Q2 2014 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to
Commission File Number 1-13232 (Apartment Investment and Management Company)
Commission File Number 0-24497 (AIMCO Properties, L.P.)
 
Apartment Investment and Management Company
AIMCO Properties, L.P.
(Exact name of registrant as specified in its charter)
 
Maryland (Apartment Investment and Management Company)
 
84-1259577
 
Delaware (AIMCO Properties, L.P.)
 
84-1275621
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
4582 South Ulster Street, Suite 1100
 
 
 
Denver, Colorado
 
80237
 
(Address of principal executive offices)
 
(Zip Code)
 
(303) 757-8101
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Apartment Investment and Management Company: Yes x    No o
AIMCO Properties, L.P.: Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Apartment Investment and Management Company: Yes x    No o
AIMCO Properties, L.P.: Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Apartment Investment and Management Company:
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
AIMCO Properties, L.P.:
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Apartment Investment and Management Company: Yes
o
No
x
AIMCO Properties, L.P.: Yes
o
No
x
 
_______________________________________________________
The number of shares of Apartment Investment and Management Company
Class A Common Stock outstanding as of July 31, 2014: 146,188,496
 

Table of Contents

EXPLANATORY NOTE
This filing combines the reports on Form 10-Q for the quarterly period ended June 30, 2014, of Apartment Investment and Management Company, or Aimco, and AIMCO Properties, L.P., or the Aimco Operating Partnership. Where it is important to distinguish between the two entities, we refer to them specifically. Otherwise, references to “we,” “us” or “our” mean, collectively, Aimco, the Aimco Operating Partnership and their consolidated entities.
Aimco, a Maryland corporation, is a self-administered and self-managed real estate investment trust, or REIT. Aimco, through wholly-owned subsidiaries, is the general and special limited partner of and, as of June 30, 2014, owned a 95.0% ownership interest in the common partnership units of, the Aimco Operating Partnership. The remaining 5.0% interest is owned by limited partners. As the sole general partner of the Aimco Operating Partnership, Aimco has exclusive control of the Aimco Operating Partnership’s day-to-day management.
The Aimco Operating Partnership holds all of Aimco’s assets and manages the daily operations of Aimco’s business and assets. Aimco is required to contribute all proceeds from offerings of its securities to the Aimco Operating Partnership. In addition, substantially all of Aimco’s assets must be owned through the Aimco Operating Partnership; therefore, Aimco is generally required to contribute all assets acquired to the Aimco Operating Partnership. In exchange for the contribution of offering proceeds or assets, Aimco receives additional interests in the Aimco Operating Partnership with similar terms (e.g., if Aimco contributes proceeds of a stock offering, Aimco receives partnership units with terms substantially similar to the stock issued by Aimco).
We believe combining the periodic reports of Aimco and the Aimco Operating Partnership into this single report provides the following benefits:
•
presents our business as a whole, in the same manner our management views and operates the business;
•
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosures apply to both Aimco and the Aimco Operating Partnership; and
•
saves time and cost through the preparation of a single combined report rather than two separate reports.
We operate Aimco and the Aimco Operating Partnership as one enterprise and the management of Aimco directs the management and operations of the Aimco Operating Partnership.
We believe it is important to understand the few differences between Aimco and the Aimco Operating Partnership in the context of how Aimco and the Aimco Operating Partnership operate as a consolidated company. Aimco has no assets or liabilities other than its investment in the Aimco Operating Partnership. Also, Aimco is a corporation that issues publicly traded equity from time to time, whereas the Aimco Operating Partnership is a partnership that has no publicly traded equity. Except for the net proceeds from stock offerings by Aimco, which are contributed to the Aimco Operating Partnership in exchange for additional limited partnership interests (of a similar type and in an amount equal to the shares of stock sold in the offering), the Aimco Operating Partnership generates all remaining capital required by its business. These sources include the Aimco Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility, the issuance of secured debt and equity securities, including additional partnership units, and proceeds received from the sale of apartment communities.
Equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of Aimco and those of the Aimco Operating Partnership. Interests in the Aimco Operating Partnership held by entities other than Aimco are classified within partners’ capital in the Aimco Operating Partnership’s financial statements and as noncontrolling interests in Aimco’s financial statements.
To help investors understand the differences between Aimco and the Aimco Operating Partnership, this report provides separate consolidated financial statements for Aimco and the Aimco Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for Aimco and the Aimco Operating Partnership in order to establish that the requisite certifications have been made and that Aimco and the Aimco Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

1
Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
AIMCO PROPERTIES, L.P.

TABLE OF CONTENTS

FORM 10-Q

 
 
Page
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
ITEM 1A.
ITEM 2.
ITEM 6.
 


2
Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.
Financial Statements


APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Buildings and improvements
$
6,169,512

 
$
6,332,723

Land
1,811,503

 
1,881,358

Total real estate
7,981,015

 
8,214,081

Less accumulated depreciation
(2,716,076
)
 
(2,822,872
)
Net real estate ($379,920 and $392,245 related to VIEs)
5,264,939

 
5,391,209

Cash and cash equivalents ($17,583 and $24,094 related to VIEs)
33,826

 
55,751

Restricted cash ($35,758 and $36,369 related to VIEs)
223,580

 
127,037

Other assets ($210,280 and $211,286 related to VIEs)
500,877

 
505,416

Assets held for sale
55,443

 
—

Total assets
$
6,078,665

 
$
6,079,413

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Non-recourse property debt ($351,819 and $355,372 related to VIEs)
$
4,152,802

 
$
4,337,785

Revolving credit facility borrowings
53,400

 
50,400

Total indebtedness
4,206,202

 
4,388,185

Accounts payable
37,158

 
43,161

Accrued liabilities and other ($129,837 and $140,910 related to VIEs)
282,531

 
287,595

Deferred income
93,294

 
107,775

Liabilities related to assets held for sale
30,753

 
—

Total liabilities
4,649,938

 
4,826,716

Preferred noncontrolling interests in Aimco Operating Partnership
78,917

 
79,953

Commitments and contingencies (Note 6)
—

 
—

Equity:
 
 
 
Perpetual Preferred Stock
186,126

 
68,114

Common Stock, $0.01 par value, 505,787,260 shares authorized, 146,188,496 and 145,917,387 shares issued/outstanding at June 30, 2014 and December 31, 2013, respectively
1,462

 
1,459

Additional paid-in capital
3,692,854

 
3,701,339

Accumulated other comprehensive loss
(5,243
)
 
(4,602
)
Distributions in excess of earnings
(2,735,097
)
 
(2,798,853
)
Total Aimco equity
1,140,102

 
967,457

Noncontrolling interests in consolidated real estate partnerships
233,064

 
233,008

Common noncontrolling interests in Aimco Operating Partnership
(23,356
)
 
(27,721
)
Total equity
1,349,810

 
1,172,744

Total liabilities and equity
$
6,078,665

 
$
6,079,413




See notes to condensed consolidated financial statements.

3
Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Rental and other property revenues
$
239,492

 
$
233,936

 
$
479,628

 
$
464,188

Tax credit and asset management revenues
6,926

 
7,809

 
15,714

 
15,061

Total revenues
246,418

 
241,745

 
495,342

 
479,249

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses
94,438

 
94,298

 
193,643

 
188,166

Investment management expenses
1,021

 
1,697

 
2,273

 
3,130

Depreciation and amortization
71,399

 
73,833

 
141,706

 
149,548

General and administrative expenses
10,125

 
11,153

 
20,657

 
22,932

Other expense, net
3,638

 
2,052

 
5,988

 
4,121

Total operating expenses
180,621

 
183,033

 
364,267

 
367,897

Operating income
65,797

 
58,712

 
131,075

 
111,352

Interest income, net
1,671

 
2,651

 
3,400

 
9,064

Interest expense
(55,061
)
 
(57,730
)
 
(110,807
)
 
(116,076
)
Other, net
189

 
(987
)
 
(1,790
)
 
(3,251
)
Income before income taxes, discontinued operations and gain on dispositions
12,596

 
2,646

 
21,878

 
1,089

Income tax benefit (expense)
5,347

 
(169
)
 
8,105

 
(274
)
Income from continuing operations
17,943

 
2,477

 
29,983

 
815

Income from discontinued operations, net
—

 
4,502

 
—

 
8,997

Gain on dispositions of real estate, net of tax
66,662

 
—

 
136,154

 
—

Net income
84,605

 
6,979

 
166,137

 
9,812

Noncontrolling interests:
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships
(2,226
)
 
6,150

 
(13,615
)
 
11,112

Net income attributable to preferred noncontrolling interests in Aimco Operating Partnership
(1,602
)
 
(1,606
)
 
(3,207
)
 
(3,212
)
Net income attributable to common noncontrolling interests in Aimco Operating Partnership
(3,735
)
 
(575
)
 
(7,346
)
 
(872
)
Net (income) loss attributable to noncontrolling interests
(7,563
)
 
3,969

 
(24,168
)
 
7,028

Net income attributable to Aimco
77,042

 
10,948

 
141,969

 
16,840

Net income attributable to Aimco preferred stockholders
(1,758
)
 
(701
)
 
(2,212
)
 
(1,403
)
Net income attributable to participating securities
(274
)
 
(140
)
 
(513
)
 
(280
)
Net income attributable to Aimco common stockholders
$
75,010

 
$
10,107

 
$
139,244

 
$
15,157

Earnings attributable to Aimco per common share – basic (Note 7):
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.96

 
$
—

Net income
$
0.51

 
$
0.07

 
$
0.96

 
$
0.10

Earnings attributable to Aimco per common share – diluted (Note 7):
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.95

 
$
—

Net income
$
0.51

 
$
0.07

 
$
0.95

 
$
0.10

Dividends declared per common share
$
0.26

 
$
0.24

 
$
0.52

 
$
0.48


See notes to condensed consolidated financial statements.

4
Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
84,605

 
$
6,979

 
$
166,137

 
$
9,812

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (losses) gains on interest rate swaps
(666
)
 
1,430

 
(1,427
)
 
1,608

Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
418

 
417

 
844

 
836

Unrealized losses on debt securities classified as available-for-sale
(518
)
 
(1,347
)
 
(51
)
 
(3,055
)
Other comprehensive (loss) income
(766
)
 
500

 
(634
)
 
(611
)
Comprehensive income
83,839

 
7,479

 
165,503

 
9,201

Comprehensive (income) loss attributable to noncontrolling interests
(7,537
)
 
3,767

 
(24,173
)
 
6,816

Comprehensive income attributable to Aimco
$
76,302

 
$
11,246

 
$
141,330

 
$
16,017






See notes to condensed consolidated financial statements.

5
Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
166,137

 
$
9,812

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
141,706

 
149,548

Gain on dispositions of real estate, net of tax
(136,154
)
 
—

Discontinued operations
—

 
3,462

Other adjustments
1,549

 
8,764

Net changes in operating assets and operating liabilities
(28,959
)
 
1,440

Net cash provided by operating activities
144,279

 
173,026

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of real estate
(13,981
)
 
(19,444
)
Capital expenditures
(182,424
)
 
(163,368
)
Proceeds from dispositions of real estate
238,855

 
7,960

Purchases of corporate assets
(4,130
)
 
(5,123
)
Purchase of property loans
—

 
(119,101
)
Change in restricted cash
(96,186
)
 
19,932

Other investing activities
(3,447
)
 
12,375

Net cash used in investing activities
(61,313
)
 
(266,769
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from non-recourse property debt
62,974

 
111,007

Principal repayments on non-recourse property debt
(178,739
)
 
(153,532
)
Net borrowings on revolving credit facility
3,000

 
187,050

Proceeds from issuance of Preferred Stock
123,658

 
—

Repurchase of Preferred Stock
(9,500
)
 
—

Proceeds from Common Stock option exercises
128

 
983

Payment of dividends to holders of Preferred Stock
(1,355
)
 
(1,402
)
Payment of dividends to holders of Common Stock
(76,004
)
 
(70,014
)
Payment of distributions to noncontrolling interests
(32,107
)
 
(22,513
)
Other financing activities
3,054

 
4,674

Net cash (used in) provided by financing activities
(104,891
)
 
56,253

NET DECREASE IN CASH AND CASH EQUIVALENTS
(21,925
)
 
(37,490
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
55,751

 
84,413

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
33,826

 
$
46,923






See notes to condensed consolidated financial statements.

6
Table of Contents


AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Buildings and improvements
$
6,169,512

 
$
6,332,723

Land
1,811,503

 
1,881,358

Total real estate
7,981,015

 
8,214,081

Less accumulated depreciation
(2,716,076
)
 
(2,822,872
)
Net real estate ($379,920 and $392,245 related to VIEs)
5,264,939

 
5,391,209

Cash and cash equivalents ($17,583 and $24,094 related to VIEs)
33,826

 
55,751

Restricted cash ($35,758 and $36,369 related to VIEs)
223,580

 
127,037

Other assets ($210,280 and $211,286 related to VIEs)
500,877

 
505,416

Assets held for sale
55,443

 
—

Total assets
$
6,078,665

 
$
6,079,413

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Non-recourse property debt ($351,819 and $355,372 related to VIEs)
$
4,152,802

 
$
4,337,785

Revolving credit facility borrowings
53,400

 
50,400

Total indebtedness
4,206,202

 
4,388,185

Accounts payable
37,158

 
43,161

Accrued liabilities and other ($129,837 and $140,910 related to VIEs)
282,531

 
287,595

Deferred income
93,294

 
107,775

Liabilities related to assets held for sale
30,753

 
—

Total liabilities
4,649,938

 
4,826,716

Redeemable preferred units
78,917

 
79,953

Commitments and contingencies (Note 6)
—

 
—

Partners’ Capital:
 
 
 
Preferred units
186,126

 
68,114

General Partner and Special Limited Partner
953,976

 
899,343

Limited Partners
(23,356
)
 
(27,721
)
Partners’ capital attributable to the Aimco Operating Partnership
1,116,746

 
939,736

Noncontrolling interests in consolidated real estate partnerships
233,064

 
233,008

Total partners’ capital
1,349,810

 
1,172,744

Total liabilities and partners’ capital
$
6,078,665

 
$
6,079,413




See notes to condensed consolidated financial statements.

7
Table of Contents

AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Rental and other property revenues
$
239,492

 
$
233,936

 
$
479,628

 
$
464,188

Tax credit and asset management revenues
6,926

 
7,809

 
15,714

 
15,061

Total revenues
246,418

 
241,745

 
495,342

 
479,249

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses
94,438

 
94,298

 
193,643

 
188,166

Investment management expenses
1,021

 
1,697

 
2,273

 
3,130

Depreciation and amortization
71,399

 
73,833

 
141,706

 
149,548

General and administrative expenses
10,125

 
11,153

 
20,657

 
22,932

Other expense, net
3,638

 
2,052

 
5,988

 
4,121

Total operating expenses
180,621

 
183,033

 
364,267

 
367,897

Operating income
65,797

 
58,712

 
131,075

 
111,352

Interest income, net
1,671

 
2,651

 
3,400

 
9,064

Interest expense
(55,061
)
 
(57,730
)
 
(110,807
)
 
(116,076
)
Other, net
189

 
(987
)
 
(1,790
)
 
(3,251
)
Income before income taxes, discontinued operations and gain on dispositions
12,596

 
2,646

 
21,878

 
1,089

Income tax benefit (expense)
5,347

 
(169
)
 
8,105

 
(274
)
Income from continuing operations
17,943

 
2,477

 
29,983

 
815

Income from discontinued operations, net
—

 
4,502

 
—

 
8,997

Gain on dispositions of real estate, net of tax
66,662

 
—

 
136,154

 
—

Net income
84,605

 
6,979

 
166,137

 
9,812

Net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships
(2,226
)
 
6,150

 
(13,615
)
 
11,112

Net income attributable to the Aimco Operating Partnership
82,379

 
13,129

 
152,522

 
20,924

Net income attributable to the Aimco Operating Partnership’s preferred unitholders
(3,360
)
 
(2,307
)
 
(5,419
)
 
(4,615
)
Net income attributable to participating securities
(274
)
 
(140
)
 
(513
)
 
(280
)
Net income attributable to the Aimco Operating Partnership’s common unitholders
$
78,745

 
$
10,682

 
$
146,590

 
$
16,029

Earnings attributable to the Aimco Operating Partnership per common unit – basic (Note 7):


 


 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.96

 
$
—

Net income
$
0.51

 
$
0.07

 
$
0.96

 
$
0.10

Earnings attributable to the Aimco Operating Partnership per common unit – diluted (Note 7):
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.95

 
$
—

Net income
$
0.51

 
$
0.07

 
$
0.95

 
$
0.10

Distributions declared per common unit
$
0.26

 
$
0.24

 
$
0.52

 
$
0.48

 

See notes to condensed consolidated financial statements.

8
Table of Contents

AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
84,605

 
$
6,979

 
$
166,137

 
$
9,812

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (losses) gains on interest rate swaps
(666
)
 
1,430

 
(1,427
)
 
1,608

Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
418

 
417

 
844

 
836

Unrealized losses on debt securities classified as available-for-sale
(518
)
 
(1,347
)
 
(51
)
 
(3,055
)
Other comprehensive (loss) income
(766
)
 
500

 
(634
)
 
(611
)
Comprehensive income
83,839

 
7,479

 
165,503

 
9,201

Comprehensive (income) loss attributable to noncontrolling interests
(2,239
)
 
5,965

 
(13,654
)
 
10,855

Comprehensive income attributable to the Aimco Operating Partnership
$
81,600

 
$
13,444

 
$
151,849

 
$
20,056




See notes to condensed consolidated financial statements.

9
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AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
166,137

 
$
9,812

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
141,706

 
149,548

Gain on dispositions of real estate, net of tax
(136,154
)
 
—

Discontinued operations
—

 
3,462

Other adjustments
1,549

 
8,764

Net changes in operating assets and operating liabilities
(28,959
)
 
1,440

Net cash provided by operating activities
144,279

 
173,026

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of real estate
(13,981
)
 
(19,444
)
Capital expenditures
(182,424
)
 
(163,368
)
Proceeds from dispositions of real estate
238,855

 
7,960

Purchases of corporate assets
(4,130
)
 
(5,123
)
Purchase of property loans
—

 
(119,101
)
Change in restricted cash
(96,186
)
 
19,932

Other investing activities
(3,447
)
 
12,375

Net cash used in investing activities
(61,313
)
 
(266,769
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from non-recourse property debt
62,974

 
111,007

Principal repayments on non-recourse property debt
(178,739
)
 
(153,532
)
Net borrowings on revolving credit facility
3,000

 
187,050

Proceeds from issuance of Preferred Units to Aimco
123,658

 
—

Repurchase of Preferred Units from Aimco
(9,500
)
 
—

Proceeds from Aimco Common Stock option exercises
128

 
983

Payment of distributions to holders of Preferred Units
(4,562
)
 
(4,614
)
Payment of distributions to General Partner and Special Limited Partner
(76,004
)
 
(70,014
)
Payment of distributions to Limited Partners
(4,026
)
 
(3,884
)
Payment of distributions to noncontrolling interests
(24,874
)
 
(15,417
)
Other financing activities
3,054

 
4,674

Net cash (used in) provided by financing activities
(104,891
)
 
56,253

NET DECREASE IN CASH AND CASH EQUIVALENTS
(21,925
)
 
(37,490
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
55,751

 
84,413

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
33,826

 
$
46,923




See notes to condensed consolidated financial statements.

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
AIMCO PROPERTIES, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

Note 1 — Organization
Apartment Investment and Management Company, or Aimco, is a Maryland corporation incorporated on January 10, 1994. Aimco is a self-administered and self-managed real estate investment trust, or REIT. AIMCO Properties, L.P., or the Aimco Operating Partnership, is a Delaware limited partnership formed on May 16, 1994, to conduct our business, which is focused on the ownership and management of quality apartment communities located in the largest coastal and job growth markets in the United States.
Aimco, and through its wholly-owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, owns a majority of the ownership interests in the Aimco Operating Partnership. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership. Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are referred to as “OP Units.” OP Units include common partnership units, high performance partnership units and partnership preferred units, which we refer to as common OP Units, HPUs and preferred OP Units, respectively. We also refer to HPUs as common OP Unit equivalents. At June 30, 2014, after eliminations for units held by consolidated entities, the Aimco Operating Partnership had 153,860,349 common partnership units and equivalents outstanding. At June 30, 2014, Aimco owned 146,188,496 of the common partnership units (95.0% of the common partnership units and equivalents) of the Aimco Operating Partnership and Aimco had outstanding an equal number of shares of its Class A Common Stock, which we refer to as Common Stock.
Except as the context otherwise requires, “we,” “our” and “us” refer to Aimco, the Aimco Operating Partnership and their consolidated subsidiaries, collectively.
As of June 30, 2014, we owned an equity interest in 157 conventional apartment communities with 47,302 apartment homes and 61 affordable apartment communities with 9,142 apartment homes. Of these, we consolidated 153 conventional apartment communities with 47,160 apartment homes and 54 affordable apartment communities with 8,455 apartment homes. These conventional and affordable apartment communities generated 90% and 10%, respectively, of our proportionate property net operating income (as defined in Note 8) during the six months ended June 30, 2014.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
The balance sheets of Aimco and the Aimco Operating Partnership at December 31, 2013, have been derived from their respective audited financial statements at that date, but do not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in Aimco’s and the Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2013. Certain 2013 financial statement amounts have been reclassified to conform to the 2014 and full year 2013 presentation, including adjustments for discontinued operations reported through December 31, 2013. Except where indicated, the footnotes refer to both Aimco and the Aimco Operating Partnership.
Principles of Consolidation
Aimco’s accompanying condensed consolidated financial statements include the accounts of Aimco, the Aimco Operating Partnership, and their consolidated subsidiaries. The Aimco Operating Partnership’s condensed consolidated financial statements include the accounts of the Aimco Operating Partnership and its consolidated entities.

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We consolidate all variable interest entities for which we are the primary beneficiary. Generally, a variable interest entity, or VIE, is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
As of June 30, 2014, we were the primary beneficiary of, and therefore consolidated, 63 VIEs, which owned 49 apartment communities with 7,656 apartment homes. Substantially all these VIEs are partnerships that are involved in the ownership or operation of qualifying affordable housing apartment communities and which are structured to provide for the pass-through of low-income housing tax credits and deductions to their partners. Real estate with a carrying value of $379.9 million collateralized $351.8 million of debt of those VIEs. Any significant amounts of assets and liabilities related to our consolidated VIEs are identified parenthetically on our accompanying condensed consolidated balance sheets. The creditors of the consolidated VIEs do not have recourse to our general credit.
In addition to the consolidated VIEs discussed above, at June 30, 2014, our consolidated financial statements included certain consolidated and unconsolidated VIEs that are part of the legacy asset management business we sold during 2012, which is discussed in Note 4. The assets and liabilities related to these consolidated and unconsolidated VIEs are each condensed into single line items within other assets and accrued liabilities and other, respectively, in our condensed consolidated balance sheets.
Generally, we consolidate real estate partnerships and other entities that are not variable interest entities when we own, directly or indirectly, a majority voting interest in the entity or are otherwise able to control the entity. All significant intercompany balances and transactions have been eliminated in consolidation.
Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are reflected in Aimco’s accompanying balance sheets as noncontrolling interests in Aimco Operating Partnership. Interests in partnerships consolidated into the Aimco Operating Partnership that are held by third parties are reflected in our accompanying balance sheets as noncontrolling interests in consolidated real estate partnerships. The assets of consolidated real estate partnerships owned or controlled by the Aimco Operating Partnership generally are not available to pay creditors of Aimco or the Aimco Operating Partnership.
As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a partner in a limited partnership or a member of a limited liability company.
Temporary Equity and Partners’ Capital
The following table presents a reconciliation of the Aimco Operating Partnership’s Preferred OP Units from December 31, 2013 to June 30, 2014 (in thousands). These amounts are presented within temporary equity in Aimco’s condensed consolidated balance sheets as preferred noncontrolling interests in the Aimco Operating Partnership, and within temporary capital in the Aimco Operating Partnership’s condensed consolidated balance sheets as redeemable preferred units.
Balance, December 31, 2013
$
79,953

Distributions to preferred unitholders
(3,207
)
Redemption of preferred units and other
(1,036
)
Net income
3,207

Balance, June 30, 2014
$
78,917


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Aimco Equity (including Noncontrolling Interests)
The following table presents a reconciliation of Aimco’s consolidated permanent equity accounts from December 31, 2013 to June 30, 2014 (in thousands):
 
Aimco
Equity
 
Noncontrolling
interests in
consolidated real estate
partnerships
 
Common
noncontrolling
interests in
Aimco Operating
Partnership
 
Total
Equity
Balance, December 31, 2013
$
967,457

 
$
233,008

 
$
(27,721
)
 
$
1,172,744

Contributions
—

 
10,201

 
—

 
10,201

Issuance of preferred stock
123,658

 
—

 
—

 
123,658

Repurchase of preferred stock
(9,500
)
 
—

 
—

 
(9,500
)
Preferred stock dividends
(2,455
)
 
—

 
—

 
(2,455
)
Common dividends and distributions
(76,004
)
 
(23,723
)
 
(4,026
)
 
(103,753
)
Redemptions of common OP Units
—

 
—

 
(7,107
)
 
(7,107
)
Amortization of stock-based compensation cost
3,508

 
—

 
—

 
3,508

Effect of changes in ownership for consolidated entities
(8,179
)
 
(76
)
 
8,186

 
(69
)
Change in accumulated other comprehensive loss
(639
)
 
39

 
(34
)
 
(634
)
Other
287

 
—

 
—

 
287

Net income
141,969

 
13,615

 
7,346

 
162,930

Balance, June 30, 2014
$
1,140,102

 
$
233,064

 
$
(23,356
)
 
$
1,349,810

Partners’ Capital attributable to the Aimco Operating Partnership
The following table presents a reconciliation of the consolidated partners’ capital balances in permanent capital that are attributable to the Aimco Operating Partnership from December 31, 2013 to June 30, 2014 (in thousands):
 
Partners’ capital
 attributable to
the Partnership
Balance, December 31, 2013
$
939,736

Issuance of Preferred Units to Aimco
123,658

Repurchase of Preferred Units from Aimco
(9,500
)
Distributions to preferred units held by Aimco
(2,455
)
Distributions to common units held by Aimco
(76,004
)
Distributions to common units held by Limited Partners
(4,026
)
Redemption of common OP Units
(7,107
)
Amortization of Aimco stock-based compensation cost
3,508

Effect of changes in ownership for consolidated entities
7

Change in accumulated other comprehensive loss
(673
)
Other
287

Net income
149,315

Balance, June 30, 2014
$
1,116,746

A separate reconciliation of noncontrolling interests in consolidated real estate partnerships and total partners’ capital for the Aimco Operating Partnership is not presented as these amounts are identical to the corresponding noncontrolling interests in consolidated real estate partnerships and total equity for Aimco, which are presented above.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes thereto. Actual results could differ from those estimates.

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Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, and International Accounting Standards Board issued their final standard on revenue from contracts with customers, which was issued by the FASB as Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, supersedes most current GAAP applicable to revenue recognition and converges U.S. and international accounting standards in this area. The core principle of the new guidance is that revenue shall only be recognized when an entity has transferred control of goods or services to a customer and for an amount reflecting the consideration to which the entity expects to be entitled for such exchange.

ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, with no early adoption permitted, and allows for full retrospective adoption applied to all periods presented or modified retrospective adoption with the cumulative effect of initially applying the standard recognized at the date of initial application. We have not yet determined the effect ASU 2014-09 will have on our consolidated financial statements.

Note 3 — Disposals and Discontinued Operations
In April 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 revised the definition of, and the requirements for reporting, a "discontinued operation." Specifically, ASU 2014-08 revised the reporting requirements to only allow a component of an entity, or group of components of an entity, to be reported in discontinued operations if their disposal represents a “strategic shift that has (or will have) a major effect on an entity’s operations and financial results.”
For public companies, ASU 2014-08 is generally required to be applied prospectively to disposals of components of an entity or classifications as held for sale of components of an entity that occur in annual periods commencing after December 15, 2014; however, we elected to adopt ASU 2014-08 effective January 1, 2014, as permitted by the transition provisions, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued.
Under ASU 2014-08, we believe routine sales of apartment communities and certain groups of apartment communities generally do not meet the requirements for reporting within discontinued operations. During the three and six months ended June 30, 2014, we sold six and eleven consolidated apartment communities with an aggregate of 2,127 and 3,733 apartment homes, respectively. Based on our prospective application of the revised discontinued operation definition, the results of operations for the three and six months ended June 30, 2014 and 2013, for these apartment communities are reflected within income from continuing operations in our condensed consolidated statements of operations. These apartment communities did not generate a significant amount of income (before gain on dispositions) prior to their sale during the three and six months ended June 30, 2014. The sale of these apartment communities resulted in gains on disposition of real estate of $66.7 million (which is net of $8.6 million of related income taxes) and $136.2 million (which is net of $8.7 million of related income taxes), respectively, for the three and six months ended June 30, 2014, which are reflected below income from discontinued operations within our condensed consolidated statements of operations. We report gains on disposition net of incremental direct costs incurred in connection with the transactions, including any prepayment penalties incurred upon repayment of property debt collateralized by the apartment communities being sold. Such prepayment penalties totaled $2.7 million and $8.5 million for consolidated dispositions during the three and six months ended June 30, 2014, respectively. In addition to the sales of consolidated apartment communities, during the three months ended June 30, 2014, we sold our partnership interests in nine unconsolidated apartment communities with 427 apartment homes, for gross proceeds to us of less than $0.1 million.
In accordance with GAAP prior to our adoption of ASU 2014-08, we reported as discontinued operations apartment communities that met the definition of a component of an entity and had been sold or met the criteria to be classified as held for sale. For years ended December 31, 2013 or earlier, and interim periods within those years, we included the results of such apartment communities, including any gain or loss on their disposition, less applicable income taxes, in income from discontinued operations within the consolidated statements of operations. During the three and six months ended June 30, 2013, we sold two and five consolidated apartment communities with an aggregate of 164 and 230 apartment homes, respectively, and during the year ended December 31, 2013, we sold 29 consolidated apartment communities with an aggregate of 6,953 apartment homes. The results of operations for the three and six months ended June 30, 2013, for those apartment communities sold as of December 31, 2013, and gains related to apartment communities sold during the three and six months ended June 30, 2013, are included in discontinued operations and are summarized below, along with the related amounts of income from discontinued operations attributable to Aimco, the Aimco Operating Partnership and noncontrolling interests (in thousands).

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Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
Rental and other property revenues
$
18,647

 
$
37,267

Property operating expenses
(8,075
)
 
(16,628
)
Depreciation and amortization
(4,838
)
 
(9,718
)
(Provision for) recovery of real estate impairment losses
(103
)
 
124

Operating income
5,631

 
11,045

Interest income
115

 
193

Interest expense
(4,172
)
 
(8,373
)
Income before gain on dispositions of real estate and income tax
1,574

 
2,865

Gain on dispositions of real estate
2,663

 
5,992

Income tax benefit
265

 
140

Income from discontinued operations, net
$
4,502

 
$
8,997

Loss from discontinued operations attributable to noncontrolling interests in consolidated real estate partnerships
5,313

 
7,530

Income from discontinued operations attributable to the Aimco Operating Partnership
9,815

 
16,527

Income from discontinued operations attributable to noncontrolling interests in Aimco Operating Partnership
(550
)
 
(866
)
Income from discontinued operations attributable to Aimco
$
9,265

 
$
15,661

The gain on dispositions for the three and six months ended June 30, 2013, is net of incremental direct costs incurred in connection with the transactions, including $0.7 million and $0.9 million, respectively, of prepayment penalties incurred upon repayment of property debt collateralized by the apartment communities sold. For periods prior to our adoption of ASU 2014-08, we classified interest expense related to property debt within discontinued operations when the related apartment community was sold or classified as held for sale.
In connection with sales of apartment communities during the three and six months ended June 30, 2014, the purchasers assumed approximately $8.8 million and $38.6 million, respectively, of non-recourse property debt. In connection with sales of apartment communities during the six months ended June 30, 2013, the purchasers assumed approximately $2.1 million of non-recourse property debt.
We are currently marketing for sale certain apartment communities that are inconsistent with our long-term investment strategy. At the end of each reporting period, we evaluate whether such apartment communities meet the criteria to be classified as held for sale. As of June 30, 2014, we had six properties with an aggregate of 224 units classified as held for sale.
Note 4 — Other Significant Transactions
Asset Management Business Disposition
In December 2012, we sold the Napico portfolio, our legacy asset management business. The transaction was primarily seller-financed, and the associated notes are scheduled to be repaid over several years. The notes will be repaid from the operation and liquidation of the portfolio and are collateralized by the buyer’s interests in the portfolio. 
In accordance with the provisions of GAAP applicable to sales of real estate or interests therein, for accounting purposes, we have not recognized the sale and are accounting for the transaction under the profit sharing method. Until full payment has been received for the seller-financed notes, we will continue to recognize the portfolio’s assets and liabilities, each condensed into single line items within other assets and accrued liabilities and other, respectively, in our consolidated balance sheets, for all dates following the transaction. Similarly, we will continue to recognize the portfolio’s results of operations, also condensed into a single line item within our consolidated statements of operations, for periods subsequent to the transaction. To date we have received all required payments under the seller-financed notes.
At June 30, 2014, the Napico portfolio consisted of 17 partnerships that held investments in 14 apartment communities that were consolidated and 59 apartment communities that were accounted for under the equity or cost methods of accounting. The portfolio’s assets and liabilities included in our condensed consolidated balance sheets are summarized below (in thousands):

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June 30, 2014
 
December 31, 2013
Real estate, net
$
116,622

 
$
120,175

Cash and cash equivalents
24,904

 
22,602

Investment in unconsolidated real estate partnerships
10,003

 
10,817

Other assets
10,099

 
10,255

Total assets
$
161,628

 
$
163,849

 
 
 
 
Total indebtedness
$
106,559

 
$
106,032

Accrued and other liabilities
8,653

 
19,263

Total liabilities
$
115,212

 
$
125,295

 
 
 
 
Noncontrolling interests in consolidated real estate partnerships
44,436

 
35,818

Equity attributable to Aimco and the Aimco Operating Partnership
1,980

 
2,736

Total liabilities and equity
$
161,628

 
$
163,849

During the six months ended June 30, 2014, approximately $9.2 million of non-recourse debt payable to a noncontrolling limited partner was contributed to the partnership's capital, pursuant to the dissolution provisions of the partnership, resulting in an increase in noncontrolling interests.
Summarized information regarding the Napico portfolio’s results of operations, including any expense we recognize under the profit sharing method, is shown below in thousands. The net loss related to Napico (before noncontrolling interests) is included in other, net in our condensed consolidated statements of operations.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
5,675

 
$
6,912

 
$
11,350

 
$
12,359

Expenses
(5,677
)
 
(5,132
)
 
(10,878
)
 
(10,796
)
Equity loss of unconsolidated entities, gains or losses on dispositions and other, net
41

 
(2,985
)
 
(1,953
)
 
(5,474
)
Net income (loss) related to legacy asset management business
39

 
(1,205
)
 
(1,481
)
 
(3,911
)
Income tax benefit (expense) associated with legacy asset management business
240

 
(9
)
 
349

 
(35
)
(Income) loss allocated to noncontrolling interests in consolidated real estate partnerships
(711
)
 
1,569

 
188

 
4,251

Net (losses) income of legacy asset management business attributable to Aimco and the Aimco Operating Partnership
$
(432
)
 
$
355

 
$
(944
)
 
$
305

The results of operations for the consolidated apartment communities sold by the owner of this portfolio through December 31, 2013, are presented within income from discontinued operations in our consolidated statement of operations for the three and six months ended June 30, 2013, and are excluded from the summary above.
Based on our limited economic ownership in this portfolio, most of the assets and liabilities are allocated to noncontrolling interests and do not significantly affect our consolidated equity and partners’ capital. Additionally, the operating results of this portfolio generally have an insignificant effect on the amounts of income or loss attributable to us. Income or loss attributable to these noncontrolling interests will continue to be recognized commensurate with the recognition of the results of operations of the portfolio. If full payment is received on the notes and we meet the requirements to recognize the sale for accounting purposes, we expect to recognize a gain attributable to Aimco and the Aimco Operating Partnership.
Equity and Partners’ Capital Transactions
During the three months ended June 30, 2014, Aimco issued 5,000,000 shares of 6.875% Class A Cumulative Preferred Stock, par value $0.01 per share, in an underwritten public offering, for net proceeds per share of $24.15 (reflecting a public offering price of $25.00 per share, less an underwriting discount and transaction costs of approximately $0.85 per share). The offering generated net proceeds of $120.8 million. 

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During the three months ended June 30, 2014, Aimco also issued 117,400 shares of its 7.00% Class Z Cumulative Preferred Stock, par value $0.01 per share, through an at-the-market, or ATM, offering program for net proceeds per share of $25.14 (reflecting an average price to the public of $25.65 per share, less an underwriting discount and transaction costs of approximately $0.51 per share). The ATM offerings generated net proceeds of $3.0 million. 
In connection with Aimco's preferred stock issuances, Aimco contributed the net proceeds to the Aimco Operating Partnership in exchange for an equal number of the corresponding class of partnership preferred units. 
Note 5 — Fair Value Measurements
Recurring Fair Value Measurements
We measure at fair value on a recurring basis our investment in the securitization trust that holds certain of our property debt, which we classify as available for sale (AFS) securities, and our interest rate swaps. Information regarding these items measured at fair value, both of which are classified within Level 2 of the GAAP fair value hierarchy, is presented below (in thousands):
 
AFS Investments
 
Interest Rate Swaps
 
Total
Fair value at December 31, 2012
$
59,145

 
$
(7,968
)
 
$
51,177

Investment accretion included in interest income
1,681

 
—

 
1,681

Unrealized losses included in interest expense
—

 
(24
)
 
(24
)
Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
—

 
836

 
836

Unrealized (losses) gains included in equity and partners’ capital
(3,055
)
 
1,608

 
(1,447
)
Fair value at June 30, 2013
$
57,771

 
$
(5,548
)
 
$
52,223

 
 
 
 
 
 
Fair value at December 31, 2013
$
58,408

 
$
(4,604
)
 
$
53,804

Investment accretion included in interest income
1,864

 
—

 
1,864

Unrealized losses included in interest expense
—

 
(24
)
 
(24
)
Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
—

 
844

 
844

Unrealized losses included in equity and partners’ capital
(51
)
 
(1,427
)
 
(1,478
)
Fair value at June 30, 2014
$
60,221

 
$
(5,211
)
 
$
55,010

Our investments classified as AFS are presented within other assets in the accompanying consolidated balance sheets. We hold the most subordinate position in the securitization, along with several mezzanine positions. We estimate the fair value of these investments using an income and market approach with primarily observable inputs, including yields and other information regarding similar types of investments, and adjusted for certain unobservable inputs specific to these investments. We are accreting the discount to the $100.9 million face value of the investments into interest income using the effective interest method over the remaining expected term of the investments, which, as of June 30, 2014, was approximately 6.9 years. Our amortized cost basis for these investments, which represents the original cost adjusted for interest accretion less interest payments received, was $61.6 million and $59.8 million at June 30, 2014 and December 31, 2013, respectively. The amortized cost exceeded the fair value of the most subordinate position at June 30, 2014, primarily due to increases in market interest rates and a decrease in demand for similar investments as compared to when we purchased the investments. We currently expect to hold each of the investments to their maturity dates and we believe we will fully recover our basis in the investments. Accordingly, we believe the current impairment in the fair value, as compared to the amortized cost basis, of the most subordinate position is temporary and we have not recognized any of the loss in value in earnings.
For our variable rate debt, we are sometimes required by limited partners in our consolidated real estate partnerships to limit our exposure to interest rate fluctuations by entering into interest rate swap agreements, which moderate our exposure to interest rate risk by effectively converting the interest on variable rate debt to a fixed rate. We estimate the fair value of interest rate swaps using an income approach with primarily observable inputs including information regarding the hedged variable cash flows and forward yield curves relating to the variable interest rates on which the hedged cash flows are based.
As of June 30, 2014 and December 31, 2013, we had interest rate swaps with aggregate notional amounts of $50.5 million and $50.7 million, respectively. As of June 30, 2014, these swaps had a weighted average remaining term of 6.5 years. We have designated these interest rate swaps as cash flow hedges. The fair value of these swaps is presented within accrued liabilities and other in our consolidated balance sheets, and we recognize any changes in the fair value as an adjustment of accumulated other comprehensive loss within equity and partners’ capital to the extent of their effectiveness.

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If the forward rates at June 30, 2014, remain constant, we estimate that during the next 12 months, we would reclassify into earnings approximately $1.7 million of the unrealized losses in accumulated other comprehensive loss. If market interest rates increase above the 3.43% weighted average fixed rate under these interest rate swaps we will benefit from net cash payments due to us from our counterparty to the interest rate swaps.
Fair Value Disclosures
We believe that the aggregate fair value of our cash and cash equivalents, receivables and payables approximates their aggregate carrying amounts at June 30, 2014 and December 31, 2013, due to their relatively short-term nature and high probability of realization. The estimated aggregate fair value of our consolidated debt (including outstanding borrowings under our revolving credit facility) was approximately $4.4 billion and $4.5 billion at June 30, 2014 and December 31, 2013, respectively, as compared to aggregate carrying amounts of $4.2 billion and $4.4 billion, respectively. We estimate the fair value of our consolidated debt using an income and market approach, including comparison of the contractual terms to observable and unobservable inputs such as market interest rate risk spreads, contractual interest rates, remaining periods to maturity, collateral quality and loan to value ratios on similarly encumbered assets within our portfolio. We classify the fair value of our consolidated debt within Level 3 of the GAAP valuation hierarchy based on the significance of certain of the unobservable inputs used to estimate their fair values.
Note 6 — Commitments and Contingencies
Commitments
In connection with our development, redevelopment and capital improvement activities, we have entered into various construction related contracts. Additionally, pursuant to financing and/or other arrangements on our One Canal Street, Lincoln Place, and The Preserve at Marin projects, we are contractually obligated to complete the planned activities. As of June 30, 2014, our commitments related to these capital activities totaled approximately $237.7 million, approximately half of which we expect to incur during the next 12 months. We also enter into certain commitments for future purchases of goods and services in connection with the operations of our apartment communities. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to our historical expenditures.
Tax Credit Arrangements
We are required to manage certain consolidated real estate partnerships in compliance with various laws, regulations and contractual provisions that apply to our historic and low-income housing tax credit syndication arrangements. In some instances, noncompliance with applicable requirements could result in projected tax benefits not being realized and require a refund or reduction of investor capital contributions, which are reported as deferred income in our condensed consolidated balance sheet, until such time as our obligation to deliver tax benefits is relieved. The remaining compliance periods for our tax credit syndication arrangements range from less than one year to 12 years. We do not anticipate that any material refunds or reductions of investor capital contributions will be required in connection with these arrangements.
Income Taxes
On October 25, 2012, the Internal Revenue Service, or IRS, issued Final Partnership Administrative Adjustments with respect to the Aimco Operating Partnership’s 2006 and 2007 tax years.  On January 18, 2013, AIMCO-GP, Inc., in its capacity as tax matters partner of the Aimco Operating Partnership, filed a petition challenging those adjustments in the United States Tax Court in Washington, D.C.  On December 20, 2013, the parties agreed on the terms of a settlement of that litigation. On July 23, 2014, the United States Tax Court approved the stipulated decision document previously filed by the IRS and the Aimco Operating Partnership. The settlement had no material effect on our unrecognized tax benefits, financial condition or results of operations.
On March 19, 2014, the IRS notified the Aimco Operating Partnership of its intent to audit the 2011 and 2012 tax years.  We do not believe the audit will have any material effect on our unrecognized tax benefits, financial condition or results of operations.
Legal Matters
In addition to the matters described below, we are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by our general liability insurance program, and none of which we expect to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

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Limited Partnerships
In connection with our acquisitions of interests in real estate partnerships, we are sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the partners of such real estate partnerships or violations of the relevant partnership agreements. We may incur costs in connection with the defense or settlement of such litigation. We believe that we comply with our fiduciary obligations and relevant partnership agreements. Although the outcome of any litigation is uncertain, we do not expect any such legal actions to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Environmental
Various federal, state and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials present on an apartment community, including lead-based paint, asbestos, polychlorinated biphenyls, petroleum-based fuels, and other miscellaneous materials. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such materials. The presence of, or the failure to manage or remedy properly, these materials may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected apartment communities. In addition to the costs associated with investigation and remediation actions brought by government agencies, and potential fines or penalties imposed by such agencies in connection therewith, the improper management of these materials on an apartment community could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal, remediation or disposal of these materials through a licensed disposal or treatment facility. Anyone who arranges for the disposal or treatment of these materials is potentially liable under such laws for the proper operation of the disposal facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of apartment communities, we could potentially be responsible for environmental liabilities or costs associated with our apartment communities or communities we acquire or manage in the future.
We have determined that our legal obligations to remove or remediate certain potentially hazardous materials may be conditional asset retirement obligations, as defined in GAAP. Except in limited circumstances where the asset retirement activities are expected to be performed in connection with a planned construction project or apartment community casualty, we believe that the fair value of our asset retirement obligations cannot be reasonably estimated due to significant uncertainties in the timing and manner of settlement of those obligations. Asset retirement obligations that are reasonably estimable as of June 30, 2014, are immaterial to our consolidated financial condition, results of operations and cash flows.

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Note 7 — Earnings per Share/Unit
Aimco
Aimco calculates earnings per share based on the weighted average number of shares of Common Stock, participating securities, common stock equivalents and dilutive convertible securities outstanding during the period. The following table illustrates Aimco’s calculation of basic and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 (in thousands, except per share data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
17,943

 
$
2,477

 
$
29,983

 
$
815

Gain on dispositions of real estate, net of tax
66,662

 
—

 
136,154

 
—

(Income) loss from continuing operations and gain on dispositions attributable to noncontrolling interests
(7,563
)
 
(794
)
 
(24,168
)
 
364

Income attributable to preferred stockholders
(1,758
)
 
(701
)
 
(2,212
)
 
(1,403
)
Income attributable to participating securities
(274
)
 
(140
)
 
(513
)
 
(280
)
Income (loss) from continuing operations attributable to Aimco common stockholders
$
75,010

 
$
842

 
$
139,244

 
$
(504
)
 
 
 
 
 
 
 
 
Income from discontinued operations
$
—

 
$
4,502

 
$
—

 
$
8,997

Loss from discontinued operations attributable to noncontrolling interests
—

 
4,763

 
—

 
6,664

Income from discontinued operations attributable to Aimco common stockholders
$
—

 
$
9,265

 
$
—

 
$
15,661

 
 
 
 
 
 
 
 
Net income
$
84,605

 
$
6,979

 
$
166,137

 
$
9,812

Net (income) loss attributable to noncontrolling interests
(7,563
)
 
3,969

 
(24,168
)
 
7,028

Net income attributable to preferred stockholders
(1,758
)
 
(701
)
 
(2,212
)
 
(1,403
)
Net income attributable to participating securities
(274
)
 
(140
)
 
(513
)
 
(280
)
Net income attributable to Aimco common stockholders
$
75,010

 
$
10,107

 
$
139,244

 
$
15,157

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
145,657

 
145,321

 
145,565

 
145,245

 Dilutive potential common shares
328

 
353

 
268

 
—

Weighted average common shares outstanding – diluted
145,985

 
145,674

 
145,833

 
145,245

 
 
 
 
 
 
 
 
Earnings attributable to Aimco per common share – basic:
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.96

 
$
—

Income from discontinued operations
—

 
0.06

 
—

 
0.10

Net income
$
0.51

 
$
0.07

 
$
0.96

 
$
0.10

 
 
 
 
 
 
 
 
Earnings attributable to Aimco per common share – diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.95

 
$
—

Income from discontinued operations
—

 
0.06

 
—

 
0.10

Net income
$
0.51

 
$
0.07

 
$
0.95

 
$
0.10


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The Aimco Operating Partnership
The Aimco Operating Partnership calculates earnings per unit based on the weighted average number of common partnership units and equivalents, participating securities and dilutive convertible securities outstanding during the period. The Aimco Operating Partnership considers both common OP Units and HPUs, which have identical rights to distributions and undistributed earnings, to be common units for purposes of the earnings per unit data presented below. The following table illustrates the Aimco Operating Partnership’s calculation of basic and diluted earnings per unit for the three and six months ended June 30, 2014 and 2013 (in thousands, except per unit data):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
17,943

 
$
2,477

 
$
29,983

 
$
815

Gain on dispositions of real estate, net of tax
66,662

 
—

 
136,154

 
—

(Income) loss from continuing operations and gain on dispositions attributable to noncontrolling interests
(2,226
)
 
837

 
(13,615
)
 
3,582

Income attributable to the Aimco Operating Partnership’s preferred unitholders
(3,360
)
 
(2,307
)
 
(5,419
)
 
(4,615
)
Income attributable to participating securities
(274
)
 
(140
)
 
(513
)
 
(280
)
Income (loss) from continuing operations attributable to the Aimco Operating Partnership’s common unitholders
$
78,745

 
$
867

 
$
146,590

 
$
(498
)
 
 
 
 
 
 
 
 
Income from discontinued operations
$
—

 
$
4,502

 
$
—

 
$
8,997

Loss from discontinued operations attributable to noncontrolling interests
—

 
5,313

 
—

 
7,530

Income from discontinued operations attributable to the Aimco Operating Partnership’s common unitholders
$
—

 
$
9,815

 
$
—

 
$
16,527

 
 
 
 
 
 
 
 
Net income
$
84,605

 
$
6,979

 
$
166,137

 
$
9,812

Net (income) loss attributable to noncontrolling interests
(2,226
)
 
6,150

 
(13,615
)
 
11,112

Net income attributable to the Aimco Operating Partnership’s preferred unitholders
(3,360
)
 
(2,307
)
 
(5,419
)
 
(4,615
)
Net income attributable to participating securities
(274
)
 
(140
)
 
(513
)
 
(280
)
Net income attributable to the Aimco Operating Partnership’s common unitholders
$
78,745

 
$
10,682

 
$
146,590

 
$
16,029

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common units outstanding – basic
153,377

 
153,294

 
153,295

 
153,217

Dilutive potential common units
328

 
353

 
268

 
—

Weighted average common units outstanding – diluted
153,705

 
153,647

 
153,563

 
153,217

 
 
 
 
 
 
 
 
Earnings attributable to the Aimco Operating Partnership per common unit – basic:
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.96

 
$
—

Income from discontinued operations
—

 
0.06

 
—

 
0.10

Net income
$
0.51

 
$
0.07

 
$
0.96

 
$
0.10

 
 
 
 
 
 
 
 
Earnings attributable to the Aimco Operating Partnership per common unit – diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.51

 
$
0.01

 
$
0.95

 
$
—

Income from discontinued operations
—

 
0.06

 
—

 
0.10

Net income
$
0.51

 
$
0.07

 
$
0.95

 
$
0.10


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Aimco and the Aimco Operating Partnership
As of June 30, 2014, the common share equivalents or common partnership unit equivalents that could potentially dilute basic earnings per share or unit in future periods totaled 2.5 million. These securities represent options to purchase shares of Common Stock, which, if exercised, would result in Aimco’s issuance of additional shares and the Aimco Operating Partnership’s issuance to Aimco of additional common partnership units equal to the number of shares purchased under the options. The effect of these securities was dilutive for the three and six months ended June 30, 2014 and three months ended June 30, 2013, and accordingly has been included in the denominator for calculating diluted earnings per share and unit during these periods. These securities have been excluded from the earnings per share or unit computations for the six months ended June 30, 2013, because their effect would have been anti-dilutive. Participating securities, consisting of unvested restricted shares of Common Stock, receive dividends similar to shares of Common Stock and common partnership units and totaled 0.5 million and 0.6 million at June 30, 2014 and 2013, respectively. The effect of participating securities is included in basic and diluted earnings per share and unit computations for the periods presented above using the two-class method of allocating distributed and undistributed earnings.
Various classes of preferred OP Units of the Aimco Operating Partnership are outstanding. Depending on the terms of each class, these preferred OP Units are convertible into common OP Units or redeemable for cash or, at the Aimco Operating Partnership’s option, Common Stock, and are paid distributions varying from 1.8% to 8.8% per annum per unit. As of June 30, 2014, a total of 2.9 million preferred OP Units were outstanding with an aggregate redemption value of $78.9 million and were potentially redeemable for approximately 2.4 million shares of Common Stock (based on the period end market price), or cash at the Aimco Operating Partnership’s option. The Aimco Operating Partnership has a redemption policy that requires cash settlement of redemption requests for the preferred OP Units, subject to limited exceptions. Accordingly, we have excluded these securities from earnings per share and unit computations for the periods presented above, and we expect to exclude them in future periods.
Note 8 — Business Segments
We have two reportable segments: conventional real estate operations and affordable real estate operations. Our conventional real estate operations consist of market-rate apartment communities with rents paid by the residents and included 157 apartment communities with 47,302 apartment homes at June 30, 2014. Our affordable real estate operations consisted of 61 apartment communities with 9,142 apartment homes at June 30, 2014, with rents that are generally paid, in whole or part, by a government agency.
Due to the diversity of our economic ownership interests in our apartment communities, our chief executive officer, who is our operating decision maker, uses proportionate property net operating income to asses the operating performance of our apartment communities. Proportionate property net operating income reflects our share of rental and other property revenues less direct property operating expenses, including real estate taxes, for the consolidated and unconsolidated apartment communities that we manage.
The following tables present the revenues, net operating income (loss) and income (loss) from continuing operations of our conventional and affordable real estate operations segments on a proportionate basis for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Conventional
Real Estate
Operations
 
Affordable
Real Estate
Operations
 
Proportionate
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to
Segments (2)
 
Consolidated
Three Months Ended June 30, 2014:
 
 
 
 
 
 
 
 
 
Rental and other property revenues (3)
$
201,598

 
$
24,318

 
$
8,832

 
$
4,744

 
$
239,492

Tax credit and asset management revenues
—

 
—

 
—

 
6,926

 
6,926

Total revenues
201,598

 
24,318

 
8,832

 
11,670

 
246,418

Property operating expenses (3)
69,800

 
9,870

 
2,610

 
12,158

 
94,438

Investment management expenses
—

 
—

 
—

 
1,021

 
1,021

Depreciation and amortization (3)
—

 
—

 
—

 
71,399

 
71,399

General and administrative expenses
—

 
—

 
—

 
10,125

 
10,125

Other expense, net
—

 
—

 
—

 
3,638

 
3,638

Total operating expenses
69,800

 
9,870

 
2,610

 
98,341

 
180,621

Net operating income (loss)
131,798

 
14,448

 
6,222

 
(86,671
)
 
65,797

Other items included in continuing operations
—

 
—

 
—

 
(47,854
)
 
(47,854
)
Income (loss) from continuing operations
$
131,798

 
$
14,448

 
$
6,222

 
$
(134,525
)
 
$
17,943


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