Higher leverage essential for expansion
As we’ve already seen, REITs such as Apartment Investment & Management Company (or AIMCO) (AIV) have to pay at least 90% of their taxable income to investors as dividends. Higher dividend payout by many REITs forces management to go for higher leverage to expand real estate holdings. This results in higher interest outgo, thereby reducing their earnings. On the other hand, expansion in real estate holdings creates additional sources of income for leveraged REITs. So how good is management in converting the higher leverage to its advantage?
As of the end of fiscal 2014, AIMCO’s (AIV) consolidated debt was $4.1 billion, down by 5.8% over the previous year. Over the last five years, AIMCO’s (AIV) total debt declined from $5.2 billion in 2010 to the present level.
AIMCO’s (AIV) debt-to-equity ratio reached its high of 3.9 in fiscal 2011. Since then, it has declined consistently to reach a low of 2.7 in 2014. This is the lowest debt-to-equity ratio recorded by the company for the last nine years. As of June 2015, AIMCO’s (AIV) debt-to-equity ratio at 2 is higher than the industry average of 1.1.
A peer group comparison shows that AIMCO’s debt-to-equity ratio is the highest. AvalonBay Communities (AVB) had the lowest debt-to-equity ratio of 0.7. It’s followed by Essex Property Trust (ESS) at 0.85 and Camden Property Trust (CPT) at 0.89. The iShares US Real Estate ETF (IYR) invests 0.73% of its portfolio in AIMCO.
Higher share of fixed rate debt
As of the end of fiscal 2014, 91% of AIMCO’s leverage consisted of property-level, non-recourse, long-dated debt, and 6% consisted of perpetual preferred equity. That combination reduces the refunding and repricing risk.
The weighted average maturity of property-level debt was 8.1 years, with 3.3% of unpaid principal balances maturing in 2015 and, on an average, 7.5% maturing each year from 2016 through 2018. Approximately 97% of the property-level debt was fixed-rate, which provides a hedge against increases in interest rates, capitalization rates, and inflation.
In the next part of this series, we’ll analyze AIMCO’s valuation.