The art of the simplified portfolio

  • By Wendy Broffman
  • Published September 2015

$148,000, with a median income of $90,000, up 20 percent compared to the same quarter in 2014, while average revenue per apartment home was $1,760, up 14 percent year over year. Aimco's service record also is at an all-time high, according to satisfaction surveys the REIT conducts among customers.

"We are focused on customer service and that has many facets to it, but, in the end the assessment is made by the customer. We ask their opinion about everything and their responses drive what we do onsite and the customer focus comes from doing a good job on maintenance or from doing a good job upgrading the apartments," said Considine.

Over the past two years, Aimco customers have provided 170,000 answers to surveys revealing steadily rising satisfaction scores.

"In the first quarter, Aimco customers graded us at 4.12 stars out of five and (our teams) are working to earn that fifth star," said Considine.

Having satisfied residents allows Aimco to keep turnover low, which helps control turnover costs that run approximately $2,300 per turn.

Customers are now renting an Aimco apartment for an average of 24 months, up from 22 months just three years ago, and turnover has averaged 48 percent, lower than the peer average of 55 percent.

Diversification versus location
The well-known mantra of real estate may be location, location, location, but Considine believes diversification is the best way to prepare for inevitable market fluctuations.

While Aimco may have joined its REIT peers in targeting higher income renters, its portfolio remains the most diverse among them by not limiting its markets to both coasts.

Thirty-one percent of Aimco's NOI is derived from coastal California (soon to increase to around 33 percent as some redevelopment projects there are completed), 25 percent from the Mid-Atlantic, 15 percent from the Northeast, 10 percent from the Midwest (70 percent of that is from Chicago alone) nine percent from Southeast Florida and 10 percent from the Sunbelt.

Maintaining footprints in the Sunbelt, Southeast Florida and the Midwest helps Aimco avoid concentration risk.

"Every market will become overbuilt. It's just a question of when because that's how markets work. They tend to overshoot and then correct and our business strategy is to acknowledge that and be diversified so that we are invested in markets with different cycles and timing.

"So today our largest market is Washington, D.C. and it's been in correction mode for the last four or five years and yet our other markets that are in expansion mode have provided handsome returns. But there will be a future as there has been a past and Washington, D.C. will be in ascendency and it will be offsetting slower growth elsewhere," said Considine.

Recent acquisitions highlight the success of the REIT's diversification strategy, like last year's purchase of the 324-unit Saybrook Pointe Apartments in San Jose.

Aimco paid $118.4 million for the B class property and expects a levered eight percent IRR after property upgrades and operational improvements. The asset was 97 percent occupied at close of escrow.

Prior to acquiring Saybrook, Aimco was under-allocated in the Bay Area, deriving only five percent of its NOI from the market, but eventually wants to be invested there on a long-term basis at around seven to eight percent of the portfolio.

Aimco also would like to expand in Seattle, where it recently completed redevelopment in Q2 on the 135-unit, 2900 on First in the Belltown submarket, and in New York, having entered Manhattan with the purchase of five assets in 2003.

Considine's philosophy on diversification also extends to price point. He believes building tends to occur and continue in a market until it is no longer profitable, while new supply typically is delivered at the highest price points. Therefore, Aimco's portfolio of A, B and C-plus quality assets provide insulation from overbuilding.

Debt differences
Aimco recently shifted its strategy to maintain and grow a pool of unencumbered assets by repaying maturing mortgage debt. The REIT's use of non-recourse debt and preferred stock as its financing tool differs from most of its peers and helps protect it from asset-level issues.

"We have always used property debt versus corporate debt for several reasons. One, it is generally lower cost. Two, it is safer and three, it sometimes permits longer duration.

"For example, we have a 40-year loan on our balance sheet that would be very unusual in corporate America. It's a bit more cumbersome, but I place great value on predictability and caution, so at a time like this, when interest rates might fluctuate, we are relatively insulated because we have long-rated average maturities, limited exposure to refunding risk and not much pressure generated by fluctuations in the bond market," said Considine.

Aimco's only recourse debt at June 30 was its revolving credit facility, which the REIT uses for working capital and other short-term purposes and to secure letters of credit. At quarter-end, Aimco had outstanding borrowings on its revolving credit facility of $47.5 million and available capacity of $514.9 million, net of $37.6 million of letters of credit.

The REIT's conservative financing strategy and improved portfolio has resonated with several ratings agencies, which have increased Aimco's rating to investment grade.

Considine admits he would consider, if warranted, the possibility of selling assets and holding the proceeds in cash or using them for further deleveraging, but the REIT's predisposition is to stay fully invested in real estate.

"When you think about Aimco as a REIT," said Bezzant, "we are fully invested in real estate. That's what we get paid by our shareholders to do-to own real estate for them and return to them the profits by so doing. Our paired trades are an equation and we compare some very specific metrics, starting with our free cash flow internal rate of return, which is our primary investment metric.

"We want to invest up so obviously we're selling the lower anticipated IRR over a 10-year hold period and buying a property that delivers a higher IRR, but we also look at current cash flow on the properties and the growth rate for the submarkets the properties are located in, both historically and for the next five years. We look at median household incomes and median home values in the area of the properties to be bought and sold, as well as revenue per unit as part of the trade. At the end of the day, we have positive match movement," he said, adding that Aimco looks to recycle between five and 10 percent of its gross asset value annually, somewhere in the range of $500 million to $1 billion in a typical year.

Considine believes that Aimco's greatest challenge today is to "remain balanced-appropriately aggressive when the markets are good, but cautious about the inevitable overbuilding, market downturns and economic volatility that will occur, while maintaining our cultural values that allow us to be effective and fulfilled as we do our work," he said.