AIMCO Spin-Off

Question 1

Aimco’s revenue (Pre-Spin)

Answer 1

~$900MM

Question 2

Aimco’s EBITDA (Pre-Spin)

Answer 2

$750MM

Question 3

Aimco’s revenue trend

Answer 3

Revenue has grown 50bps over the last 4 years

Question 4

What is Aimco’s operating margin and trajectory?

Answer 4

Aimco’s current operating margin ~70% and it’s grown at a 50bps CAGR over the last 4 years

Question 5

Who are Aimco’s peers?

Answer 5

• Mid-American Apartment Co. (MAA)
• Camden Property Trust (CPT)
• Avalon Bay (AVB)
• United Dominion Realty Trust (UDR)
• Equity Residential (EQR)
• Essex Property Trust (ESS)

Question 6

Why did you choose these peers?

Answer 6

Within the apartment sector, these 6 names were those that most closely resembled Aimco with regards to both geographical concentration and portfolio size/quality.

Question 7

What does Aimco trade at? What has it traded at historically?

Answer 7

Aimco currently trades at 16.0x P/AFFO and historically has traded at 20.0x P/AFFO

Question 8

What do Aimco’s peers trade? What have they traded at historically?

Answer 8

Aimco’s peers currently trade at 19.0x P/AFFO and historically have traded at 22.0x P/AFFO

Question 9

What are Aimco’s peers’ leverage?

Answer 9

Aimco’s peers’ average leverage is 5.5x Net Debt/EBITDA

Question 10

What was Aimco’s EBITDA interest coverage (Pre-Spin)?

Answer 10

Pre-Spin EBITDA interest coverage ratio: 3.5x

Question 11

What is Aimco’s Fixed charge coverage ratio (Post-Spin)?

Answer 11

Post-Spin AIRC’s Fixed charge coverage ratio: 4.5x

Question 12

What was Aimco’s leverage (Pre-Spin)?

Answer 12

Aimco’s Pre-Spin Net Debt/EBITDA was 8.0x with $300MM cash and $5.0Bn Debt

Question 13

What was Aimco’s leverage (Post-Spin)?

Answer 13

AIRC’s Post-Spin Net Debt/EBITDA is 6.5x with $0MM cash and $3.5Bn Debt

Question 14

Walk me through this deal/Tell me about Aimco

Answer 14

Sure thing…we advised on a reverse spin-off transaction for AIMCO, a North American self-managed multifamily REIT. Pre-spin, AIMCO was focused on the ownership, management, development and redevelopment of quality apartment communities in the largest markets in the US. AIMCO was one of the largest multifamily REITs, owning over 130 apartment communities nationwide.

Question 15

What was Aimco’s market cap (Pre-Spin)?

Answer 15

Aimco’s Pre-Spin market cap was approximately $7Bn

Question 16

What was Aimco’s Agg Value/TEV (Pre-Spin)?

Answer 16

Aimco’s Pre-Spin Agg Value/TEV was approximately $11Bn

Question 17

What Aimco’s NAV (Internal, Pre-Spin)

Answer 17

Aimco’s internal Pre-Spin NAV was $9Bn

Question 18

What was Aimco’s NAV/sh (Pre-Spin)?

Answer 18

Aimco’s NAV/sh Pre-Spin:

• Internal: $59/sh
• Consensus: $47/sh

Question 19

What was Aimco’s Pre-Spin profit/net income margin?

Answer 19

Aimco’s Pre-Spin profit/net income margin was 50%

Question 20

What were Aimco’s primary markets?

Answer 20

Atlanta, New York, Boston, Chicago, Miami, Denver, Seattle, Philly, LA, Bay Area

Question 21

Why did Aimco pursue this reverse spin-off? (High level answer)

Answer 21

There are several reasons, but at a high level, management saw Aimco as being two distinct business rolled into one 1) a self-administered property manager and 2) a developer/redeveloper

Question 22

What was the financial rationale for pursuing the spin-off? (Long answer)

Answer 22

There were several rationalizations:

1) Aimco historically traded at a significant discount to NAV (-32% compared to a peer average of -17%) which made equity issuance prohibitively dilutive. The CEO believed today’s marginal price setter values yield (as measured by FFO), simplicity/predictability in operations/acquisitions and low corporate management costs
2) A spin-off could increase FFO by eliminating drag from development and redevelopment projects and reducing G&A
3) Aimco had the lowest tax basis among multifamily peers that constituted a historical impediment to pursuing value accretive transactions (tax basis was 40% TEV as opposed peers’ average of 65%). Executing a taxable reverse spin-off would refresh Aimco’s tax basis.
4) A spin-off could reduce Net Debt/EBITDA from 8.0x to 6.0x in the near term and 5.0x in the long term (peers average leverage of 5.3x) by spinning out the most highly levered development assets.

Question 23

Was the reverse spin-off a good idea?

Answer 23

Though Aimco’s stock has materially outperformed its peers (+10% its nearest peer) and the RMZ (US REIT index) since announcing the spin, I think many of the same goals could have been achieved without incurring the massive upfront tax bill (~$5/sh), transaction costs and activist investor pushback.

-Greater dispositions and deleveraging (such as the California JV selling 39% on $1.2Bn in equity at a 4% cap rate), simplicity in future capital allocation, improved investor relations and sale of the enterprise given robust private market demand all could have unlocked shareholder value.

Question 24

How does Aimco/AIRC differentiate itself from its competitors?

Answer 24

1) Aimco offers price point differentiation relative to its competitors whose portfolios are top heavy and swollen with high priced assets

2) AIRC offers greater exposure to LA, Boston, Philly, San Diego and Miami relative to peers and tilts more suburban
- -Moreover, lower exposure to urban assets in the Bay Area and NYC will benefit shareholders in the near term given “reverse urbanization” trends as a result of WFH

Question 25

Why was Aimco trading where it was/at a significant discount to NAV?

Answer 25

There are several reasons Aimco traded at such a substantial discount to NAV:

1) Balance sheet: Aimco was an outlier amongst peers in terms of amount, duration and cost of leverage (AIV: 8.0x Net Debt/EBITDA, Peers: 5.3x Net Debt/EBITDA)
2) Portfolio perception: Aimco was an outlier amongst peers in terms of its portfolio’s age (Average asset age of 40 yrs and average asset age of 20 for peers)
3) Investor communication: Many of Aimco’s oldest assets had been recently renovated (which would have assuaged concerns regarding portfolio age relative to peers) but the market was unaware of that fact.
4) Overly complex transactions/capital allocation: Investments in non-core assets like the Miami Brickell Bay office building and in complex JV structures like the San Francisco Parkmerced (apartment community) loan ($275MM subordinated loan with a 10% interest rate along with a 10-year option to purchase 30% of the partnership that owns Parkmerced for $1MM).

Question 26

What were some risks in pursuing the spin-off?

Answer 26

There were several risks that warranted consideration, the primary ones were:

1) Significant tax consequences for shareholders
2) Shareholder pushback via activism
3) Destruction of shareholder value at Remainco: it was very small and thinly capitalized

Question 27

Would you invest in Aimco? Why?

Answer 27

Yes I would, for 3 reasons:

1) By spinning of its entire development/redevelopment portfolio, Aimco removed all the company’s riskiest assets, leaving only stabilized income producing assets in fast growing metro areas (like the sun belt). The AIRC portfolio offered superior price point diversification relative to peers and more exposure to suburban markets than peers. Additionally, offers less NYC and Bay Area exposure than peers, good for shareholders in the long terms.
2) Genuinely have a very strong and experienced management team and best in-class operations
3) AIRC still trades at a discount to NAV (~20% discount to NAV)

Question 28

If you were to invest in Aimco, what would be your thesis?

Answer 28

I find the company compelling for three key reasons:

1) Aimco has the most well diversified portfolio relative to its peers on a price point and geographic basis
2) Has best in class operations and management team (Has 73.1% operating margins, compared to a peers who settle at around the mid 60s)
3) Trading at a significant discount to NAV and a significant discount to peers:

• P/AFFOx=16.3 vs. Peer average of 18.7x
• 32% discount to NAV vs. Peer average of 17%

Question 29

What are some risks to investing in AIRC?

Answer 29

There are several risks worth considering:

1) Competitive residential housing pressures could limit AIRC’s ability to lease apartment homes or increase or maintain rents
2) Currently robust private market demand could sour by the time we are looking to monetize our investment
3) Favorable demographic trends could halt or even reverse

Question 30

What is Aimco’s consensus cap rate?

Answer 30

Pre-Spin Aimco’s consensus cap rate was 5.1%

Question 31

Describe your valuation work on the deal

Answer 31

I prepared NAV valuation (compared NAV implied by internal figures to NAV implied by consensus figures) and development pipeline analysis (aggregated data on current development/redevelopment and construction in progress and calculated yields to compare against peers).

1) Internal NAV = $59/sh (4.85% cap rate, $580MM NOI and $1.2Bn in development/redevelopment)

2) Consensus NAV = $47/sh (5.1% cap rate, $580MM NOI and $100MM in development/redevelopment)
- Consensus valued AIV real estate at $11.4Bn as opposed to AIV’s internal estimate of $12.0Bn ($600MM discrepancy)
- Attributed $100MM value to Aimco’s $1.2Bn development/redevelopment portfolio (per internal estimates)
- ^^Demonstrates ineffective investor relations strategy

3) Development pipeline analysis was meant to demonstrate that 1) the market does not recognize the 17k units of additional pipeline AIV claimed to possess and 2) Peers with far larger development pipelines (according to consensus) did not suffer from the same valuation issues

Question 32

Please describe your role on the deal

Answer 32

My role on the deal was focused on three primary workstreams:

1) I prepared NAV valuation (compared NAV implied by internal figures to NAV implied by consensus figures) and development pipeline analysis (aggregated data on current development/redevelopment and construction in progress and calculated yields to compare against peers).
2) I created the investor presentation laying out remainco’s portfolio and articulating its value proposition going forward (Redevelopment and development focused total return investing approach with emphasis on long term transactions and ability to invest across the capital structure as warranted). Separately, I also worked with an Evercore associate to build the new Aimco investor presentation. Both presentations were constructed in response to increased investor activism engagement.
3) I was given a lot of freedom in putting together the slide deck for the board presentation, which reviewed our conclusions and overall perspective on the proposed reverse spin-off. The deck reviewed several key points including:

1) Whether aimco was truly undervalued relative to peers and if so, why?
2) If there was a disconnect between internal Aimco NAV and third party perspectives
3) How Aimco’s development pipeline compares to peers
4) Whether a taxable spin-off was the right transaction to close the valuation gap
5) How such a spin-off should be structured (new aimco should be higher leverage given its more stable asset base and remainco should be overcapitalized given how small it would be)

Question 33

Was it a good deal? Why?

Answer 33

Tough to say given how recently the spin-off actually occurred. While the company did close the trading price vs. NAV valuation gap by about 12%, AIRC and AIV combined are still trading well below the company’s stated pre-spin NAV of $59/sh. Furthermore, as our team predicted, the company incurred significant advisory fees to address Land & Buildings activist investor grievances. Lastly, though the company engineered a partial remedy to the transactions tax consequences for shareholders, it drastically altered the shareholder base of AIV and rendered it a much more thinly traded stock (replaced by Tesla on the NYSE). If AIRC keeps its capital allocation strategy simple and transparent and pursues opportunistic dispositions, the spin-off could be a success. However, the success of the spin also hinges on AIV’s trading performance which will largely be determined by management’s capital allocation going forward and its ability to limit execution risk.

Question 34

How did the deal perform?

Answer 34

Currently AIRC + AIV are trading up 20% since the spin-off was announced, but significant investor churn and continued protestation on the part of activist investor Land & Buildings has created some trading noise. Will have to wait and see how equity research and analyst estimates look in the coming months.