real estate industry; and
• the non-cash (income) loss recognized on our Mezzanine Investment.
• the non-cash (income) loss recognized on a passive equity investment.
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The reconciliation of net income (loss) to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2024 and 2023, is as follows ( in thousands ):
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net income (loss)
$
(20,065
)
$
1,674
$
(88,364
)
$
(3,952
)
Adjustments:
Interest expense
19,031
8,252
49,221
27,633
Income tax (benefit) expense
(3,814
)
(6,210
)
(8,731
)
(10,823
)
Gain on disposition of real estate
—
—
—
(1,878
)
Unrealized (gains) losses from investment in unconsolidated partnerships
2,597
—
2,597
—
Depreciation and amortization
23,545
17,804
65,123
51,106
Adjustment related to EBITDAre of unconsolidated partnerships
218
25
650
589
EBITDAre
$
21,512
$
21,545
$
20,496
$
62,675
Net (income) loss attributable to redeemable noncontrolling interests in consolidated real estate partnerships
(3,659
)
(3,610
)
(10,817
)
(10,460
)
Net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships
572
(447
)
1,399
(1,060
)
EBITDAre adjustments attributable to noncontrolling interests
(1,000
)
22
(2,505
)
10
Mezzanine investment (income) loss, net
628
757
1,884
1,013
Realized and unrealized (gains) losses on interest rate contracts
1,148
(955
)
(1,164
)
(3,280
)
Unrealized (gains) losses on a passive equity investment
—
—
46,972
—
Adjusted EBITDAre
$
19,201
$
17,312
$
56,265
$
48,898
Liquidity and Capital Resources
Liquidity
Liquidity is the ability to meet present and future financial obligations. Our primary sources of liquidity are cash flows from operations and borrowing capacity under our loan agreements.
As of September 30, 2024, our available liquidity was $260.4 million, which consisted of:
• $82.6 million in cash and cash equivalents;
• $27.8 million of restricted cash, including amounts related to tenant security deposits and escrows held by lenders for capital additions, property taxes, and insurance; and
• $150.0 million of available capacity to borrow under our revolving secured credit facility.
As of September 30, 2024, we had sufficient capacity on our non-recourse construction loans to cover our remaining commitments on development and redevelopment projects of approximately $163.7 million. We also have unfunded commitments in the amount of $1.5 million related to four investments in entities that develop technology related to the real estate industry. Our principal uses for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital expenditures, and future investments. Additionally, our third-party property managers may enter into commitments on our behalf to purchase goods and services in connection with the operation of our apartment communities and our office building. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to historical levels.
We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for the next twelve months.
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In the event that our cash and cash equivalents, revolving secured credit facility, and cash provided by operating activities are not sufficient to cover our liquidity needs, we have the means to generate additional liquidity, such as from additional property financing activity and proceeds from apartment community sales. We expect to meet our long-term liquidity requirements, including debt maturities, development and redevelopment spending, and future investment activity, primarily through property financing activity, cash generated from operations, and the recycling of our equity. Our revolving secured credit facility matures in December 2024, prior to consideration of its one-year extension option that we intend to exercise.
Leverage and Capital Resources
The availability and cost 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. Any adverse changes in the lending environment could negatively affect our liquidity. We have taken steps to mitigate a portion of our short-term refunding risk. However, if property or development financing options become unavailable, we may consider alternative sources of liquidity, such as reductions in capital spending or apartment community dispositions.
As of September 30, 2024, approximately 90% of our outstanding non-recourse property debt had a fixed interest rate and approximately 10% had a variable interest rate, all of which was hedged. In addition, the weighted-average contractual rate on our non-recourse debt was 4.8% and 4.6% inclusive of interest rate caps, and the average remaining term to maturity was 5.9 years. Our use of interest rate caps may vary from quarter to quarter depending on lender requirements, recycling of interest rate caps between projects, and our view on forecasted interest rates.
While our primary sources of leverage are property-level debt and non-recourse construction loans, we also have a secured $150.0 million credit facility with a syndicate of financial institutions. As of September 30, 2024, we had no outstanding borrowings under our revolving secured credit facility, which requires that we maintain a fixed charge coverage ratio of 1.25X, minimum tangible net worth of $625.0 million, and maximum leverage of 60.0% as defined in the credit agreement. We are currently in compliance and expect to remain in compliance with these covenants during the next twelve months.
Changes in Cash, Cash Equivalents, and Restricted Cash
The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing and financing activities, which are presented in our Condensed Consolidated Statements of Cash Flows in Item 1 of this report.
Operating Activities
For the nine months ended September 30, 2024, net cash provided by operating activities was $46.2 million. Our operating cash flow is primarily affected by rental rates, occupancy levels, operating expenses related to our portfolio of apartment communities and general and administrative costs. Cash provided by operating activities for the nine months ended September 30, 2024, increased by $3.6 million compared to the same period in 2023, due primarily to increased net operating income driven by higher rents and the timing of balance sheet position changes, partially offset by increased interest expense.
Investing Activities
For the nine months ended September 30, 2024, net cash used in investing activities of $114.4 million consisted primarily of capital expenditures. Net cash used in investing activities for the nine months ended September 30, 2024, decreased by $149.8 million compared to the same period in 2023, due primarily to decreased capital expenditures and the purchase of a short-term treasury bill in the prior period.
Financing Activities
For the nine months ended September 30, 2024, net cash provided by financing activities of $39.3 million consisted primarily of proceeds from non-recourse construction loans, offset by common stock repurchases and distributions to redeemable noncontrolling interests. Net cash provided by financing activities for the nine months ended September 30, 2024, decreased by $68.3 million compared to the same period in 2023, due primarily to decreased proceeds from non-recourse construction loans, the sale of a participation in the Mezzanine Investment and the monetization of interest rate options in the prior period, offset by decreased principal repayments on non-recourse property debt.
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Future Capital Needs
We expect to fund any future acquisitions, development and redevelopment, and other capital spending principally with operating cash flows, short-term borrowings, and debt and equity financing. Our near-term business plan does not contemplate the issuance of equity. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK
Our chief market risks are refunding risk, that is the availability of property debt or other cash sources to refund maturing property debt, and repricing risk, that is the possibility of increases in base interest rates and credit risk spreads. We primarily use long-dated, fixed-rate, non-recourse property debt on stabilized properties in order to manage the refunding and repricing risks of short-term borrowings.
We use working capital primarily to fund short-term uses. We use derivative financial instruments as a risk management tool and do not use them for trading or other speculative purposes.
As of September 30, 2024, on a consolidated basis, we had approximately $81.3 million of variable-rate property-level debt outstanding and $365.1 million of variable-rate construction loans. The impact of rising interest rates in recent history has been mitigated by our use of interest rate caps, which as of September 30, 2024, provided protection for our variable interest rate debt. Our use of interest rate caps may vary from quarter to quarter depending on lender requirements, recycling of interest rate caps between projects, and our view on forecasted interest rates. As of September 30, 2024, we estimate an increase or decrease in our variable rate indices of 100 basis points with constant credit risk spreads, would have no material impact on interest expense.
As of September 30, 2024, we held interest rate caps with $799.4 million notional value. These instruments were acquired for $6.3 million and at September 30, 2024, were valued at $1.7 million.
As of September 30, 2024, we had $110.4 million in cash and cash equivalents and restricted cash, a portion of which earns interest at variable rates.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.