Sum Of Its Parts: Analysis Of Aimco’s Proposed Split (NYSE:AIV)

Split in Two

On 9/14/2020, AIMCO (AIV) announced a plan to split its business into two, separate and distinct, publicly traded companies, Apartment Income REIT (“AIR”) and AIMCO. The new REIT, “AIR”, would form a self-managed REIT, expected to own a ~$10.4 billion portfolio according to AIMCO. “AIR” would not engage in development or re-development of properties and would focus on stabilized properties only. “AIMCO” is expected to retain its development and redevelopment businesses and a portfolio of assets valued at~$1.3 billion. According to the separation timeline provided by AIMCO, the split is expected to become effective by December 2020.

Source: AIMCO, slide 3. Full presentation found here

AIV Splits into AIR and AIMCO Sources: AIMCO, apartment list for period ending June 30, 2020 and Strategic Transformation. Map produced by REIT Data Market using python and QGIS

Overall, “AIR” is expected to assume 82% of AIV’s current portfolio as measured by Gross Asset Value (GAV) and 78.4% or 98 of the 125 properties partially or fully owned currently by AIV. We see these percentages more as a minimum than maximum since “AIR” has the option to purchase stabilized properties held by “AIMCO”.

Due to the fact a super majority of AIV’s legacy portfolio is moving to the new REIT, “AIR”, we think it is important to compare the portfolios of AIV and “AIR”. This will allow us to dig deeper and test AIV’s thesis that the proposed separation is truly a “strategic transformation” for the company. We have seen REITs in the past use strategic transformations as an opportunity to fundamentally change a REITs geographic and demographic footprint. We saw this when Equity Residential (EQR) sold 72 properties to Starwood capital in 2015. Though the EQR example is not 100% identical to AIV’s proposed split, disposing such a large percentage of a portfolio made EQR more urban; EQR’s move was deliberate and purposeful.

It is important to point out that others are questioning whether the proposed separation is truly transformative. Well-known Activist investor Jonathan Litt, of Land and Buildings, opposes AIV’s plan to split into two publicly traded companies and threatens to call a special meeting if the real estate company doesn’t let shareholders vote on the transaction. Litt, owns ~1.4% stake in AIV and called the plan to split a, “thinly veiled attempt by management and the board to rid themselves of a decades-long poor track record rather than address the fundamental issues facing the company.” In turn, AIV has responded by stating that they will, “carefully review Land & Buildings’ preliminary solicitation statement to call a special meeting and will provide additional details to shareholders in due course.”

With some influential voices coming out against the proposed split, a data-driven analysis of the current AIV and proposed “AIR” property portfolios is needed to help investors understand the value proposition of the proposed split. We focus our comparative analysis on the similarities and differences between AIV and “AIR” since a super-majority of AIV’s portfolio will be assumed by “AIR”. This comparison will assist investors’ evaluation of both AIV’s claim that the separation is a “strategic transformation” and the critique that the split is equivalent to repackaging the same company under different names without substantiate change in company strategy and approach. Investors need actionable intelligence to determine if “AIR” is a new entity that provides access to previously unrealized value or if the only difference between AIV and “AIR” is the letter “R”.

AIV vs “AIR”

As mentioned above, most of AIV’s assets will move to a newly formed self-managed REIT called, Apartment Income REIT or “AIR”. For those not familiar with AIV, AIV is one of the more geo-diversified REITs, owning properties across the country. Moreover, AIV communities vary in quality from “A” to “C” quality apartment homes, with more than half of its revenues derived from “A” quality multi-family communities.

aimco revenue by asset quality Source: AIMCO, 10Q for period ending June 30, 2020.

According to its most recent 10K published in February 2020, AIV owns on average “B” to “B+” properties, but quality does differ by geography ranging from “C+” in the Greater Washington DC area (where AIV owned more apartment homes relative to other geographies as of December 2019) to an average quality of “A” for the Los Angeles market.

AIMCO asset quality by geography Source: AIMCO, 10K for period ending December 31, 2019.

We can compare the above two tables that depict asset quality by percentage of revenue and market to slide 8 of AIV’s investor presentation detailing its proposal to split the REIT into two separate entities. Slide 8 (shown below) provides a breakdown of the number of units, % of GAV, unit weighted rent vs market and property grade by the top 8 and “other” markets that would comprise the future portfolio of “AIR”. Based on the information provided, at least 75% of AIV’s units will be transferred to “AIR”; emphasizing the point that “AIR” maybe AIV by another name. Second, the average asset quality (B+) of the two portfolios is the same. Third, on average the property quality for “AIR”‘s Boston portfolio is listed as “B” compared to “C+” for AIV. Conversely, the average property quality in Miami for “AIR” is “B+” compared to “A” for AIV. So, yes, there is slight variation at the market level in terms of asset quality, but no change to the average asset quality at the portfolio level.

Another area we can compare between “AIR” and AIV is the “Unit Weighted Rent vs Market”, which we assume compares mean rents for AIV properties to the “local market” mean. AIV average rents were 112% of the local average mean across its portfolio, while the unit weighted average rents compared to the local market for “AIR” is reported as 115.2%. Looking closer at the data, two markets, Los Angeles and Philadelphia are driving the additional 3% over performance for “AIR” as the other 6 (out of 8 total) “AIR” markets have mean rents less than the AIV portfolio average of 112%. We will address geo-concentration in detail below, but it is worth noting that 33.5% of Total GAV for “AIR” is located in Los Angeles and Philadelphia, the two markets driving higher rent premiums.

AIR expects to maintain a balanced multi-family portfolio consisting of approximately ½ Class A and ½ Class B/C+ communities Source: AIMCO, slide 8. Full presentation found here

We show above that in many ways “AIR” resembles AIV. So the question remains, what are investors getting from “AIR” that they are not getting from AIV? Let’s dive further into that question, in particular comparing the property geography and demographic attributes of AIV and “AIR” real estate.

The table below details the concentration of units by Metropolitan Statistical Area (NYSE:MSA) as a percentage of units. We highlight rows in “red” where the difference between AIV and “AIR” is at least -1% and highlight the rows in “green” where the difference in concentration between AIV and “AIR” portfolios is at least 1%. Though 13 out of the 21 total MSAs where AIV owns properties show no to little change in geographic concentration, the proposed “AIR” portfolio will be more concentrated in Los Angeles-Long Beach-Anaheim CA, Philadelphia-Camden-Wilmington PA-NJ-DE-MD, San Diego-Carlsbad CA and Washington-Arlington-Alexandria DC-VA-MD-WV MSAs. Conversely, “AIR” will be less concentrated in Boston-Cambridge-Newton MA-NH, Chicago-Naperville-Elgin IL-IN-WI, Manchester-Nashua NH and Providence RI-MA MSAs compared to the legacy REIT.

It is worth noting that “AIR” will not own properties in the Charleston SC, Nashville-Davidson-Murfreesboro-Franklin TN, Worcester MA-CT and Seattle-Tacoma-Bellevue WA MSAs. “AIR” would own properties in 16 MSAs compared to 21 MSAs for AIV, and therefore its portfolio would be less geographically diverse.

Metropolitan Statistical Area (MSA)

AIV (% of portfolio)

AIR (% of portfolio) Delta
Atlanta-Sandy Springs-Roswell, GA 1.6% 1.9% .3
Boston-Cambridge-Newton, MA-NH 10.5% 8.8% -1.7
Boulder, CO 2.5% 3.1% .6
Charleston-North Charleston, SC 0.03% 0.0% -.03
Chicago-Naperville-Elgin, IL-IN-WI 5.4% 1.2% -4.2
Denver-Aurora-Lakewood, CO 5.0% 5.9% .9
Los Angeles-Long Beach-Anaheim, CA 13.3% 16.7% 3.4
Manchester-Nashua, NH 4.2% 1.7% -2.5
Miami-Fort Lauderdale-West Palm Beach, FL 9.1% 8.4% -.7
Minneapolis-St. Paul-Bloomington, MN-WI 1.1% 1.3% .2
Nashville-Davidson–Murfreesboro–Franklin, TN 0.9% 0.0% -.9
New York-Newark-Jersey City, NY-NJ-PA 3.4% 3.6% .2
Oxnard-Thousand Oaks-Ventura, CA 1.0% 1.2% .2
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 8.6% 10.7% 2.1
Providence-Warwick, RI-MA 1.6% 0.0% -1.6
San Diego-Carlsbad, CA 7.1% 8.5% 1.4
San Francisco-Oakland-Hayward, CA 5.6% 5.7% .1
San Jose-Sunnyvale-Santa Clara, CA 1.1% 1.3% .2
Seattle-Tacoma-Bellevue, WA 0.8% 0.0% -.8
Washington-Arlington-Alexandria, DC-VA-MD-WV 16.1% 20.0% 3.9
Worcester, MA-CT 0.9% 0.0%

-.9

Sources: Table created by author with data from AIMCO, apartment list & AIMCO, slides 18-19 found here.

These changes could make “AIR” more attractive to investors if they believe the delta between the AIV and “AIR” portfolio footprints is advantageous long-term. The higher concentrations in the Los Angeles and Philadelphia metros are noteworthy since “AIR” properties in these two metro areas generate premium rents relative to the local market. Los Angeles and Philadelphia would also comprise more than 27% of the “AIR” portfolio in terms of units/apartment homes.

At the intersection of geography and demography and also on the minds of REIT investors’ is the urban/suburban breakdown of REIT portfolios. Across the board, Q2 2020 conference calls for multifamily REITs indicated serious concerns about the performance of urban markets. According to our previous analysis published on seeking alpha, AIV was the second most “urban” REIT after EQR. For consistency, we use the same methodology to classify zip codes as urban, suburban and rural where AIV owns properties detailed in our previous article on the subject. After the split from AIV, the “AIR” portfolio would be slightly more urban than AIV’s portfolio as of June 30, 2020, but this difference is insignificant.

REIT % zip codes Urban % zip codes Suburban % zip codes Rural

Mean Households / sqmi

AIV 58% 41% 1% 8,755
“AIR” 60% 39% 1% 9,131

Sources: Created by Author with data from REIT Data Market analysis. Please download data here and here.

Given there are differences in the geographic concentrations of AIV and “AIR”, we should also analyze the demographics of the zip codes where AIV currently owns and “AIR” would own properties. Do the changes to geographic concentration make the “AIR” portfolio fundamentally different from a demographic perspective? Before we dive into this question, it is important to clarify that the demographic data is from U.S. Census not acquired from AIV nor a demographic breakdown of current AIV tenets. The data are derived from the most recent U.S. Census Bureau’s American Community Survey (ACS 2014-2018) and are aggregated at the zip code level.

We compared AIV and “AIV” across multiple demographic factors using the ACS data. The goal of this comparison is to determine if the split changes the demographic characteristics of the “AIR” portfolio compared to the legacy AIV properties. The human geography also provides a means to parse the separation of AIV’s portfolio into “AIV” and “AIR”, for example, to test whether AIV is attempting to target a specific renter demographic. We chose these specific demographics because they are often used by multifamily REITs to evaluate the quality of property locations.

The following table provides the portfolio average for each demographic factor respectively. We weigh each demographic factor by the concentration of units/apartments homes (as a proportion of the total portfolio) within a zip code.

Portfolio Weighted Mean by Demographic Factor for zip codes where AIV/”AIR” own properties

AIV AIR
% of Zip Code Housing units that are Renter-Occupied 53% 54%
% of Zip Code Renter-Occupied Householders 25 – 34 yrs of age 33% 33%
% of Zip Code Renter-Occupied Housing Units with Bachelor’s degree or Higher 53% 55%
% of Zip Code Renter-Occupied Housing Units paying more than $2,000 in rent 24% 26%
% of Zip Code Renter-Occupied Householders w/ Median income greater than $100,000 15% 16%

Sources: Table created by Author from American Community Survey (Tables: B25007, B25056, B25013,B25119, B25118). Property lists from AIMCO, apartment list & AIMCO, slides 18-19 found here. Census data accessed via R library tidycensus.

Comparing the demographics of the renters living in the zip codes where AIV/”AIR” own properties shows very little difference. Any change between the two values is statistically insignificant, as each demographic factor listed includes a margin of error that is greater than the delta between the two values. The data is telling us that from a demographic perspective the portfolios are the same.

Our geographic and demographic analysis of the two portfolios highlight little difference between the current AIV and proposed “AIR” portfolios. This indicates that AIV probably did not prioritize geography and demography when determining what parts of AIV’s portfolio would go to “AIR” vs “AIMCO”. We wonder if the split of AIV is a missed opportunity to concentrate the “AIR” portfolio in geographies that yield higher rent premiums, with notable exceptions in Los Angeles and Philadelphia.

Conclusion

Comparing the current AIV portfolio with the proposed “AIR” portfolio highlights the similarities of the two portfolio and suggests that the separation of AIV into two distinct REITs will not be a “strategic transformation”. With a few notable exceptions, the current AIV and proposed “AIR” property portfolios are the same. However, we do think the additional concentration of the “AIR” portfolio in markets where its properties generate rent premiums relative to the local market is a positive development.

Moreover, we don’t think the split will change existing opinions on AIV’s value proposition. If you are an investor in AIV or believe AIV is currently undervalued, then the movement of a super-majority of AIV’s GAV to “AIR” should do little to change your mind. So if you align with this thesis then the new “AIR” REIT is an attractive investment. For investors who are already skeptical of the AIV story, the comparative analysis above should only harden the lack of faith in company leadership. If you align with this thesis then you are likely to conclude that the separation is “more of the same”. Going forward (and if the split proceeds) we will be watching the “AIR” portfolio for transactions that create distance between itself and legacy AIV and distinguish the new REIT from its predecessor and future competitors. Specifically, investors should pay attention to asset quality, urban/suburban mix and trends towards geo-concentration/diversification, and/or the targeting of specific demographic factors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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