Description

Thesis:

I recommend the purchase of shares of Aimco (AIV), a multi-family REIT with properties in Boston, NY, Miami, et all.  I think that over the next three years, the stock should quintuple.  I believe that it is an exceptional opportunity to invest in a very attractive and tax advantaged asset class, with multiple tailwinds, that should benefit substantially from inflation, higher mortgage rates and resumption of immigration. 

We are creating these mostly Class A buildings in areas with barriers to supply at 50% of replacement cost and 70% discount to NAV.   

Description of the business

Grizzlybear had an excellent write-up a year ago, I highly recommend reading it.  The situation has changed in the last thirteen months.  The price is slightly lower, rents and asset values are up sharply.  Inflation and mortgage rates are also much higher which benefits the investment.

Aimco owns mostly Class A properties in NYC (Manhattan), Boston Metropolitan Area, Washington DC, Miami, Atlanta, Miami Beach, Chicago, Denver, Aurora Co, San Diego, Seattle, Redwood City CA.   The company has both established, stabilized properties and properties in either development or redevelopment.  A very detailed description is available in the October 2021 presentation on the firm’s website.  The company also owns a mezzanine loan to an existing property in San Francisco California, and an option to participate in additional development of market rate housing at the same property.

Aimco is selling at an 11.6% cap rate based on my 2025 forecasts, while according to industry participants, Class A & Class B properties are selling at sub 4% cap rates in supply constrained markets.  

Long term prospects

I am very optimistic on rent growth in the markets Aimco operates.  These are generally markets with high barriers to construction and very high construction costs.   I think the demand for rentals in their markets will continue to increase ahead of supply, and this will lead to rental increases comfortably ahead of inflation. 

In the short-run, higher mortgage rates increase demand for rentals as ownership becomes more expensive.

In the long-run, resumption of immigration post Covid-19 hiatus, Biden’s free for all on the southern border, Ukraine War (5MM people have fled Ukraine, Russia and Belarus) and resumption of emigration from China (WSJ article from May 14^th 2022 https://www.wsj.com/articles/chinas-covid-lockdowns-drive-middle-class-citizens-to-head-abroad-11652460449?mod=world_major_1_pos1) will significantly increase demand for apartments in the cities that Aimco operates.  Given 98%+ occupancy, impact on rents and asset values will be material. 

Management

Aimco’s management does not seem to me that great or shareholder oriented.  A couple of years ago, they were roundly criticized by Jonathan Litt.  However, the chairman does own a lot of stock and bought quite a bit of stock last year, so there is skin in the game.  

SG&A is absurdly high at $40MM per annum, should be more like $10-15MM, although SG&A does include development costs. 

The one mitigating factor is the discipline of take-over market.  There are no controlling shareholders, and while this is a Maryland REIT, the staggered board ends in 2024. 

Financials

Stabilized properties generated $24.6MM in NOI in Q1 2022.  Q1 is generally the least profitable quarter due to heating and snow removal expenses.  So normalized NOI = $105MM per annum.  Q1 2022 saw 9.4% revenue and 14.3% NOI growth, and occupancy was 98.5% from 97.6% in Q1 2021.  New lease rents rose by 15.4% and renewal lease increases = 14.7%.  Assuming across the board 15% rent increase, and 25% NOI increase, gives us a run-rate of NOI = $130MM.  I expect these properties to be on a $145MM NOI run-rate in 2025.  [This is not adjusted for the sale of Fremont CA property.]

There are also several development and redevelopment properties.  One of them, Flamingo Point in Miami Beach, Florida, reached stabilized occupancy in April of 2022, more than six months ahead of schedule and at rental rates more than 25% ahead of underwriting.  It is at 98% occupancy.   Company claims that all construction is running on time and on budget.   I expect these properties to generate more than $130MM of NOI in 2025.  There remains around $300MM of cap ex to be spent to finish redevelopment.  [These figures are not adjusted for the future $100MM purchase in Ft Lauderdale.]

There is also a mezzanine loan to ParkMerced in San Francisco California, with a balance of = $345MM on 03/31/2022, which I expect to accrue to $450MM by 12/31/2024, and a $50MM investment in life science development real estate projects.  As part of the mezzanine deal, the company received an option to buy a 30% stake in a project to develop several thousand market rate apartments at the existing site for $1MM.   This option may become quite valuable in the future.

Capital structure

Debt = $1.525bn on 03/31/2022 (includes leaseholds)

Market cap =  $940MM on 05/13/2022 ($5.82 * 161MM assuming all options are exercised and all LP units are converted)

Valuation

There are two ways I think about it.

Approach A – what do we have today

Stabilized properties are on a run-rate of NOI = $130MM, so using cap rate = 4%, worth = $3.25bn.

Redevelopment properties (valued at $900MM on 03/31/2020) = $1.2bn (value on 03/31/2020 + 300MM in cap ex spent.)  Since 03/31/2020 was essentially the bottom, this is extremely conservative.

Mezzanine loan = $338MM

Option to participate in market rate development at Parkmerced SF CA = 0 – 100MM?

Investment in life science development = $50MM

Corporate SG&A burn = $40MM/0.04 = Negative $1bn

Debt = $1.525bn

Value: $3.25bn + $1.2bn + $388MM - $1bn - $1.525bn = $2.3bn or $14.30 per share.

Company in its October 2021 presentation claimed that NAV = $12 on 12/31/2022, however that figure is probably low since Aimco sold an asset in May of 2022 at 8% higher valuation that used in October of 2021, and development at Flamingo Beach, Miami came in 6 months ahead of schedule at rents 25% higher than projections.

Sensitivity analysis: at 5% cap rate, value = $10.40 per share. 

Approach B – what we will have in 2025

Stabilized properties are on a run-rate of NOI = $145MM ($3.625bn value at 4% cap rate)

Redevelopment properties are on a run rate of NOI = $130MM ($3.25bn value at 4% cap rate)

Mezzanine loan = $450MM on 12/31/2024

Investment in life science real estate development = $50MM

Option to participate in market rate development at Parkmerced SF CA = 0 – 100MM?

Debt = $1.6bn (adjusted for cashflows to be generated and cap ex & interest paid)

SG&A = $20MM per annum (cut in half due to investor pressure, end of development) = Negative $500M (4% cap rate)

Value: $3.625bn + $3.25bn + 500MM - $2.1bn = $32.75 on 12/31/2024. 

Sensitivity analysis: at 5% cap rate, value = $24.20 per share

Capital allocation

Historically it has not been very good.  In Q1 2022, the company bought back 0.13% of s/o (200K) around 10% higher than today’s stock price.

I am puzzled of course why the company is not buying back stock hand over fist, but rather investing in additional development projects. 

I am hopeful that the large stake owned by the chairman and the discipline of the takeover market will prevent management from making egregious mistakes.

Conclusion

An opportunity to buy a collection of primarily Class A multi family assets in premier apartment markets in the US, at 50% of replacement cost and 70%+ discount to NAV. 

Catalyst

Initiation of significant dividends in 2025.

Take-over bid from Blackstone, KKR or another real estate operator.

Catalyst

Initiation of significant dividends in 2025.

Take-over bid from Blackstone, KKR or another real estate operator.