APARTMENT INVESTMENT & MANAGEMENT CO 10-Q

ITEM 2. MANAGEMENT’S 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 Quarterly Report on Form 10-Q contains or may contain information that is forward-looking, within the meaning of the federal securities laws, including, without limitation, statements regarding: the ongoing relationship between Aimco and AIR (the “Separate Entities”) following the Separation; the impact of the COVID-19 pandemic, 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. Risks and uncertainties that could cause actual results to differ materially from our expectations include, but are not limited to: the effects of the coronavirus pandemic on Aimco’s business and on the global and U.S. economies generally, and the ongoing, dynamic and uncertain nature and duration of the pandemic, all of which heightens the impact of the other risks and factors described herein, and the impact on entities in which Aimco holds a partial interest, including its indirect interest in the partnership that owns Parkmerced Apartments, and the impact of coronavirus related governmental lockdowns on Aimco’s residents, commercial tenants, and operations; 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; possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of real estate presently or previously owned by Aimco; the relationship between Aimco and Separate Entities after the Separation; the ability and willingness of the Separate Entities and their subsidiaries to meet and/or perform their obligations under the contractual arrangements that were entered into among the parties in connection with the Separation and any of their obligations to indemnify, defend and hold the other party harmless from and against various claims, litigation and liabilities; and the ability to achieve some or all the benefits that we expect to achieve from the Separation; and such other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (“SEC”). 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 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, 2020, 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 subsidiaries, collectively. Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted in the United States, or GAAP. These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading. Executive Overview Our mission is to make real estate investments, primarily focused on the multifamily sector within the continental United States, where outcomes are enhanced through our human capital so that substantial value is created for investors, teammates, and the communities in which we operate. Our value proposition includes our national platform organized around four regional and two satellite offices, consisting of a cohesive, talented, and tenured team and our proven investment process; a diversified portfolio, consisting of high-performing in-process value-add investments, a deep and growing pipeline, alternative investments, and stabilized assets; and our capital 29 Table of Contents redeployment plan of reallocating Aimco equity to higher returning investments and prudent recycling of capital. Our primary goal is outsized risk adjusted returns and accelerating growth for Aimco shareholders. • Platform: Our talented leadership with an average Aimco tenure of 10 years and nearly 20 years of diverse real estate industry experience combined with a disciplined and proven investment process. • Portfolio: We benefit from a deep and growing investment pipeline with $1.0 billion of development and redevelopment projects currently underway, over $2 billion of future opportunities under Aimco-control and more being explored. We add to this alternative investment strategies and a diversified portfolio of stabilized real estate to provide risk management and produce predictable cash flow. • Growth Plan: We have over $500 million of equity targeted for redeployment into high returning activities over the next 4-5 years offering investors a high performing, high return, vehicle with expected annualized returns on equity between 12-16% once optimal capital allocation is achieved. We are focused on providing superior total-return performance to shareholders, primarily through capital appreciation driven by accretive investment and active portfolio management over multi-year periods. We plan to reinvest earnings to facilitate growth and, therefore, do not presently intend to pay a regular cash dividend. Our financial objectives are to create value and produce superior, project-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 has been designed to leverage the Aimco investment platform and optimize risk adjusted returns for Aimco shareholders. Overall, we target a growth-oriented capital allocation, primarily weighted toward direct investment in ‘Value Add’ and ‘Opportunistic’ multifamily real estate. From time to time, we will allocate a defined portion of our capital into alternative investments including passive debt and equity investments (both direct and indirect). Aimco also plans to utilize its established platform and existing relationships to generate fees through service offerings. We have policies in place that support our strategy, guide our investment allocations, and manage risk, including to hold at all times a sizeable portion of its net equity in a diversified portfolio of ‘Core’ and ‘Core-Plus’ assets and before starting a project, require cash or committed credit necessary for completion. 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 the Aimco 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 Bethesda, Maryland. Our investment platform is managed by experienced professionals based in four regions: West Coast, Central and Mountain West, Mid-Atlantic and Northeast, and Southeast. 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. • 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, across our national platform. The Aimco Development and Redevelopment portfolio currently includes $1.0 billion of projects in construction and lease-up, located across five major US markets. In addition, we currently have $2 billion worth of pipeline opportunities under Aimco control and have the opportunity to add to our investment pipeline based on strategic relationships and through sourcing by regional investment teams. 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. • Managing and investing in other alternative investments Our current allocation to alternative investments includes: our indirect interest mezzanine loan to the Parkmerced partnership which owns 3,165 apartment homes and future development rights in San Francisco, California; our passive equity investments in IQHQ, Inc. (“IQHQ”), a privately-held life sciences real estate development company; 30 Table of Contents and RET Ventures, an early-stage real estate technology fund. We expect to allocate a portion of our capital to passive debt and equity investments, both directly and at the entity level. These prove attractive when warranted by risk adjusted returns, when we have special knowledge or expertise relevant to the particular investment or when the opportunity exists for positive asymmetric outcomes whether through strategic partnerships or otherwise. In addition, from time to time, we will use our established platform and existing relationships to generate fees through service offerings to third party real estate investors, owners, and capital allocators. • Owning a portfolio of stabilized core and core plus real estate Our current operating portfolio includes 29 apartment communities (25 consolidated properties and 4 unconsolidated properties) located in ten major US markets and 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 nationally diversified portfolio and with a bias toward long established residential neighborhoods that rank highly in regard to schools, employment fundamental 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. • Maintaining sufficient liquidity and utilizing safe financial leverage At all times, we will guard our liquidity by maintaining sufficient cash and committed credit. From time-to-time we will allocate capital to financial assets designed to mitigate risks elsewhere in the Aimco enterprise. Existing examples include our option to acquire an interest rate swap designed to protect against repricing risk on maturing Aimco liabilities. We expect to capitalize our activities through a combination of non-recourse property debt, construction loans, third-party equity, and the recycling of Aimco equity, including retained earnings. We plan to limit the use of recourse leverage, with a strong preference towards non-recourse property-level debt in order to limit risk to the Aimco enterprise. When warranted, we plan to seek equity capital from joint venture partners to improve our cost of capital, further leverage Aimco equity, reduce exposure to a single investment and, in certain cases, for strategic benefits. Results for the Three Months and Nine Months Ended September 30, 2021 The results from the execution of our business plan during the three and nine months ended September 30, 2021, are described below. Financial Results and Recent Highlights • Net income (loss) attributable to Aimco common stockholders per share was $(0.03) for the three months ended September 30, 2021, compared to net income per share of $0.01 for the three months ended September 30, 2020, and $(0.03) per share for the nine months ended September 30, 2021, compared to net income per share of $0.06 for the nine months ended September 30, 2020. • Strong demand for our Development and Redevelopment projects resulted in the execution of about 150 net new leases during the period, increasing NOI for that portfolio of properties by $0.8 million for the quarter. • We acquired, for $40 million, a collection of 58 luxury townhomes in Elmhurst, Illinois and benefit from the community’s adjacency to an existing Aimco asset. • We closed on $60 million of property financing and ended the third quarter with $413 million of liquidity, including cash and capacity on our revolving credit facility. • Revenue from our operating properties was up 6.8% year-over-year, with occupancy of 97.8%, up 280 basis points. Our business is organized around defined areas of strategic focus: value add and opportunistic real estate; alternative investments; investment activity; operating properties; balance sheet; and team and culture. Value Add, Opportunistic and Alternative Investments Development and Redevelopment During the three and nine months ended September 30, 2021, we made total capitalized investments of $54 million and $162 million, respectively, in our development and redevelopment projects. Construction Activity 31 Table of Contents • At the North Tower of Flamingo Point in Miami Beach, Florida, the major redevelopment continues on plan. Initial delivery of apartment homes began in the third quarter with construction completion scheduled for 2022 and NOI stabilization targeted for 2024. • Upton Place in Upper-Northwest Washington, D.C., is progressing on schedule and on-budget. The project is scheduled for completion in 2024 and NOI stabilization is targeted for 2026. • The Benson Hotel and Faculty Club on the Anschutz Medical and Life Sciences Campus in Aurora, Colorado, is on budget and on schedule for completion in early 2023 and NOI stabilization in late 2026. • In Corte Madera, California, development activity on Oak Shore, a community with 16 luxury single family rental homes, each averaging approximately 3,200 sf, plus eight accessory dwelling units, is underway and on plan with deliveries beginning in 2023 and NOI stabilization occurring in 2025. • In the Edgewater neighborhood of Miami, Florida, Aimco is completely renovating Hamilton on the Bay and expects apartment homes coming back online in 2022 and NOI stabilization targeted for 2024. Lease-up Progress • At 707 Leahy, in Redwood City, California, all apartment homes had been delivered and construction was complete as of 4Q 2020. As of September 30, 2021, the 110-unit property was 97% leased. • At The Fremont on the Anschutz Medical Campus in Aurora, Colorado, all apartment homes had been delivered and construction was complete as of 4Q 2020. As of September 30, 2021, the 253-unit property was 75% leased. • At Prism, located in Cambridge, Massachusetts, all apartment homes had been delivered and construction was complete as of 1Q 2021. As of September 30, 2021, the 136-unit property was 88% leased. • At Flamingo Point North Tower in Miami Beach, Florida, the initial units were delivered in third quarter with 193 of the 366 total units leased as of September 30, 2021. Alternative Investments • Parkmerced Mezzanine Investment : On November 26, 2019, we made a five-year, $275.0 million mezzanine loan to a partnership owning Parkmerced Apartments, located in southwest San Francisco (the “Mezzanine Investment”). The loan bears interest at a 10% annual rate, accruing if not paid from property operations. The Separation Agreement provides for AIR to transfer ownership of the subsidiaries that originated and hold the mezzanine loan, a related equity option to acquire a 30% interest in the partnership owning Parkmerced Apartments and the interest rate option, or swaption, that provides partial protection against future refinancing risk through 2024 to Aimco. At the time of the Separation and as of the date of this report , legal title of these subsidiaries had not yet transferred to Aimco. Until legal title of the subsidiaries is transferred, AIR is obligated to pass payments on such loan to us, and we are obligated to indemnify AIR against any costs and expenses related thereto. We have the risks and rewards of ownership of the Mezzanine Investment and have recognized an asset related to our right to receive the Mezzanine Investment from AIR. • Life Science Developer Investment : In the third quarter of 2020, we made a $50 million commitment to purchase common stock of IQHQ, a privately-held life sciences real estate development company. In the third quarter we funded a capital call of $12.1 million bringing our total investment to $24.6 million of the total commitment. Investment Activity Leasehold Agreements • On January 1, 2021, terms commenced on the leasehold agreements with AIR for 707 Leahy, The Fremont, Prism, and Flamingo Point North Tower. On June 1, 2021, terms commenced on the leasehold agreement with AIR for Oak Shore Land, a 15-acre plot of land in the San Francisco Bay Area on which we began construction of 16 single family rental homes and eight accessory dwelling units in June 2021. • The combined initial value of leasehold interest, as indicative of the initial fair market values of the leased assets at the time of lease inception, was $475.1 million. The combined annual leasehold payment for these five assets is $25.6 million. • The lease agreements provide Aimco the right, but not the obligation, to terminate each lease once the leased property is stabilized with AIR then having the option to retain ownership of the land and purchase the improvements from Aimco. Should AIR exercise its option, Aimco would be due the difference between the property’s fair-market value at stabilization and the initial value of the leasehold interest, less a 5% discount. Acquisitions • During the three months ended September 30, 2021, we acquired, for $40.0 million, Eldridge Townhomes, a 58-unit townhome community located in Elmhurst, Illinois that Aimco developed between 2018 and 2020. The 32 Table of Contents Eldridge Townhomes are located adjacent to an existing 400-unit Aimco community and the acquisition provides for continued operational efficiencies and improved NOI margins. We plan to hold the Eldridge Townhomes within our portfolio of stabilized operating properties. • During the three months ended September 30, 2021, we acquired for $7.3 million an additional two parcels adjacent to our Hamilton on the Bay apartment community in Miami’s Edgewater neighborhood. Combined with the six adjacent properties acquired in the second quarter of 2021, and land purchased as part of the initial acquisition of Hamilton on the Bay, we can now, in total, construct more than 1.1 million square feet of new development in this rapidly growing submarket. • During the three months ended September 30, 2021, we purchased seven acres of developable land in Colorado Springs, Colorado for $4.1 million that allows for the construction of 119 apartment and townhomes. • During the nine months ended September 30, 2021, we also acquired The Benson Hotel and Faculty Club (“Benson Hotel”) development property for $6.2 million, net of outstanding construction liabilities of $0.9 million. The development property consists of land and initial construction costs. The project is expected to be completed in the first quarter of 2023. • In July 2021, Aimco entered into a joint venture with Kushner Companies to purchase three undeveloped land parcels located in downtown Fort Lauderdale, Florida. The total contract price for the land is $49.0 million ($25.0 million at Aimco’s 51% share). Current zoning allows for the development of approximately three million square feet of multifamily homes and commercial space. The land purchase is expected to close in January 2022. We have paid $2.4 million of the $25 million commitment, related to our share of the contract price. Operating Property Results We own a geographically diversified portfolio of operating properties that produces stable cash flow and serves to balance the risk and highly variable cash flows associated with its portfolio of development and redevelopments and value-add investments. Our operating portfolio produced solid results for the three and nine months ended September 30, 2021. Highlights for the three months ended September 30, 2021 include: • Average daily occupancy at our operating portfolio of 97.8%, a 280-basis point improvement from the three months ended September 30, 2020. • Revenue, before utility reimbursements, of $34.6 million, up 6.8% year over year. • Expenses, net of utility reimbursements of $11.2 million, up 10.6% year over year, due primarily to higher real estate taxes and insurance. • Net operating income of our operating portfolio increased by 5.1% year over year. We measure residential rent collection as the amount of payments received as a percentage of all residential amounts owed. During the three months ended September 30, 2021, we collected 98.2% of all amounts owed by Aimco residents and recognized 99.2% of revenue, reserving 80 basis points as bad debt. 1001 Brickell Bay Drive, a waterfront office building in Miami, Florida owned as part of a larger assemblage, was 73% occupied on September 30, 2021. Balance Sheet Aimco capitalizes its activities through a combination of non-recourse property debt, construction loans, third-party equity, and the recycling of Aimco equity, including retained earnings. We plan to limit the use of recourse leverage, with a strong preference towards non-recourse property-level debt in order to limit risk to the Aimco enterprise. When warranted, we plan to seek equity capital from joint venture partners to improve its cost of capital, further leverage Aimco equity, reduce exposure to a single investment and, in certain cases, for strategic benefits. We are highly focused on maintaining ample liquidity. As of September 30, 2021, we had access to $413 million, including $253 million of cash on hand, $10 million of restricted cash, and the capacity to borrow up to $150 million on our revolving credit facility. Please refer to the Liquidity and Capital Resources section for additional information regarding our leverage. In evaluating our financial condition and operating performance we use non-GAAP measures, including Adjusted EBITDAre, which we believe is useful to investors and creditors as a supplemental measure of our ability to incur and service debt. Our Adjusted EBITDAre for the three and nine months ended September 30, 2021 was $17.6 million and $53.8 million, respectively. Please refer to the Non-GAAP Measures section for further information about the calculation of Adjusted EBITDAre and our leverage ratios. Please refer to the Liquidity and Capital Resources section for additional information regarding our leverage. 33 Table of Contents Financing Activity On April 15, 2021, the Company entered into a $150 million variable-rate non-recourse construction loan collateralized by our leasehold interest and AIR’s fee ownership interest in Flamingo North Tower. The initial term of the loan is three years and bears interest at one month LIBOR plus 360 basis points subject to a minimum all-in per annum interest rate of 3.85%. As of September 30, 2021, we had $118.8 million of principal outstanding. Certain consolidated subsidiaries have indemnified AIR for any losses it incurs as a result of a default on the loan by Aimco. On June 21, 2021, we entered into a $100.7 million variable-rate non-recourse construction loan collateralized by our fee ownership interest in Hamilton on the Bay. The initial term of the loan is three years and bears interest at one month LIBOR plus 320 basis points subject to a minimum all-in per annum interest rate of 3.45%. As of September 30, 2021, we had $25 million of principal outstanding. During the three months ended September 30, 2021, we closed on two non-recourse loans for $60 million. The loans have 10-year terms and a weighted average fixed interest rate of 3.09%. Proceeds from the loans were used to fund the acquisition of Eldridge Townhomes and other investment activities. If LIBOR ceases to exist during the term of these agreements, the documents associated with these agreements contain language to address a transition to another bench mark rate. It is anticipated LIBOR will be replaced with SOFR, however, if SOFR were to not be available the agreements contain alternate provisions. Financial Results of Operations We have three segments: (i) Development and Redevelopment; (ii) Operating Portfolio; and (iii) Other. Our Development and Redevelopment segment includes properties that are under construction, in pre-construction, or have not achieved stabilization, as well as land assemblages that are being held for development adjacent to our Hamilton on the Bay community and other land purchases. The Development and Redevelopment segment also includes our five leased properties; two are under construction and three are operational but have not achieved stabilization. Our Operating Portfolio segment includes majority owned residential communities that have achieved stabilized levels of operations as of January 1, 2020 and maintained it throughout the current year and comparable period. Our Other segment includes our recent Eldridge Townhomes acquisition, stabilized but not owned for a comparable reporting period, and 1001 Brickell Bay Drive, our only office building. 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. Net income decreased by $6.8 million and $13.5 million during the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, as described more fully below. Detailed Results of Operations for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020. Property Results As of September 30, 2021, our Development and Redevelopment segment included five properties that were under construction and three properties in lease-up. Our Operating Portfolio segment included 24 communities with 6,067 apartment homes, and our Other segment includes our recent Eldridge Townhomes acquisition, and one office building. 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 consolidated communities. In our condensed consolidated statements of operations, utility reimbursements are included in rental and other property revenues, in accordance with GAAP. Accordingly, the results of operations of our segments discussed below are presented on a proportionate basis and exclude the results of four apartment communities with an aggregate 142 apartment homes that we neither manage nor consolidate, notes receivable, our investment in IQHQ and the Mezzanine Investment. We do not include property management costs and casualty gains or losses, reported in consolidated amounts, in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below. Please refer to Note 9 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. 34 Table of Contents Proportionate Property Net Operating Income The results of our segments for the three months ended September 30, 2021 and 2020, as presented below, are based on segment classifications as of September 30, 2021. Three Months Ended September 30, Historical Change (in thousands) 2021 2020 $ % Rental and other property revenues, before utility reimbursements: Development and Redevelopment $ 3,196 $ — $ 3,196 100 % Operating Portfolio 34,591 32,376 2,215 6.8 % Other 3,360 3,107 253 8.1 % Total 41,147 35,483 5,664 16.0 % Property operating expenses, net of utility reimbursements: Development and Redevelopment 2,026 — 2,026 100 % Operating Portfolio 11,257 10,182 1,075 10.6 % Other 1,047 1,077 (30 ) (2.8 %) Total 14,330 11,259 3,071 27.3 % Proportionate property net operating income: Development and Redevelopment 1,170 — 1,170 100 % Operating Portfolio 23,334 22,194 1,140 5.1 % Other 2,313 2,030 283 13.9 % Total $ 26,817 $ 24,224 $ 2,593 10.7 % For the three months ended September 30, 2021, compared to 2020, our Operating Portfolio proportionate property net operating income increased by $1.1 million, or 5.1%. The increase was attributable to a $2.2 million, or 6.8% increase in rental and other property revenues due to higher average revenues of $72 per apartment home, and a 280-basis point increase in occupancy, offset partially by a $1.1 million, or 10.6%, increase in property operating expenses due primarily to higher real estate taxes and insurance. For the three months ended September 30, 2021, compared to 2020, total proportionate property net operating income increased by $2.6 million, or 10.7%. The results of our segments for the nine months ended September 30, 2021 and 2020, as presented below, are based on segment classifications as of September 30, 2021. Nine Months Ended September 30, Historical Change (in thousands) 2021 2020 $ % Rental and other property revenues, before utility reimbursements: Development and Redevelopment $ 7,889 $ — $ 7,889 100.0 % Operating Portfolio 100,609 98,336 2,273 2.3 % Other 9,489 9,458 31 0.3 % Total 117,987 107,794 10,193 9.5 % Property operating expenses, net of utility reimbursements: Development and Redevelopment 5,956 — 5,956 100.0 % Operating Portfolio 33,386 31,088 2,298 7.4 % Other 3,108 3,022 86 2.8 % Total 42,450 34,110 8,340 24.5 % Proportionate property net operating income: Development and Redevelopment 1,933 — 1,933 100.0 % Operating Portfolio 67,223 67,248 (25 ) (— %) Other 6,381 6,436 (55 ) (0.9 %) Total $ 75,537 $ 73,684 $ 1,853 2.5 % For the nine months ended September 30, 2021, compared to 2020, our Operating Portfolio proportionate property net operating income was flat year over year. This was the result of a $2.3 million, or 2.3%, increase in rental and other property revenues due to higher average revenues of $17 per apartment home, and a 140-basis point increase in occupancy, offset by increases in property operating expenses due primarily to higher real estate taxes and insurance. For the nine months ended September 30, 2021, compared to 2020, total proportionate property net operating income increased by $1.9 million, or 2.5%. 35 Table of Contents Non-Segment Real Estate Operations Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, write-off of straight-line rent receivables, and 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 and nine months ended September 30, 2021 depreciation and amortization expense was higher by $2.4 million and $5.4 million, respectively, when compared to the same periods in 2020, primarily due to additional assets being placed into service. General and Administrative Expenses For the three and nine months ended September 30, 2021, compared to the same periods in 2020, general and administrative expenses increased by $7.3 million and $17.6 million, respectively, due primarily to the difference of allocating costs in 2020 and the actual costs experienced running the separate business in 2021. Interest Expense For the three and nine months ended September 30, 2021, compared to the same periods in 2020, interest expense increased by $5.6 million, or 78.5%, and $19.4 million, or 104.7%, respectively, mainly due to interest associated with the notes payable to AIR entered into in conjunction with the Separation. Mezzanine Investment Income, Net On November 26, 2019, we made a five-year, $275.0 million mezzanine loan to a partnership owning Parkmerced Apartments, located in southwest San Francisco. The loan is junior to a $1.5 billion first mortgage position and bears interest at a 10% annual rate, accruing if not paid from property operations. As of September 30, 2021, the total receivable including accrued and unpaid interest was $330.0 million. During the three and nine months ended September 30, 2021, we recognized $7.6 million and $22.7 million, respectively, of income in connection with the mezzanine loan, compared to $6.9 million and $20.6 million during the three and nine months ended September 30, 2020, respectively. Unrealized Gains (Losses) on Interest Rate Options We are required to adjust our interest rate options to fair value on a quarterly basis. As a result of the mark to market adjustment we recorded an unrealized gain in the amount of $2.2 million and an unrealized gain in the amount of $10.6 million during the three and nine months ended September 30, 2021, respectively, and we recorded an unrealized loss in the amount of $1.0 million and $2.1 million during the three and nine months ended September 30, 2020. 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 such as service revenue. For the three and nine months ended September 30, 2021, compared to the same periods in 2020, other expenses, net decreased by $2.6 million and $6.4 million, respectively, due primarily to $1.0 million and $3.3 million of service fee revenue earned during the three and nine months ended September 30, 2021 with the remaining differences being RETV valuation changes. Income Tax Benefit Certain of our operations, including our Development and Redevelopment activities, are conducted through taxable REIT subsidiaries, or TRS entities. Additionally, our TRS entities hold investments in one of our apartment communities and 1001 Brickell Bay Drive. Our income tax benefit 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 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 gains retained by the REIT. For the three and nine months ended September 30, 2021 , we had consolidated net losses subject to tax of $7.9 million and $26.4 million, respectively. For the three and nine months ended September 30, 2020, we had consolidated net losses subject to tax of $5.7 million and $14.5 million, respectively. 36 Table of Contents For the three months ended September 30, 2021 , we recognized income tax benefit of $2.0 million, compared to $2.7 million during the same period in 2020. The change is due primarily to lower losses at our TRS entities. For the nine months ended September 30, 2021, we recognized income tax benefit of $9.9 million, compared to $6.7 million during the same period ended 2020. The change is due primarily to income tax benefit associated with internal restructuring, changes to our effective state rate expected to apply to the reversal of our existing deferred items, and higher losses at our TRS entities. Critical Accounting Policies and Estimates We prepare our condensed consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements relate to the impairment of long-lived assets and capitalized costs. Our critical accounting policies are described in more detail 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, 2020. There have been no significant changes in our critical accounting policies from those reported in our Form 10-K 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 Aimco’s 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 net income attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests, and unrealized gain on interest rate options, 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. Additionally, we exclude interest income recognized on our Mezzanine Investment that was accrued but not paid during the three and nine months ended September 30, 2021 and 2020. 37 Table of Contents The reconciliation of net (loss) income to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2021 and 2020 , is as follows (in thousands): Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Net (loss) income $ (4,846 ) $ 1,996 $ (3,798 ) $ 9,664 Adjustments: Interest expense 12,680 7,103 37,995 18,563 Income tax benefit (2,021 ) (2,673 ) (9,881 ) (6,728 ) Depreciation and amortization 21,709 19,296 63,065 57,673 Adjustment related to EBITDAre of unconsolidated partnerships 225 212 655 635 EBITDAre $ 27,747 $ 25,934 $ 88,036 $ 79,807 Net loss (income) attributable to redeemable noncontrolling interest consolidated real estate partnership (127 ) 121 (41 ) 349 Net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships (296 ) 1 (862 ) (4 ) EBITDAre adjustments attributable to noncontrolling interests 177 (326 ) (54 ) (678 ) Mezzanine investment income, net accrued (7,636 ) (6,870 ) (22,654 ) (20,553 ) Unrealized (gains) losses on interest rate options (2,231 ) 998 (10,608 ) 2,078 Adjusted EBITDAre $ 17,635 $ 19,858 $ 53,817 $ 60,999 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, 2021, our available liquidity was $413 million, which consisted of: • $253 million in cash and cash equivalents; • $10 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 million of available capacity to borrow under our revolving secured credit facility. We have commitments for, and expect to spend, approximately $294.2 million on development and redevelopment projects underway, with $281.2 million undrawn on our construction loans as of September 30, 2021. Our principal uses for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital expenditures, and future investments. 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 Aimco equity. Our revolving secured credit facility matures in December 2023, prior to consideration of its two one-year extension options. 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. Currently, interest rates are low compared to historical levels, and financing is readily available. Any adverse changes in the lending environment could negatively affect our 38 Table of Contents liquidity. We have taken steps to mitigate a portion of our repricing 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, 2021, approximately 42% of our leverage consisted of property-level, non-recourse, amortizing debt. Approximately 89% of our property-level debt is fixed-rate, which provides a hedge against increases in interest rates, capitalization rates, and inflation. The weighted-average remaining term to maturity of our non-recourse property-level debt was 5.7 years at a weighted-average interest rate of 3.09%. While our primary source of leverage is property-level debt, we also have a credit facility with a syndicate of financial institutions and construction loans. As of September 30, 2021, we had no outstanding borrowings under our revolving secured credit facility, swingline loan sub-facility and letter of credit sub-facility and had capacity to borrow up to $150 million. As of September 30, 2021, approximately 46% of our leverage consisted of notes payable to AIR, with a fixed interest rate of 5.2% and a term to maturity of 2.3 years, and approximately 12% consisted of our variable-rate non-recourse construction loans. Under our revolving secured credit facility, we have agreed to maintain a fixed charge coverage ratio of at least 1.25x, minimum tangible net worth of $625 million, and maximum leverage of 60% as defined in the credit agreement. We are currently in compliance and expect to remain in compliance with these covenants. 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, 2021, net cash provided by operating activities was $22.1 million. Our operating cash flow is primarily affected by rental rates, occupancy levels, and 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, 2021, decreased by $19.2 million compared to the same period ended in 2020 due to higher operating and general and administrative expenses. Investing Activities For the nine months ended September 30, 2021, our net cash used in investing activities of $216.6 million consisted primarily of capital expenditures and cash used in the purchase of The Benson Hotel, the Eldridge Townhomes, and construction costs on our development properties. Total capital additions totaled $134.9 million and $15.3 million during the nine months ended September 30, 2021 and 2020, respectively. We have generally funded capital additions with available cash and cash provided by operating activities. We exclude the amounts of capital spending related to commercial spaces and to apartment communities sold or classified as held for sale at the end of the period from the foregoing measures. We have also excluded from these measures indirect capitalized costs, which are not yet allocated to communities with capital additions, and their related capital spending categories. For further details regarding our development and redevelopment activities, including apartment communities constructed and delivered refer to the Executive Overview section above. Financing Activities Net cash from financing activities for the nine months ended September 30, 2021 increased by $93.2 million compared to the nine months ended September 30, 2020, due primarily to draws on construction loans, and proceeds from the $59.8 million non-recourse property loans entered into during the nine months ended September 30, 2021. Future Capital Needs We expect to fund any future acquisitions, redevelopment, development, 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 39 Table of Contents 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 2021 and beyond.