Leveraged Breakdowns

Public REIT Valuation Part Ten: Aimco News Flash

This week, Aimco announced a plan to separate into two separate and distinct public companies. This adds a fun layer of real-life complexity to our real estate private equity case study! Here’s the quick take:

  1. Apartment Income REIT (“AIR”): Most operating apartment buildings will spin into a new self-managed REIT, valued at ~$10.4B
  2. Aimco: The development and redevelopment business will remain with the legacy Aimco entity along with a portfolio of assets valued at ~$1.3B.

In short, Aimco is spinning its development and redevelopment business out from its stable apartment business. For more detail, check out our earlier bit on development and redevelopment in this real estate private equity guide on public M&A.

The split will be 1:1, meaning current Aimco shareholders will get one AIR share for each share they own of Aimco. Once all is said and done, they will own one AIV share (legacy Aimco, #2 above) and one AIR share (the new Apartment Income REIT, #1 above).

Rationale

At the end of the executive summary, Aimco justifies the split with these two bullets:

  • AIR seeks to provide investors the most efficient and effective way to allocate capital to multi-family by investing in a diversified portfolio of stabilized apartments, disciplined market selection, best-in-class operations, a strong balance sheet, and a stable and seasoned management team with sector-leading low overhead costs.
  • AIR will not engage in development or redevelopment and is expected to have higher and more predictable earnings, as measured by Funds From Operations (“FFO”), allowing for a ~5% higher annual dividend in 2021, or $1.72 per share

But in lay terms, what does this mean? In short, they believe these two lines of business are worth more separately than together. For context, look back at the two key phases I underlined above:

  • Pre-split, the stable apartment business subsidized the development business. That’s because developments don’t make money until they’re fully leased up, and it costs millions upon millions to build an apartment from the ground-up.
  • Post-split, the apartment income will go straight to its AIR investors. Further, those investors willing to accept more negative cash flow for potentially outsized development returns can overweight their shares in the legacy Aimco business.

Either way, people can have more of what they want and less of what they don’t. Income investors, which are a large constituency of public REIT ownership, would likely price up this optionality. Aimco is betting that its pure-play apartment income investors will appreciate the relief of this burden on the new AIR business. No longer will it need to subsidize the cash flow negative development business.

For a full list of official reasons from Aimco, you can flip to page two of the official announcement linked at the top of this post. But I’d say the separation of concerns and the relief of the development cash flow subsidy from the AIR portfolio are the two key drivers of this split.

Conclusion

There’s plenty more detail on this spin and its rationale, and I suggest you read through the entire document linked above. But now that we’ve touched on the recent news, let’s shift the focus of this real estate private equity case study back to building our public REIT model. Aimco isn’t building anything new, they’re just splitting the company into separate entities. WIth that in mind, we’ll stay focused on bifurcating assets and liabilities between the new AIR and legacy AIV portfolios as we model.

If you’re looking for more real estate private equity guides after finishing this article, check out all we have to offer! Everything is created for outsiders by Manhattan megafund insiders with years and billions of dollars of acquisitions experience.

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