Leveraged Breakdowns

Public REIT Valuation, Part Three: Reading the Supplemental

Introduction

This is part three of our series on REPE public valuation, one of many core real estate private equity skills we teach at Leveraged Breakdowns. If you’re just now diving into this series, I urge you to begin at part one. In the previous post (part two), we discussed the purpose of the various filings Aimco shares on its investor relations page. Now, this post will dive into one of those filings: the supplemental. But first, a word on organization – a critical habit to develop for a successful career in real estate private equity.

Organizing your Working Folder

Let’s go ahead and download all of the files mentioned in the last post to our local drive. I prefer to work on OneDrive because it automatically backs up my files. My personal folder hierarchy is “Deals > [Deal]”, so my primary directory for this project would be in “Deals > AIMCO.” Do whatever you want, but know that organization is everything.

Within your primary directory, create a folder called “Working Data Room” and inside “Working Data Room,” create another folder called “Filings” where you’ll save all of these files with informational names. Here’s how I’ve named my files:

  • AIV 1Q20 10Q
  • AIV 2019 10K
  • AIV 1Q20 ER & Supp
  • AIV 2020 Citi Global Property CEO Conference IP
  • AIV June 2020 IP
  • AIV 1Q20 Apartment List

Opening up the Supplemental

Okay, let’s begin by looking at the Supplemental, the file “AIV 1Q20 ER & Supp.” Public companies typically treat the supplemental as the highlight reel, making it a great place to start our own analysis. Below are my notes on various elements of the business as I read through the supplemental. You should use this as a resource to check yourself – did you catch everything I caught? Did you notice anything else that was important? Although we won’t begin our model until next week, as you read through the supplemental yourself, think about how each schedule might feed your NAV and cash flow projections for this business.

Aimco’s COVID Response

On doc p2/pdf3, the company highlights their response to COVID. Of all the facets of their business to highlight, why do you think the company chose to include the bullets below? What about them is particularly important to Aimco? Discuss in the comments section of this post, which I have recently opened to the public!

  • “We prefer short-cycle redevelopment to less flexible ground-up development”
  • “Why our portfolio is so diversified by geography and price point”
  • “Why our leverage is primarily long-dated, non-recourse property debt”

FYI – when referencing pages, I always call out both the document page and the PDF page to avoid any confusion. So if you’re confused what doc2/pdf3 means, it just means doc page 2 (the page number visually displayed on the document) and the PDF page (the page count your PDF viewer states).

Debt & Liquidity

Throughout the supplemental, Aimco emphasizes its liquidity. Why might that be the case? Well, first, liquidity represents the cash a company has plus the maximum debt it is able to issue, usually through its revolving credit facility (much like a really big credit card). In other words, how much cash does Aimco have access to if its back were against the wall? In highly uncertain times, liquidity provides comfort because it is a buffer against insolvency. If a company has cash on hand and extra potential cash via its revolving credit facility, it can weather a storm much better and interrupt fewer elements of its business plan than otherwise. In Aimco’s own words, its “balance sheet is safe and provides flexibility and abundant liquidity.”

Some highlights regarding Aimco’s liquidity:

  • Aimco has $1B of liquidity inclusive of cash on hand, its revolving credit facility, and excess refinancing proceeds due in the coming weeks. This is a healthy level of liquidity. (doc3/pdf4)
  • Regarding debt activity, Aimco drew down $300M on its bank lines, reduced 2020E capex by $150M (almost one-half), and undertook to increase available credit by another $720M: a $350M bank term loan and approximately $370M in proceeds from property loans, of which half are closed or rate-locked and half closing over the next 30 days (doc3/pdf4)

Another question for those of you engaging in the comments section – what book-value LTV does Aimco’s in-place debt imply? Is that high or low? If REPE, what sort of fund would its leverage levels be suitable for?

Debt Covenants

It’s worth noting that revolver draws can be constrained by more than their maximum commitment. Aimco must also maintain certain leverage ratios. In their supplemental, they flag one particular ratio: the fixed charge coverage ratio (FCCR). The terms of FCCR calculations vary slightly, but it is generally LTM NOI over NTM fixed charges (amortization + interest expense). Basically, Aimco must maintain a ratio of income-to-debt charges (amortization and interest) above 1.40x. Per its filings, Aimco has earned $2.08 of income for every dollar of fixed charges it is obligated to pay. Thus, Aimco is within a healthy degree of compliance of its debt covenants. Nevertheless, we’ll make sure to forecast these in our model.

Conclusion

The next post will finish our read of this supplemental and prime us for the start of our work in Excel. Reading financial statements is a critical real estate private equity skill, which is why I am focusing on it so heavily at the onset of this series. Excel really just represents the tip of the iceberg. The true legwork is in digesting and familiarizing yourself with every facet of a company. Once you do this enough times over a career in real estate private equity, you get familiar with the patterns. So keep pushing, and you’ll get there in no time. And don’t forget to engage in our brand new comments section, just below this post!

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