AIMCo's Days of Easy Growth Are Over

Analysts think shares of this affordable apartment REIT are poised to weaken.
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While many of the REIT world's blue-chip names remain mired in a months-long slump, one distinctly blue-collar apartment REIT is charging ahead.

Apartment Investment and Management Company

(AIV) - Get Report

has bucked the industry trend, rising 13.4% since the beginning of the year, while the

SNL Securities

REIT Index has lost .92% -- and the latter includes a hefty dividend of 8.6%.

But before investors jump on board, they should be aware that a growing chorus of analysts and money managers are questioning whether AIMCo can keep up its winning ways. Too much of the firm's profit growth has relied, they say, on the acquisition of limited partnership units -- a roll-up play that has nearly run its course. And the existence of a turbocharged executive option plan leaves others wondering if the company's long-term growth is being sacrificed on the altar of short-term profitability. These questions become all the more pressing considering the stock trades at almost 10 times 1999 cash flow, a significant premium to that of the average large apartment REIT, which trades at only 8.7 times cash flow.

AIMCo owns one of the largest stables of "affordable housing" -- those apartment units whose rental payments are subsidized by the

U.S. Department of Housing and Urban Development

. The Denver-based company controls over 380,000 apartment units from coast to coast, mostly class "B" units that provide basic shelter and little more. "They are the Chevrolet of the apartment industry," quips

Robinson Humphrey

analyst Chris Marinac. "They serve the renter-by-necessity as opposed to the renter-by-choice." Marinac rates the stock a buy and Robinson Humphrey has banked the company in the past three years.

While not glitzy, the business has been very profitable. In each of the last three years AIMCo has grown its funds from operations or FFO -- a REITs measure of cash flow which adds back real estate depreciation expense -- in excess of 20%. And most analysts expect the growth to continue: Consensus estimates compiled by

First Call

estimate AIMCo's FFO will grow from $3.42 in 1998 to $4.07 in 1999 and $4.71 in 2000.

Nor has the company had to resort to debt financing. AIMCo sports a debt-to-equity ratio of 0.69 vs. an industry average of 2.48, and interest coverage of more than 2.6 times. That cash flow enables AIMCo to pay a dividend of $2.50, which makes a current yield of 6.2%.

The Days of Easy Growth May Be Over

The growth at AIMCo has been unparalleled by other public real estate companies and is largely due to a strategy devised, and brilliantly executed, by Chairman Terry Considine. It was Considine who recognized a deeply undervalued asset in

National Housing Partners

or NHP -- an amalgamation of low-to-moderate income apartment developments owned by a series of limited partnerships.

But changes in the tax laws beginning in 1986 meant that by the mid-1990s, most of the limited partners were holding investments with little public market value, while NHP was experiencing problems of its own as the units' general partner. By purchasing the general partnership units from NHP, and offering buyouts to the limited partners, AIMCo was able to pick up many of the apartment complexes for pennies on the dollar. Furthermore, Considine paid for these acquisitions by issuing "operating partnership units," ultimately convertible into shares of AIMCo itself. "The partners think their holdings are worthless or near worthless, and any offer is better than nothing, especially given the illiquidity of the partnership units," says Marinac.

The ability of Considine to buy out the limited partners, make slight improvements to the properties and show exponential external growth from these deals has been remarkable. "AIMCo has had a great growth pipeline, and the market has rewarded the company for the growth," says Marc Halle of

Alpine Management and Research

, a New York real estate investment manager who holds no position in AIMCo shares. "The limited partner buyouts have made growth look exceptional, and that's what investors see."

However, some are beginning to wonder if the days of easy growth are coming to an end. "AIMCo is a consolidation game, and at some point that has to come to an end," said one buyside manager. "I don't know how long that keeps going but when it's over, their rapid growth ends, and investors will leave quickly."

Most analysts believe AIMCo will continue to post strong earnings through next year, thanks to the continued roll-up of partnerships. But they also cite another factor -- a large number of "high-performance units" -- in effect, turbocharged stock options available to senior management for either outperforming their peers or providing 30% total return to shareholders between 1998-2000. Though asked for comment, the company hasn't returned any phone calls.

"There are a lot of portfolio managers that are wary of owning AIMCo through 2000," says

Legg Mason's

Rod Petrik, who has no rating on the shares, and whose firm has performed no underwriting for the company. "Most think AIMCO will do everything possible to meet the short-term targets, possibly at the expense of longer-term objectives."

Adds Marinac, "It's fair to wonder if the

high-performance options will impact the stock price. Once the incentives are gone, it may be difficult to reload and re-energize."

This effect could be compounded by any economic slowdown, which might disproportionately hurt AIMCo and other lower quality apartment owners. "They own a lot of very mediocre assets," said the buysider. "That's the last place I want to be when the economy slows. Their type of renters will be quick to default."

A Nagging Subpoena

Not helping the company's case is AIMCo's receipt in July of a subpoena relating to the management of its HUD-subsidized properties. Issued by a federal grand jury, the subpoena requests a number of records relating to former NHP properties and a group purchasing program operated for HUD properties. In the words of Legg Mason's Petrik, "A grand jury subpoena for your files and records of HUD-managed properties is not good."

While sources at the company say the ongoing investigation (a subpoena was originally served on NHP in 1997) should not result in any material action against the company, no additional explanation was offered. Marinac thinks "You have to take it seriously -- it certainly merits careful scrutiny," even though he doesn't think the issue will ultimately amount to much.

All of these issues are beginning to show up in AIMCo's share price, which has languished since early July. When I asked resident technician

Gary B. Smith

to take a look at AIMCo from a technician's perspective, he agrees that the future looks challenging for AIMCo shareholders.

Which leaves us with just one little problem. If the company's prospects are indeed dimming, then why are insiders actively acquiring the shares? In June and July, four insiders -- including the company's president -- bought 23,000 shares between 40 and 42 a share, just below AIMCo's 52-week high of 44 1/8. Is it a signal -- or a smoke signal?

In sum, says Jim Trowbridge, portfolio manager with

Invesco Realty Advisors

in Dallas. "You have a high-growth, higher-risk company where it is terribly difficult to understand all of the nuances of the limited partnership game."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.