Leveraged Breakdowns

Public REIT Valuation, Part Four: Operational Metrics

Introduction

This is part four of our real estate private equity skill series focused on public REIT valuation, highlighting Aimco. We are beginning with a read through of the source materials because modeling is only the tip of the iceberg of a career in real estate private equity. The core of your job is to analyze and understand companies. Models are just a way to convey that understanding.

If you’re just joining us, begin here in post one. In this post, we will continue our read of the supplemental, which we began in the last post. There are a few other documents you should read through listed here, but we’ll crack those open in real-time as necessary when building our model. 

Operational Metrics

Below, we focus on several operational metrics that Aimco flags in its supplemental. This particular second quarter of 2020 is special when it comes to operations because it is the first pure-play COVID-impacted quarter we have to analyze. So, how did Aimco weather the pandemic in 2Q20? Below are bullets from the supplemental along with my own analysis and commentary to improve your understanding. But you should take your own spin through Aimco’s entire 2Q20 supplemental – it’s only 38 pages, and you don’t need to memorize every figure. Just get a decent impression in your mind for now. Once you’ve looked through the supplemental, keep reading below.

Turnover

Turnover reached an all-time low of 41.1%, down 270bps year-over-year (doc3/pdf4)

Turnover is what it sounds like. How many of your expiring residents choose to stay, and how many choose to leave? Last year, in 2Q19, turnover was 43.8%. This year, 41.1% of tenants have opted to leave. Seems like Aimco’s tenants prefer to stay put during the pandemic, and not move out upon expiration. This is a good thing.

Occupancy

Average daily occupancy of 96.6% was down 40bps YoY (doc3/pdf4)

Occupancy is worse in 2Q20 vs. 2Q19, down from 97.0%. But frankly, 96.6% occupancy is an admirable figure during a global pandemic. Just look at the other major retail sectors – mall landlords would consider a 40bps decline in occupancy to be a blessing. One question you may have is how could occupancy be worse YoY if the turnover has improved. Well, apartment buildings fill their units in two ways: renewing existing tenants (turnover) and signing new tenants (leasing). So if turnover has improved, but occupancy has still gone down versus last year, then new leasing must have gone down. So on the upside, more people are staying, but on the downside, fewer people are leasing

Lease Rate Growth

Blended lease rate increases of 4.2%, up 50bps YoY (doc3/pdf4)

Aimco is earning 4.2% more rent per unit than last year for the new leases it has signed. Pushing through top-line rent growth that beats inflation is an admirable accomplishment. But more so than ever during a pandemic, Aimco has done well to keep pushing its rents. Of course they might be rebounding from an unexpected dip last year or something along those lines, but we’ll figure that out later when we map historical rent growth in our outputs.

Other Revenue Sources

3.5% revenue derived from commercial tenants, ~50% office and ~50% other (doc3/pdf4)

Aimco generally earns money by charging rent to residential tenants who live in its apartments. But sometimes their buildings will also have additional space for amenity retail and office. We say amenity because tenants often like to live above a nice coffee shop or something like that. So this section emphasizes that Aimco derives 3.5% of its income from retail and office tenants. The technical guide has more detail on this subject, but think about how office and retail risk compares to multifamily as evidenced by cap rates. Aimco of course must publicly file that it earns income from these sectors, but in the same stroke we should note that 3.5% is a pretty mitigated level of exposure to these slightly more troubled sectors.

What are same-store operating results?

As you flip through, you’ll notice that Aimco emphasizes same-store property results. This is a common standardization technique in real estate finance. For those unaware, same store metrics compare only the properties that existed and were stabilized in both periods. This is how you can quickly isolate the operational growth of the portfolio. Non-same-store metrics are complicated by additions of new properties. You shouldn’t view revenue growth from acquisitions quite the same as you’d consider revenue growth from the same property. One is just the result of spending money, the other is the result of market dynamics and proper management. In short, same-store is the only way to know how revenue and operating expenses have grown without tacking on “fake” growth from acquisitions.

Hungry for more?

We know how tough it is to land a career in real estate private equity as a complete outsider. Now that we broke in, we exert every effort to teach you the core real estate private equity skills to impress your interviewers. You get out what you put in – we can only promise success if you’re willing to commit the effort. If you’re ready to take off the gloves, consider our full suite of educational resources.

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