Document
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 September 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
 
 
Emerging growth company
o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. 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
 
 
 
Emerging growth company
o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. 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 October 31, 2017: 157,023,314
The number of AIMCO Properties, L.P. Partnership Common Units outstanding as of October 31, 2017: 164,458,302
 


Table of Contents

EXPLANATORY NOTE
This filing combines the reports on Form 10-Q for the quarterly period ended September 30, 2017, 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 September 30, 2017, owned a 95.5% ownership interest in the common partnership units of, the Aimco Operating Partnership. The remaining 4.5% 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. Pursuant to the Aimco Operating Partnership agreement, Aimco is required to contribute to the Aimco Operating Partnership any assets, which it may acquire including all proceeds from the offerings of its securities. In exchange for the contribution of these 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:
We present our business as a whole, in the same manner our management views and operates the business;
We eliminate duplicative disclosure and provide a more streamlined and readable presentation because a substantial portion of the disclosures apply to both Aimco and the Aimco Operating Partnership; and
We save 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, the management of Aimco directs the management and operations of the Aimco Operating Partnership, and the members of the Board of Directors of Aimco are identical to those 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 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, which we refer to as OP Units, 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, where appropriate.
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)

 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Buildings and improvements
$
6,264,146

 
$
6,106,298

Land
1,827,748

 
1,824,819

Total real estate
8,091,894

 
7,931,117

Accumulated depreciation
(2,549,197
)
 
(2,421,357
)
Net real estate
5,542,697

 
5,509,760

Cash and cash equivalents
38,780

 
45,821

Restricted cash
47,565

 
36,405

Other assets
247,722

 
293,768

Assets of partnerships served by Asset Management business:
 
 
 
Real estate, net
228,830

 
245,648

Cash and cash equivalents
16,901

 
15,423

Restricted cash
30,350

 
33,501

Other assets
16,493

 
52,492

Total assets
$
6,169,338

 
$
6,232,818

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Non-recourse property debt secured by Real Estate communities, net
$
3,556,668

 
$
3,630,276

Term loan, net
249,252

 

Revolving credit facility borrowings
356,220

 
17,930

Total indebtedness associated with Real Estate portfolio
4,162,140

 
3,648,206

Accrued liabilities and other
207,533

 
218,937

Liabilities of partnerships served by Asset Management business:
 
 
 
Non-recourse property debt, net
228,382

 
236,426

Accrued liabilities and other
20,135

 
62,630

Deferred income
13,922

 
18,452

Total liabilities
4,632,112

 
4,184,651

Preferred noncontrolling interests in Aimco Operating Partnership
101,537

 
103,201

Commitments and contingencies (Note 4)

 

Equity:
 
 
 
Perpetual Preferred Stock
125,000

 
125,000

Common Stock, $0.01 par value, 500,787,260 shares authorized, 157,023,314 and 156,888,381 shares issued/outstanding at September 30, 2017 and December 31, 2016, respectively
1,570

 
1,569

Additional paid-in capital
3,898,441

 
4,051,722

Accumulated other comprehensive income
1,898

 
1,011

Distributions in excess of earnings
(2,572,723
)
 
(2,385,399
)
Total Aimco equity
1,454,186

 
1,793,903

Noncontrolling interests in consolidated real estate partnerships
(2,955
)
 
151,121

Common noncontrolling interests in Aimco Operating Partnership
(15,542
)
 
(58
)
Total equity
1,435,689

 
1,944,966

Total liabilities and equity
$
6,169,338

 
$
6,232,818

 


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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
233,708

 
$
225,902

 
$
686,639

 
$
672,234

Rental and other property revenues of partnerships served by Asset Management business
18,232

 
18,213

 
55,327

 
56,233

Tax credit and transaction revenues
2,695

 
4,789

 
8,242

 
17,894

Total revenues
254,635

 
248,904

 
750,208

 
746,361

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses attributable to Real Estate
81,179

 
82,756

 
239,819

 
241,936

Property operating expenses of partnerships served by Asset Management business
8,865

 
9,410

 
26,445

 
28,199

Depreciation and amortization
92,513

 
84,848

 
268,836

 
245,356

General and administrative expenses
10,529

 
11,615

 
31,599

 
35,529

Other expenses, net
2,344

 
1,543

 
6,809

 
8,639

Total operating expenses
195,430

 
190,172

 
573,508

 
559,659

Operating income
59,205

 
58,732

 
176,700

 
186,702

Interest income
2,047

 
2,163

 
6,251

 
5,841

Interest expense
(50,682
)
 
(49,377
)
 
(145,422
)
 
(145,905
)
Other, net
6,937

 
558

 
7,602

 
5,541

Income before income taxes and gain on dispositions
17,507

 
12,076

 
45,131

 
52,179

Income tax benefit
4,870

 
3,462

 
14,878

 
16,469

Income before gain on dispositions
22,377

 
15,538

 
60,009

 
68,648

Gain (loss) on dispositions of real estate, inclusive of tax
(233
)
 
14,498

 
881

 
237,226

Net income
22,144

 
30,036

 
60,890

 
305,874

Noncontrolling interests:
 
 
 
 
 
 
 
Net loss (income) attributable to noncontrolling interests in consolidated real estate partnerships
249

 
(12,489
)
 
(1,515
)
 
(22,096
)
Net income attributable to preferred noncontrolling interests in Aimco Operating Partnership
(1,938
)
 
(1,842
)
 
(5,826
)
 
(5,276
)
Net income attributable to common noncontrolling interests in Aimco Operating Partnership
(820
)
 
(192
)
 
(2,164
)
 
(12,499
)
Net income attributable to noncontrolling interests
(2,509
)
 
(14,523
)
 
(9,505
)
 
(39,871
)
Net income attributable to Aimco
19,635

 
15,513

 
51,385

 
266,003

Net income attributable to Aimco preferred stockholders
(2,148
)
 
(4,323
)
 
(6,445
)
 
(9,838
)
Net income attributable to participating securities
(57
)
 
(14
)
 
(176
)
 
(384
)
Net income attributable to Aimco common stockholders
$
17,430

 
$
11,176

 
$
44,764

 
$
255,781

 
 
 
 
 
 
 
 
Net income attributable to Aimco per common share – basic and diluted
$
0.11

 
$
0.07

 
$
0.29

 
$
1.64

Dividends declared per common share
$
0.36

 
$
0.33

 
$
1.08

 
$
0.99

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
156,306

 
156,079

 
156,290

 
155,944

Weighted average common shares outstanding – diluted
156,835

 
156,527

 
156,768

 
156,341


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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
22,144

 
$
30,036

 
$
60,890

 
$
305,874

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
75

 
337

 
(280
)
 
(748
)
Losses on interest rate swaps reclassified into earnings from accumulated other comprehensive loss
594

 
390

 
1,349

 
1,208

Unrealized gains (losses) on investments in debt securities classified as available-for-sale
381

 
(336
)
 
(40
)
 
5,615

Other comprehensive income
1,050

 
391

 
1,029

 
6,075

Comprehensive income
23,194

 
30,427

 
61,919

 
311,949

Comprehensive income attributable to noncontrolling interests
(2,557
)
 
(14,639
)
 
(9,647
)
 
(40,341
)
Comprehensive income attributable to Aimco
$
20,637

 
$
15,788

 
$
52,272

 
$
271,608



See notes to condensed consolidated financial statements.

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Table of Contents

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

 
Nine Months Ended
 
September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
60,890

 
$
305,874

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
268,836

 
245,356

Gain on dispositions of real estate, net of tax
(881
)
 
(237,226
)
Other adjustments
(14,482
)
 
(10,530
)
Net changes in operating assets and operating liabilities
(29,338
)
 
(27,018
)
Net cash provided by operating activities
285,025

 
276,456

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of real estate
(11,706
)
 
(287,952
)
Capital expenditures
(266,623
)
 
(259,323
)
Proceeds from dispositions of real estate
11,027

 
325,344

Purchases of corporate assets
(7,358
)
 
(6,472
)
Change in restricted cash
1,607

 
(15,992
)
Other investing activities
(1,086
)
 
10,134

Net cash used in investing activities
(274,139
)
 
(234,261
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from non-recourse property debt
165,785

 
190,714

Principal repayments on non-recourse property debt
(250,674
)
 
(253,328
)
Proceeds from term loan
250,000

 

Net borrowings on revolving credit facility
338,290

 
267,780

Redemption of Preferred Stock

 
(34,791
)
Payment of dividends to holders of Preferred Stock
(6,445
)
 
(7,866
)
Payment of dividends to holders of Common Stock
(168,987
)
 
(154,661
)
Payment of distributions to noncontrolling interests
(15,829
)
 
(29,026
)
Purchases and redemptions of noncontrolling interests
(324,265
)
 
(23,051
)
Other financing activities
(4,324
)
 
(847
)
Net cash used in financing activities
(16,449
)
 
(45,076
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(5,563
)
 
(2,881
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
61,244

 
50,789

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
55,681

 
$
47,908






See notes to condensed consolidated financial statements.

6

Table of Contents


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

 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Buildings and improvements
$
6,264,146

 
$
6,106,298

Land
1,827,748

 
1,824,819

Total real estate
8,091,894

 
7,931,117

Accumulated depreciation
(2,549,197
)
 
(2,421,357
)
Net real estate
5,542,697

 
5,509,760

Cash and cash equivalents
38,780

 
45,821

Restricted cash
47,565

 
36,405

Other assets
247,722

 
293,768

Assets of partnerships served by Asset Management business:
 
 
 
Real estate, net
228,830

 
245,648

Cash and cash equivalents
16,901

 
15,423

Restricted cash
30,350

 
33,501

Other assets
16,493

 
52,492

Total assets
$
6,169,338

 
$
6,232,818

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Non-recourse property debt secured by Real Estate communities, net
$
3,556,668

 
$
3,630,276

Term loan, net
249,252

 

Revolving credit facility borrowings
356,220

 
17,930

Total indebtedness associated with Real Estate portfolio
4,162,140

 
3,648,206

Accrued liabilities and other
207,533

 
218,937

Liabilities of partnerships served by Asset Management business:
 
 
 
Non-recourse property debt, net
228,382

 
236,426

Accrued liabilities and other
20,135

 
62,630

Deferred income
13,922

 
18,452

Total liabilities
4,632,112

 
4,184,651

Redeemable preferred units
101,537

 
103,201

Commitments and contingencies (Note 4)

 

Partners’ capital:
 
 
 
Preferred units
125,000

 
125,000

General Partner and Special Limited Partner
1,329,186

 
1,668,903

Limited Partners
(15,542
)
 
(58
)
Partners’ capital attributable to the Aimco Operating Partnership
1,438,644

 
1,793,845

Noncontrolling interests in consolidated real estate partnerships
(2,955
)
 
151,121

Total partners’ capital
1,435,689

 
1,944,966

Total liabilities and partners’ capital
$
6,169,338

 
$
6,232,818

 

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
233,708

 
$
225,902

 
$
686,639

 
$
672,234

Rental and other property revenues of partnerships served by Asset Management business
18,232

 
18,213

 
55,327

 
56,233

Tax credit and transaction revenues
2,695

 
4,789

 
8,242

 
17,894

Total revenues
254,635

 
248,904

 
750,208

 
746,361

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses attributable to Real Estate
81,179

 
82,756

 
239,819

 
241,936

Property operating expenses of partnerships served by Asset Management business
8,865

 
9,410

 
26,445

 
28,199

Depreciation and amortization
92,513

 
84,848

 
268,836

 
245,356

General and administrative expenses
10,529

 
11,615

 
31,599

 
35,529

Other expenses, net
2,344

 
1,543

 
6,809

 
8,639

Total operating expenses
195,430

 
190,172

 
573,508

 
559,659

Operating income
59,205

 
58,732

 
176,700

 
186,702

Interest income
2,047

 
2,163

 
6,251

 
5,841

Interest expense
(50,682
)
 
(49,377
)
 
(145,422
)
 
(145,905
)
Other, net
6,937

 
558

 
7,602

 
5,541

Income before income taxes and gain on dispositions
17,507

 
12,076

 
45,131

 
52,179

Income tax benefit
4,870

 
3,462

 
14,878

 
16,469

Income before gain on dispositions
22,377

 
15,538

 
60,009

 
68,648

Gain (loss) on dispositions of real estate, inclusive of tax
(233
)
 
14,498

 
881

 
237,226

Net income
22,144

 
30,036

 
60,890

 
305,874

Net loss (income) attributable to noncontrolling interests in consolidated real estate partnerships
249

 
(12,489
)
 
(1,515
)
 
(22,096
)
Net income attributable to the Aimco Operating Partnership
22,393

 
17,547

 
59,375

 
283,778

Net income attributable to the Aimco Operating Partnership’s preferred unitholders
(4,086
)
 
(6,165
)
 
(12,271
)
 
(15,114
)
Net income attributable to participating securities
(61
)
 
(14
)
 
(184
)
 
(384
)
Net income attributable to the Aimco Operating Partnership’s common unitholders
$
18,246

 
$
11,368

 
$
46,920

 
$
268,280

 
 
 
 
 
 
 
 
Net income attributable to the Aimco Operating Partnership per common unit – basic
$
0.11

 
$
0.07

 
$
0.29

 
$
1.64

Net income attributable to the Aimco Operating Partnership per common unit – diluted
$
0.11

 
$
0.07

 
$
0.29

 
$
1.63

Distributions declared per common unit
$
0.36

 
$
0.33

 
$
1.08

 
$
0.99

 
 
 
 
 
 
 
 
Weighted average common units outstanding – basic
163,664

 
163,832

 
163,739

 
163,749

Weighted average common units outstanding – diluted
164,194

 
164,280

 
164,218

 
164,146

 

See notes to condensed consolidated financial statements.

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Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
22,144

 
$
30,036

 
$
60,890

 
$
305,874

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swaps
75

 
337

 
(280
)
 
(748
)
Losses on interest rate swaps reclassified into earnings from accumulated other comprehensive loss
594

 
390

 
1,349

 
1,208

Unrealized gains (losses) on investments in debt securities classified as available-for-sale
381

 
(336
)
 
(40
)
 
5,615

Other comprehensive income
1,050

 
391

 
1,029

 
6,075

Comprehensive income
23,194

 
30,427

 
61,919

 
311,949

Comprehensive loss (income) attributable to noncontrolling interests
249

 
(12,591
)
 
(1,616
)
 
(22,285
)
Comprehensive income attributable to the Aimco Operating Partnership
$
23,443

 
$
17,836

 
$
60,303

 
$
289,664



See notes to condensed consolidated financial statements.

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

 
Nine Months Ended
 
September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
60,890

 
$
305,874

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
268,836

 
245,356

Gain on dispositions of real estate, net of tax
(881
)
 
(237,226
)
Other adjustments
(14,482
)
 
(10,530
)
Net changes in operating assets and operating liabilities
(29,338
)
 
(27,018
)
Net cash provided by operating activities
285,025

 
276,456

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of real estate
(11,706
)
 
(287,952
)
Capital expenditures
(266,623
)
 
(259,323
)
Proceeds from dispositions of real estate
11,027

 
325,344

Purchases of corporate assets
(7,358
)
 
(6,472
)
Change in restricted cash
1,607

 
(15,992
)
Other investing activities
(1,086
)
 
10,134

Net cash used in investing activities
(274,139
)
 
(234,261
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from non-recourse property debt
165,785

 
190,714

Principal repayments on non-recourse property debt
(250,674
)
 
(253,328
)
Proceeds from term loan
250,000

 

Net borrowings on revolving credit facility
338,290

 
267,780

Redemption of preferred units from Aimco

 
(34,791
)
Payment of distributions to holders of Preferred Units
(12,271
)
 
(13,142
)
Payment of distributions to General Partner and Special Limited Partner
(168,987
)
 
(154,661
)
Payment of distributions to Limited Partners
(8,026
)
 
(7,693
)
Payment of distributions to noncontrolling interests
(1,977
)
 
(16,057
)
Purchases of noncontrolling interests in consolidated real estate partnerships
(311,079
)
 
(11,869
)
Other financing activities
(17,510
)
 
(12,029
)
Net cash used in financing activities
(16,449
)
 
(45,076
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(5,563
)
 
(2,881
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
61,244

 
50,789

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
55,681

 
$
47,908





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
September 30, 2017
(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, management, redevelopment and limited development of quality apartment communities located in the largest markets in the United States.
Aimco, 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 and high performance partnership units, which we refer to as common OP Units, as well as partnership preferred units, which we refer to as preferred OP Units. As of September 30, 2017, after eliminations for units held by consolidated subsidiaries, the Aimco Operating Partnership had 164,459,517 common partnership units and equivalents outstanding. As of September 30, 2017, Aimco owned 157,023,314 of the common partnership units (95.5% 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 September 30, 2017, we owned an equity interest in 141 apartment communities with 39,184 apartment homes in our real estate portfolio. Our Real Estate portfolio, which comprises our reportable segment, is diversified by both price point and geography and consists primarily of market rate apartment communities in which we own a substantial interest. We consolidated 137 of these apartment communities with 39,042 apartment homes.
As of September 30, 2017, we also owned nominal ownership positions in partnerships holding 46 low-income housing tax credit apartment communities with 6,898 apartment homes. We provide services to these partnerships and receive fees and other payments in return. Our relationship with these partnerships is different than real estate ownership and is better described as an asset management business, or Asset Management. In accordance with accounting principles generally accepted in the United States of America, or GAAP, we are required to consolidate partnerships owning an aggregate of 39 apartment communities with 6,211 apartment homes.
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 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 nine months ended September 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The balance sheets of Aimco and the Aimco Operating Partnership at December 31, 2016, 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, 2016. Except where indicated, the footnotes refer to both Aimco and the Aimco Operating Partnership.
Effective in 2017, we modified our condensed consolidated balance sheets to present the assets and liabilities of consolidated partnerships served by our Asset Management business separately from those amounts relating to our Real Estate portfolio. We have similarly modified our condensed consolidated statements of operations to present separately the rental and other property

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revenues and property operating expenses of consolidated partnerships served by our Asset Management business. We have reclassified these items in the condensed consolidated balance sheets as of December 31, 2016, and in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016, to conform to the current presentation. These reclassifications had no effect on previously reported total assets, total liabilities or net income amounts.
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 subsidiaries, including partnerships served by our Asset Management business (see note Note 8). 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 the Aimco Operating Partnership. Interests in partnerships consolidated by 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.
Temporary Equity and Partners’ Capital
The following table presents a reconciliation of the Aimco Operating Partnership’s Preferred OP Units from December 31, 2016 to September 30, 2017. The Preferred OP Units may be redeemed at the holders’ option (as further discussed in Note 5), and therefore are presented within temporary equity in Aimco’s condensed consolidated balance sheets and within temporary capital in the Aimco Operating Partnership’s condensed consolidated balance sheets (in thousands).
Balance, December 31, 2016
$
103,201

Distributions to preferred unitholders
(5,826
)
Redemption of preferred units and other
(1,664
)
Net income
5,826

Balance, September 30, 2017
$
101,537

Aimco Equity (including Noncontrolling Interests)
The following table presents a reconciliation of Aimco’s consolidated permanent equity accounts from December 31, 2016 to September 30, 2017 (in thousands):
 
Aimco
Equity
 
Noncontrolling
interests in
consolidated real estate
partnerships
 
Common
noncontrolling
interests in
Aimco Operating
Partnership
 
Total
Equity
Balance, December 31, 2016
$
1,793,903

 
$
151,121

 
$
(58
)
 
$
1,944,966

Contributions

 
3,341

 

 
3,341

Dividends on Preferred Stock
(6,445
)
 

 

 
(6,445
)
Dividends and distributions on Common Stock and common OP Units
(169,582
)
 
(1,977
)
 
(8,094
)
 
(179,653
)
Redemptions of common OP Units

 

 
(11,524
)
 
(11,524
)
Amortization of stock-based compensation cost
6,780

 

 
460

 
7,240

Effect of changes in ownership for consolidated entities
(160,187
)
 
(157,056
)
 
4,497

 
(312,746
)
Cumulative effect of a change in accounting principle
(62,682
)
 

 
(3,028
)
 
(65,710
)
Change in accumulated other comprehensive loss
887

 
101

 
41

 
1,029

Other
127

 

 

 
127

Net income
51,385

 
1,515

 
2,164

 
55,064

Balance, September 30, 2017
$
1,454,186

 
$
(2,955
)
 
$
(15,542
)
 
$
1,435,689

On June 30, 2017, we reacquired the 47% noncontrolling limited partner interest in the Palazzo joint venture, as further discussed in Note 3. As a result of this transaction we recorded the consideration paid in excess of the noncontrolling interest in

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the consolidated real estate partnership of $155.6 million as a reduction of Aimco’s additional paid-in capital and the Aimco Operating Partnership’s partners capital.
Please refer to the Accounting Pronouncements Adopted in the Current Year heading below, for further discussion of the cumulative effect of a change in accounting principle.
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, 2016 to September 30, 2017 (in thousands):
 
Partners’ capital
 attributable to
the Aimco Operating Partnership
Balance, December 31, 2016
$
1,793,845

Distributions to preferred units held by Aimco
(6,445
)
Distributions to common units held by Aimco
(169,582
)
Distributions to common units held by Limited Partners
(8,094
)
Redemption of common OP Units
(11,524
)
Amortization of Aimco stock-based compensation cost
7,240

Effect of changes in ownership for consolidated entities
(155,690
)
Cumulative effect of a change in accounting principle
(65,710
)
Change in accumulated other comprehensive loss
928

Other
127

Net income
53,549

Balance, September 30, 2017
$
1,438,644

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.
Accounting Pronouncements Adopted in the Current Year
Effective April 1, 2017, we elected to adopt early the new accounting standard that revised the GAAP definition of a business. Under the new standard we expect apartment communities will no longer be considered businesses in most acquisitions and dispositions. Under the new standard, transaction costs incurred related to the acquisition of real estate operations will be capitalized as a cost of the acquisition. Additionally, we will no longer allocate goodwill to apartment communities for purposes of calculating gains or losses upon sale. We have applied the new standard prospectively to transactions occurring after April 1, 2017. This standard did not have a significant effect on our financial condition or results of operations.
Effective January 1, 2017, we adopted a new standard issued by the Financial Accounting Standards Board, or FASB, that simplifies the accounting for the income tax consequences of intercompany transfers of assets. Previously, the recognition within the statement of operations of income tax expense or benefit resulting from an intercompany transfer of assets did not occur until the assets affect GAAP income or loss, for example, through depreciation, impairment or upon the sale of the asset to a third party. Under the new standard, an entity recognizes the income tax expense or benefit from an intercompany transfer of assets when the transfer occurs. We have applied this change on a modified retrospective basis and recorded a cumulative effect adjustment to retained earnings of $65.7 million as of January 1, 2017, representing accumulated unrecognized tax expense from intercompany transfers between the Aimco Operating Partnership and TRS entities. Such amounts were included in other assets within our consolidated balance sheets at December 31, 2016.
Also effective January 1, 2017, we adopted guidance that simplifies the accounting for share-based compensation. Under prior practice, tax benefits in excess of those associated with compensation cost recognized in accordance with GAAP, or windfalls, were recorded in equity and tax deficiencies were recorded in equity until previous windfalls had been recouped and then recognized

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in earnings. Under the new guidance, all of the tax effects related to share-based compensation are recognized through earnings. This guidance is applied to all windfalls and tax deficiencies resulting from settlements occurring after January 1, 2017. The new guidance also requires windfalls to be recorded in the period the related transaction triggering tax consequences, such as an exercise of stock options or vesting of restricted shares, occurs. This change in timing of recognition has been applied on a modified retrospective basis. We did not record a cumulative effect adjustment to opening retained earnings on the date of adoption as there were no accumulated windfalls recorded in equity. Compared to prior periods, we may experience incremental volatility in income tax benefit or expense resulting from the recognition in earnings of windfall benefits or deficiencies upon the exercise of stock options and vesting of restricted shares.
Recent Accounting Pronouncements
As discussed in Note 2 to the consolidated financial statements in Item 8 of our Form 10-K for the year ended December 31, 2016, the FASB issued new standards that affect accounting for revenue from contracts with customers and that are effective for us on January 1, 2018. The FASB also issued a new standard on lease accounting, which is effective for Aimco on January 1, 2019, with early adoption permitted. We have substantially completed our evaluation of these standards and do not expect our adoption will have a significant effect on the timing or amount of revenue or lease income we recognize on an ongoing basis. However, in circumstances where we are a lessee, primarily in a limited population of ground leases and leases of corporate office space, we will be required to recognize right of use assets and related lease liabilities within our consolidated balance sheets. We expect the timing and amount of expense for these leases will remain unchanged unless modified prior to their contractual termination dates.
Note 3 — Significant Transactions, Dispositions of Apartment Communities and Assets Held for Sale
Reacquisition of Limited Partner Interest in Palazzo Joint Venture and Term Loan
On June 30, 2017, we reacquired for $451.5 million, the 47% noncontrolling limited partner interest in the Palazzo joint venture, which owns three communities with a total of 1,382 apartment homes located in Los Angeles, California. We assumed $140.5 million of the noncontrolling interest partner’s share of existing non-recourse property-level debt and paid $311.0 million in cash consideration, which was funded by short-term borrowings we expect to repay using proceeds from apartment community sales. We now own all of the interests in the Palazzo joint venture and its underlying apartment communities. Prior to the transaction, we consolidated into our financial statements the joint venture and underlying apartment communities, therefore this transaction has been accounted for as an equity transaction. In accordance with GAAP, we recognized the $155.6 million of consideration paid in excess of the noncontrolling interest balance as a reduction of additional paid-in capital within Aimco’s equity and the Aimco Operating Partnership’s partners capital.
On June 30, 2017, we entered into a second amended and restated senior secured credit agreement, or the Credit Agreement. The Credit Agreement continues our existing $600.0 million revolving loan facility with consistent terms and provides for a $250.0 million term loan, which we used to fund a portion of the Palazzo reacquisition. The term loan matures on June 30, 2018, includes a one-year extension option, subject to the satisfaction of customary conditions, and currently bears interest at 30-day LIBOR plus 1.35%. We paid lender and other fees of $1.0 million in connection with the term loan, which have been deferred and will be recognized as additional interest over the duration of the term loan.
Dispositions of Apartment Communities
During the nine months ended September 30, 2017, partnerships served by the Asset Management business sold two apartment communities with a total of 252 apartment homes, resulting in gains of $2.6 million, and related tax expense of $0.9 million.
We are currently marketing for sale certain apartment communities that are inconsistent with our long-term investment strategy. Additionally, the consolidated partnerships served by our Asset Management business periodically evaluates for sale certain of their apartment communities. At the end of each reporting period, we evaluate whether any consolidated apartment communities meet the criteria to be classified as held for sale. As of September 30, 2017, no apartment communities were classified as held for sale.
Napico Disposition
In 2012, we sold the Napico business. The transaction was primarily seller-financed, and the associated notes were scheduled to be repaid from the operation and liquidation of the Napico business and were collateralized by the buyer’s interests in the portfolio. In 2016, the buyer paid the two seller-financed notes in full. At that time we maintained continuing involvement related to preexisting guarantees of property-level debt for two communities. In accordance with GAAP, we deferred recognition of the sale of these communities until the guarantees were released. In September 2017, the owner refinanced the final mortgage, resulting

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in the release of our remaining guarantee, which allowed us to transfer our nominal general partner interest in the property to the buyer.
Accordingly, we reduced other assets and accrued liabilities and other by $34.5 million and $38.4 million, respectively, and recognized a gain of $7.1 million, net of tax, in other, net on our condensed consolidated statement of operations for the three and nine months ended September 30, 2017.
Note 4 — Commitments and Contingencies
Commitments
In connection with our redevelopment, development and capital improvement activities, we have entered into various construction-related contracts and we have made commitments to complete redevelopment of certain apartment communities, pursuant to financing or other arrangements. As of September 30, 2017, our commitments related to these capital activities totaled approximately $96.2 million, most of which we expect to incur during the next 12 months.
We 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
For various consolidated partnerships served by our Asset Management business, we are required to manage the partnerships and related apartment communities in compliance with various laws, regulations and contractual provisions that apply to 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 by the limited partners in these partnerships and would require a refund or reduction of investor capital contributions, which are reported as deferred income in our condensed consolidated balance sheets, until such time as our obligation to deliver tax benefits is relieved. The remaining compliance periods for the tax credit syndication arrangements range from less than one year to eight 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
In 2014, the Internal Revenue Service initiated an audit of the Aimco Operating Partnership’s 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.
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.
La Jolla Cove Litigation
We are a defendant in a lawsuit filed by a group of disappointed buyers that contend we interfered with their allegedly superior right to acquire the La Jolla Cove property. The case, pending in state court in California, is in fact discovery at this stage. The case is set for jury trial in February 2018.  Although the outcome of this litigation is uncertain, we do not believe its resolution will 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 that may be present in the land or buildings of an apartment community. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was

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responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or for personal injury, disease, disability or other infirmities related to the alleged presence of hazardous materials. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate.
We are engaged in discussions with the Environmental Protection Agency, or EPA, and the Indiana Department of Environmental Management, or IDEM, regarding contaminated groundwater in a residential area in the vicinity of an Indiana apartment community that has not been owned by us since 2008. The contamination allegedly derives from a dry cleaner that operated on our former property, prior to our ownership. We have undertaken a voluntary remediation of the dry cleaner contamination under IDEM’s oversight, and in previous years accrued our share of the then-estimated cleanup and abatement costs. In 2016, EPA listed our former community and a number of residential communities in the vicinity on the National Priorities List, or NPL (i.e. as a Superfund site), and IDEM has formally sought to terminate us from the voluntary remediation program. We have filed a formal appeal of the EPA listing and the IDEM termination of us from the voluntary remediation program. Although the outcome of these processes are uncertain, we do not expect their resolution to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
We also have been contacted by regulators and the current owner of a property in Lake Tahoe regarding environmental issues allegedly stemming from the historic operation of a dry cleaner. An entity owned by us was the former general partner of a now-dissolved partnership that previously owned a site that was used for dry cleaning. That entity and the current property owner have been remediating the dry cleaner site since 2009, under the oversight of the Lahontan Regional Water Quality Control Board, or Lahontan. In 2016, Lahontan sent us, the current property owner, and a former operator of the dry cleaner drafts of a proposed cleanup and abatement order that, if entered as drafted, would have required all three parties to perform additional groundwater investigation and corrective actions with respect to onsite and offsite contamination. After review of comments from us, Lahontan issued a final order in May 2017. The final order adds one more potentially-responsible party, acknowledges that there may be additional responsible parties, and narrows (as compared to earlier drafts) the scope of work. We are appealing the final order while simultaneously complying with it. Although the outcome of this process is uncertain, we do not expect its resolution to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
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 September 30, 2017, are immaterial to our consolidated financial condition, results of operations and cash flows.
Note 5 — Earnings per Share and Unit
Aimco and the Aimco Operating Partnership calculate basic earnings per common share and basic earnings per common unit based on the weighted average number of shares of Common Stock and common partnership units and participating securities outstanding, and calculate diluted earnings per share and diluted earnings per unit taking into consideration dilutive common stock and common partnership unit equivalents and dilutive convertible securities outstanding during the period.
Our common stock and common partnership unit equivalents include 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. These equivalents also include unvested total shareholder return-based restricted stock and unit awards that do not meet the definition of participating securities, which would result in an increase in the number of common shares and common partnership units outstanding equal to the number of shares that vest. The effect of these securities was dilutive for the three and nine months ended September 30, 2017 and 2016, and accordingly has been included in the denominator for calculating diluted earnings per share and unit during these periods.
Our time-based restricted stock awards receive dividends similar to shares of Common Stock and common partnership units prior to vesting. These dividends are not forfeited in the event that the restricted stock does not vest. Therefore, the unvested shares and units related to these awards are participating securities. The effect of participating securities is included in basic and diluted earnings per share and unit computations using the two-class method of allocating distributed and undistributed earnings. There were 0.2 million unvested participating shares and units at September 30, 2017 and 2016.

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The Aimco Operating Partnership has various classes of preferred OP Units, which may be redeemed at the holders’ option. The Aimco Operating Partnership may redeem these units for cash, or at its option, shares of Common Stock. As of September 30, 2017, these preferred OP Units were potentially redeemable for approximately 2.3 million shares of Common Stock (based on the period end market price), or cash. 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 and we expect to exclude them in future periods.
Note 6 — Fair Value Measurements
Recurring Fair Value Measurements
We measure at fair value on a recurring basis our investments in the securitization trust that holds certain of our property debt, which we classify as available for sale, or AFS, securities, and our interest rate swaps, both of which are classified within Level 2 of the GAAP fair value hierarchy.
Our investments classified as AFS are presented within other assets in the accompanying condensed consolidated balance sheets. We hold several positions in the securitization trust that pay interest currently and we also hold the first loss position in the securitization trust, which accrues interest over the term of the investment. 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 term of the investments, which, as of September 30, 2017, was approximately 3.7 years. Our amortized cost basis for these investments, which represents the original cost adjusted for interest accretion less interest payments received, was $76.4 million and $72.5 million at September 30, 2017 and December 31, 2016, respectively. We estimated the fair value of these investments to be $79.9 million and $76.1 million at September 30, 2017 and December 31, 2016, respectively.
We estimate the fair value of these investments using an income and market approach primarily with observable inputs, including yields and other information regarding similar types of investments, and adjusted for certain unobservable inputs specific to these investments. The fair value of the positions that pay interest currently typically moves in an inverse relationship with movements in interest rates. The fair value of the first loss position is primarily correlated to collateral quality and demand for similar subordinate commercial mortgage-backed securities.
Certain consolidated partnerships served by our Asset Management business have entered into interest rate swap agreements, which limit exposure to interest rate fluctuations on the partnerships’ variable-rate debt 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.
The following table sets forth a summary of the changes in fair value of these interest rate swaps (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Beginning balance
$
(3,175
)
 
$
(4,938
)
Realized (unrealized) losses included in interest expense
73

 
(33
)
Realized losses on derecognition of interest rate swaps included in earnings
273

 

Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
1,076

 
1,208

Unrealized losses included in equity and partners’ capital
(280
)
 
(748
)
Ending balance
$
(2,033
)
 
$
(4,511
)

Realized losses on derecognition of interest rate swaps included in earnings represents previously unrealized losses related to an interest rate swap to which the partnership owning the final Napico property was a party. Upon derecognition of the assets and liabilities related to the final property, we also wrote off the accumulated other comprehensive income related to this swap, which was included in the gain on derecognition included in other, net on our condensed consolidated statement of operations for the three and nine months ended September 30, 2017. Please refer to Note 3 for further discussion.
As of September 30, 2017 and December 31, 2016, the remaining interest rate swaps, exclusive of the derecognized Napico interest rate swap, had aggregate notional amounts of $22.1 million and $22.4 million, respectively. As of September 30, 2017, these swaps had a weighted average remaining term of 6.2 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 condensed consolidated balance sheets, and

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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.
If the forward rates at September 30, 2017 remain constant, we estimate that during the next 12 months, we would reclassify approximately $0.5 million of the unrealized losses in accumulated other comprehensive loss into earnings. If market interest rates increase above the 3.26% weighted average fixed rate under these interest rate swaps the consolidated partnerships will benefit from net cash payments due from the counterparties to the interest rate swaps.
Fair Value Disclosures
We believe that the carrying values of the consolidated amounts of cash and cash equivalents, receivables and payables approximates their fair value at September 30, 2017 and December 31, 2016, due to their relatively short-term nature and high probability of realization. The estimated fair value of total indebtedness associated with our Real Estate portfolio was approximately $4.2 billion and $3.7 billion at September 30, 2017 and December 31, 2016, respectively, as compared to carrying amounts of $4.2 billion and $3.6 billion, respectively. The carrying values of the non-recourse property debt of the consolidated partnerships served by our Asset Management business approximated its estimated fair value at September 30, 2017 and December 31, 2016. We estimate the fair value of 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 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 7 — Business Segments
In 2017, we revised the information regularly reviewed by our chief executive officer, who is our chief operating decision maker, to assess our operating performance. Apartment communities are classified as either part of our Real Estate portfolio or those owned through partnerships served by our Asset Management business.
Our Real Estate portfolio consisted of 141 apartment communities with 39,184 apartment homes at September 30, 2017. This portfolio is diversified by both price point and geography and consists primarily of market rate apartment communities.
Our chief operating decision maker uses proportionate property net operating income to assess 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 consolidated apartment communities we own and manage. As of September 30, 2017, for segment performance evaluation, our Real Estate segment included 137 consolidated apartment communities with 39,042 apartment homes and excluded four apartment communities with 142 apartment homes that we neither manage nor consolidate.
As discussed in Note 1, as of September 30, 2017, through our Asset Management business we also owned nominal ownership positions in consolidated partnerships for which we provide asset management services. These partnerships own 46 low-income housing tax credit apartment communities with 6,898 apartment homes. Neither the results of operations, nor the assets of these partnerships and apartment communities are quantitatively material; therefore, we have one reportable segment, Real Estate. The results of operations for the three and nine months ended September 30, 2016, and the segment assets as of December 31, 2016, shown below have been revised to reflect the change in our reportable segments.
The following tables present the revenues, net operating income and income before gain on dispositions of our Real Estate segment on a proportionate basis (excluding amounts related to apartment communities sold) for the three and nine months ended September 30, 2017 and 2016 (in thousands):

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Real Estate
 
Proportionate
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
230,008

 
$
1,170

 
$
2,530

 
$
233,708

Rental and other property revenues of partnerships served by Asset Management business

 

 
18,232

 
18,232

Tax credit and transaction revenues

 

 
2,695

 
2,695

Total revenues
230,008

 
1,170

 
23,457

 
254,635

Property operating expenses attributable to Real Estate
71,346

 
410

 
9,423

 
81,179

Property operating expenses of partnerships served by Asset Management business

 

 
8,865

 
8,865

Other operating expenses not allocated to reportable
segment (3)

 

 
105,386

 
105,386

Total operating expenses
71,346

 
410

 
123,674

 
195,430

Net operating income
158,662

 
760

 
(100,217
)
 
59,205

Other items included in income before gain on
dispositions (4)

 

 
(36,828
)
 
(36,828
)
Income before gain on dispositions
$
158,662

 
$
760

 
$
(137,045
)
 
$
22,377

 
Real Estate
 
Proportionate
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
210,775

 
$
7,457

 
$
7,670

 
$
225,902

Rental and other property revenues of partnerships served by Asset Management business

 

 
18,213

 
18,213

Tax credit and transaction revenues

 

 
4,789

 
4,789

Total revenues
210,775

 
7,457

 
30,672

 
248,904

Property operating expenses attributable to Real Estate
68,933

 
2,307

 
11,516

 
82,756

Property operating expenses of partnerships served by Asset Management business

 

 
9,410

 
9,410

Other operating expenses not allocated to reportable
segment (3)

 

 
98,006

 
98,006

Total operating expenses
68,933

 
2,307

 
118,932

 
190,172

Net operating income
141,842

 
5,150

 
(88,260
)
 
58,732

Other items included in income before gain on
dispositions (4)

 

 
(43,194
)
 
(43,194
)
Income before gain on dispositions
$
141,842

 
$
5,150

 
$
(131,454
)
 
$
15,538


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Real Estate
 
Proportionate
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
666,120

 
$
15,666

 
$
4,853

 
$
686,639

Rental and other property revenues of partnerships served by Asset Management business

 

 
55,327

 
55,327

Tax credit and transaction revenues

 

 
8,242

 
8,242

Total revenues
666,120

 
15,666

 
68,422

 
750,208

Property operating expenses attributable to Real Estate
209,197

 
4,978

 
25,644

 
239,819

Property operating expenses of partnerships served by Asset Management business

 

 
26,445

 
26,445

Other operating expenses not allocated to reportable
segment (3)

 

 
307,244

 
307,244

Total operating expenses
209,197

 
4,978

 
359,333

 
573,508

Net operating income
456,923

 
10,688

 
(290,911
)
 
176,700

Other items included in income before gain on
dispositions (4)

 

 
(116,691
)
 
(116,691
)
Income before gain on dispositions
$
456,923

 
$
10,688

 
$
(407,602
)
 
$
60,009

 
Real Estate
 
Proportionate
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
618,122

 
$
22,479

 
$
31,633

 
$
672,234

Rental and other property revenues of partnerships served by Asset Management business

 

 
56,233

 
56,233

Tax credit and transaction revenues

 

 
17,894

 
17,894

Total revenues
618,122

 
22,479

 
105,760

 
746,361

Property operating expenses attributable to Real Estate
200,874

 
6,531

 
34,531

 
241,936

Property operating expenses of partnerships served by Asset Management business

 

 
28,199

 
28,199

Other operating expenses not allocated to reportable
segment (3)

 

 
289,524

 
289,524

Total operating expenses
200,874

 
6,531

 
352,254

 
559,659

Net operating income
417,248

 
15,948

 
(246,494
)
 
186,702

Other items included in income before gain on
dispositions (4)

 

 
(118,054
)
 
(118,054
)
Income before gain on dispositions
$
417,248

 
$
15,948

 
$
(364,548
)
 
$
68,648

(1)
Represents adjustments for the noncontrolling interests in consolidated real estate partnerships’ share of the results of consolidated apartment communities in our Real Estate segment, which are included in the related consolidated amounts, but excluded from proportionate property net operating income for our segment evaluation.
(2)
Includes the operating results of apartment communities sold during the periods shown or held for sale at the end of the period, if any, and the operating results of apartment communities owned by consolidated partnerships served by our Asset Management business. Corporate and Amounts Not Allocated to Reportable Segment also includes property management revenues (which are included in consolidated rental and other property revenues), property management expenses and casualty gains and losses (which are included in consolidated property operating expenses) and depreciation and amortization, which are not part of our segment performance measure.
(3)
Other operating expenses not allocated to reportable segment consists of depreciation and amortization, general and administrative expenses and other operating expenses, which are not included in our measure of segment performance.
(4)
Other items included in income before gain on dispositions primarily consists of interest expense and income tax benefit.

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For the nine months ended September 30, 2017 and 2016, capital additions related to our Real Estate segment totaled $258.3 million and $247.5 million, respectively.
The assets of our reportable segment and the consolidated assets not allocated to our segment are as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Real Estate
$
5,593,795

 
$
5,545,693

Corporate and other assets (1)
575,543

 
687,125

Total consolidated assets
$
6,169,338

 
$
6,232,818

(1)
Includes the assets of consolidated partnerships served by the Asset Management business and apartment communities sold as of September 30, 2017.
Note 8 — Variable Interest Entities
Aimco consolidates the Aimco Operating Partnership, which is a variable interest entity, or VIE, for which Aimco is the primary beneficiary. Aimco, through the Aimco Operating Partnership, consolidates all VIEs for which we are the primary beneficiary. Generally, a 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. A limited partnership is considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. 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.
All of the VIEs we consolidate own interests in one or more apartment communities. VIEs that own apartment communities we classify as part of our Real Estate segment are typically structured to generate a return for their partners through the operation and ultimate sale of the communities. We are the primary beneficiary in the limited partnerships in which we are the sole decision maker and have a substantial economic interest.
All of the partnerships served by our Asset Management business own interests in low-income housing tax credit apartment communities that are structured to provide for the pass-through of tax credits and tax deductions to their partners and are VIEs. We hold a nominal ownership position in these partnerships, generally one percent or less. As general partner in these partnerships, we are the sole decision maker and we receive fees and other payments in return for the asset management and other services we provide and thus share in the economics of the partnerships, and as such, we are the primary beneficiary of these partnerships. The table below summarizes information regarding VIEs consolidated by the Aimco Operating Partnership:
 
September 30, 2017
 
December 31, 2016
Real Estate portfolio:
 
 
 
VIEs with interests in apartment communities
12

 
13

Apartment communities held by VIEs
16

 
19

Apartment homes in communities held by VIEs
4,728

 
6,110

Consolidated partnerships served by the Asset Management business:
 
 
 
VIEs with interests in apartment communities
53

 
54

Apartment communities held by VIEs
37

 
38

Apartment homes in communities held by VIEs
5,893

 
6,093


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Assets of the Aimco Operating Partnership’s consolidated VIEs must first be used to settle the liabilities of such consolidated VIEs. These consolidated VIEs’ creditors do not have recourse to the general credit of the Aimco Operating Partnership. Assets and liabilities of consolidated VIEs are summarized in the table below (in thousands):
 
September 30, 2017
 
December 31, 2016
Real Estate portfolio:
 
 
 
Assets
 
 
 
Net real estate
$
567,401

 
$
897,510

Cash and cash equivalents
14,155

 
15,877

Restricted cash
9,256

 
7,981

Liabilities
 
 
 
Non-recourse property debt secured by Real Estate communities, net
418,348

 
725,061

Accrued liabilities and other
16,368

 
14,270

Consolidated partnerships served by the Asset Management business:
 
 
 
Assets
 
 
 
Real estate, net
219,410

 
235,920

Cash and cash equivalents
15,445

 
14,926

Restricted cash
29,573

 
32,542

Liabilities
 
 
 
Non-recourse property debt
221,564

 
229,509

Accrued liabilities and other
15,686

 
16,934



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ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report contains or may contain information that is forward-looking, within the meaning of the federal securities laws, including, without limitation, statements regarding: our ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, redevelopments and developments; our ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to our redevelopment and development investments; expectations regarding sales of our apartment communities and the use of proceeds thereof; and our ability to comply with debt covenants, including financial coverage ratios.
Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond our control, including, without limitation:
Real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing of acquisitions, dispositions, redevelopments and developments; and changes in operating costs, including energy costs;
Financing risks, including the availability and cost of capital markets financing and the risk that our cash flows from operations may be insufficient to meet required payments of principal and interest and the risk that our earnings may not be sufficient to maintain compliance with debt covenants;
Insurance risks, including the cost of insurance and natural disasters and severe weather such as hurricanes; and
Legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of governmental regulations that affect us and interpretations of those regulations; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by us.
In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on our ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership.
Readers should carefully review our financial statements and the notes thereto, as well as the section entitled “Risk Factors” described in Item 1A of Apartment Investment and Management Company’s and AIMCO Properties, L.P.’s combined Annual Report on Form 10-K for the year ended December 31, 2016, and the other documents we file from time to time with the Securities and Exchange Commission.
As used herein and except as the context otherwise requires, “we,” “our” and “us” refer to Apartment Investment and Management Company (which we refer to as Aimco), AIMCO Properties, L.P. (which we refer to as the Aimco Operating Partnership) and their consolidated entities, collectively.
Executive Overview
Aimco and the Aimco Operating Partnership are focused on the ownership, management, redevelopment and limited development of quality apartment communities located in the largest markets in the United States. Our business activities are defined by a commitment to our core values of integrity, respect, collaboration, performance and a focus on our customers. These values and our corporate mission, “to consistently provide quality apartment homes in a respectful environment delivered by a team of people who care,” shape our culture. In all our interactions with residents, team members, business partners, lenders and equity holders, we aim to be the best owner and operator of apartment communities and an outstanding corporate citizen.
Our principal financial objective is to provide predictable and attractive returns to our equity holders. We measure our total return using growth in Economic Income and our current return using Adjusted Funds From Operations (each of which are defined under the Non-GAAP Measures heading below). Our business plan to achieve this principal financial objective is to:
operate our portfolio of desirable apartment homes with valued amenities, with a high level of focus on customer selection and customer satisfaction, and in an efficient manner that realizes the benefits of our corporate systems and local management expertise;

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improve our portfolio of apartment communities, which is diversified both by geography and price point, and which averages “B/B+” in quality (defined under the Portfolio Management heading below) by selling apartment communities with lower projected free cash flow returns and investing the proceeds from such sales in prospects with higher projected free cash flow returns than expected from the communities sold, such as property upgrades, redevelopment, development and selective acquisitions;
use financial leverage primarily in the form of non-recourse, long-dated, fixed-rate property debt and perpetual preferred equity, a combination which reduces our refunding and re-pricing risk and which provides a hedge against increases in interest rates; and
emphasize a collaborative, respectful, and performance-oriented culture with high team engagement.
Our business is organized around our strategic areas of focus: property operations; redevelopment/development; portfolio management; balance sheet; and culture.
The results from the execution of our business plan during the three months ended September 30, 2017, are further described below.
Net income attributable to common stockholders per common share increased by $0.04 in the three months ended September 30, 2017, as compared to the same period in 2016, primarily due to increased contribution from property net operating income more fully described below, partially offset by higher depreciation expense.
Pro forma FFO per share increased $0.08, or 14.5%, for the three months ended September 30, 2017, as compared to the same period in 2016. The primary driver of this increase was property net operating income growth of $0.05, consisting of:
$0.03 from Same Store property net operating income growth of 4.5%, driven primarily by a 2.8% increase in revenue and a 1.1% reduction in expenses;
$0.04 from the lease-up over the last 12 months of 930 renovated homes at redevelopment communities and completion of the lease-up of One Canal in Boston, Massachusetts and Indigo in Redwood City, California; less
$0.02 in property net operating income from apartment communities sold in 2016.
Lower general and administrative expenses, lower interest rates, higher tax benefits, and various other factors contributed an additional $0.03 to Pro Forma FFO.
The amounts above exclude property net operating income from the reacquisition of the 47% limited partner interest in the Palazzo joint venture, which was largely offset by higher interest expense related to temporary borrowings used to fund the purchase.
The $0.08 increase year-over-year in Pro forma FFO per share plus $0.01 in lower capital replacement spending increased AFFO per share by $0.09, or 20.0%.
Pro Forma FFO and AFFO are non-GAAP financial measures that are defined and reconciled under the Non-GAAP Measures heading.
Property Operations
We own and operate a portfolio of apartment communities diversified by both geography and price point. At September 30, 2017, our Real Estate portfolio included 141 predominantly market rate apartment communities with 39,184 apartment homes in which we held an average ownership of approximately 99%.
Our property operations team delivered solid results for our Real Estate portfolio for the three months ended September 30, 2017. Highlights for the quarter include:
Same Store net operating income increased year-over-year by 4.5%, consisting of revenue growth of 2.8% and expense reduction of 1.1%; and
Same Store rent increases on renewals and new leases averaged 4.5% and 1.4%, respectively, for a weighted average increase of 3.0%.

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Redevelopment/Development
Redevelopment/Development is our second line of business. Within our Real Estate portfolio, we invest in the redevelopment of apartment communities when we believe the investment will yield risk-adjusted returns in excess of those expected from the apartment communities sold in paired trades to fund the redevelopment.
We have undertaken a range of redevelopments, including those in which buildings or exteriors are renovated without the need to vacate apartment homes; those in which significant renovation of apartment homes may be accomplished upon lease expiration and turnover; and those in which an entire building or community is vacated. We execute our redevelopments using a phased approach, in which we renovate portions of an apartment community in stages. Redevelopment work may include seeking entitlements from local governments, which enhance the value of our existing portfolio by increasing density, that is, the right to add apartment homes to a site. We expect to create value equal to 25% to 35% of our investment in redevelopment.
We favor redevelopment because it permits adjustment of the scope and timing of spending to align with changing market conditions.
We also undertake ground-up development when warranted by risk-adjusted investment returns, either directly in connection with the redevelopment of an existing apartment community or, on a more limited basis, at a new location. In such cases, we may rely on a third-party developer with expertise in the local market and with contracts that limit our exposure to construction risk.
During the three months ended September 30, 2017, we invested $33.3 million primarily in our ongoing redevelopments and continued to lease redeveloped apartment homes at a pace consistent with our expectations.
During the three months ended September 30, 2017, we completed construction on the third tower of Park Towne Place in Center City, Philadelphia. As of September 30, 2017, this tower was 74% leased at rates consistent with underwriting. We expect this tower to be more than 90% leased by year-end, as are the first two towers redeveloped at the community.
In the past three years, we have leased more than 1,100 redeveloped apartment homes in Center City, Philadelphia. Based on these results, we decided to proceed with a $40.0 million redevelopment of the fourth and final tower at Park Towne Place. De-leasing is underway and construction is scheduled to commence by year end.
In 2014, we acquired Eastpointe, a “C” property located in Boulder, Colorado. The site is two miles from the new Google campus and is across the street from Ball Aerospace’s Technology Campus and Foothills Hospital. Building in Boulder is highly regulated and new supply is limited, notwithstanding higher enrollment at the University of Colorado and increased employment generally. Over the past two years, we have planned and entitled a new $117.0 million, 226 apartment home community to be known as Parc Mosaic. De-leasing of Eastpointe is now underway and construction of Parc Mosaic is scheduled to commence by year end.
Inclusive of these two new projects, our total estimated net investment in redevelopment/development is $710.4 million, with a projected weighted average net operating income yield on these investments of 6.1%, assuming untrended rents. Of this total, $481.4 million has been funded.
During the three months ended September 30, 2017, we leased 278 apartment homes at our redevelopment and acquisition communities.
In measuring lease-up exposure related to redevelopment activities, we consider: (a) apartments that have been de-leased in preparation for construction; (b) apartments currently under construction; and (c) apartments for which construction is complete and the apartment home is ready for occupancy. In each case, lease-up exposure is measured as the number of homes to be leased for the apartment community to achieve 95% occupancy.
As of September 30, 2017, our lease-up exposure at active redevelopment projects included approximately 360 apartment homes. Of these, 231 related to apartments that have been or will be de-leased for redevelopment of the final tower at Park Towne Place, 33 related to apartment homes under construction, and 103 related to homes for which construction is complete and the homes are available for occupancy.
Please see below under the Liquidity and Capital Resources – Redevelopment /Development heading for additional information regarding our redevelopment and development investment during the nine months ended September 30, 2017.
Portfolio Management
Our portfolio strategy seeks predictable rent growth from a portfolio of apartment communities that is diversified across “A,” “B” and “C+” price points, averaging “B/B+” in quality, and that is also diversified across the largest markets in the United States.

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We measure the quality of apartment communities in our Real Estate portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance and analysis. Under this rating system, we classify as “A” quality apartment communities those earning rents greater than 125% of the local market average, as “B” quality apartment communities those earning rents between 90% and 125% of the local market average; “C+” quality apartment communities are those earning rents greater than $1,100 per month, but lower than 90% of the local market average; and “C” quality apartment communities are those earning rents less than $1,100 per month and lower than 90% of the local market average. We classify as “B/B+” quality a portfolio that on average earns rents between 100% and 125% of the local market average rents where the portfolio is located. Although some companies and analysts within the multifamily real estate industry use apartment community quality ratings of “A,” “B” and “C,” some of which are tied to local market rent averages, the metrics used to classify apartment community quality as well as the timing for which local market rents are calculated may vary from company to company. Accordingly, our rating system for measuring apartment community quality is neither broadly nor consistently used in the multifamily real estate industry.
As part of our portfolio strategy, we seek to sell each year up to 10% of the apartment communities in our portfolio and to reinvest the proceeds from such sales in uses such as property upgrades, redevelopment of communities in its current portfolio, occasional development of new communities, and selective acquisitions of apartment communities with higher projected free cash flow returns than expected from the communities sold to fund the activity. Through this disciplined approach to capital recycling, we have significantly increased the quality and expected growth rate of its portfolio.
 
Three Months Ended
 
September 30,
 
2017
 
2016
Average revenue per Aimco apartment home (1)
$
2,075

 
$
1,954

Portfolio average rents as a percentage of local market average rents
112
%
 
113
%
Percentage A (3Q 2017 average revenue per Aimco apartment home $2,708)
53
%
 
51
%
Percentage B (3Q 2017 average revenue per Aimco apartment home $1,776)
34
%
 
37
%
Percentage C+ (3Q 2017 average revenue per Aimco apartment home $1,725)
13
%
 
12
%
(1) Represents average monthly rental and other property revenues divided by the number of occupied apartment homes multiplied by our ownership interest in the apartment community as of the end of the current period.
During the three months ended September 30, 2017, average revenue per Aimco apartment home for our Real Estate portfolio was $2,075, a 6% increase compared to three months ended September 30, 2016. The increase is due to year-over-year growth in Same Store revenue as well as our reacquisition of the 47% limited partnership interest in the Palazzo joint venture, lease-up of redevelopment and acquisition apartment communities, and the sale of apartment communities with average monthly revenues per Aimco apartment home lower than those of the retained portfolio.
As we execute our portfolio strategy, we expect to increase average revenue per Aimco apartment home for our Real Estate portfolio at a rate greater than market rent growth; to increase free cash flow margins; and to maintain sufficient geographic and price point diversification to limit volatility and concentration risk.
Balance Sheet and Liquidity
We target net leverage of $3.8 billion. Our leverage is currently above this target as the second quarter reacquisition of the 47% limited partner interest in the Palazzo joint venture was temporarily funded with debt. We are on track with plans to sell apartment communities in Virginia, Maryland, and New Jersey to reduce leverage to our $3.8 billion target.
Our leverage includes our share of long-term, non-recourse property debt secured by apartment communities in our Real Estate portfolio, our one-year term loan, outstanding borrowings under our revolving credit facility, and outstanding preferred equity. In our calculation of leverage, we exclude non-recourse property debt obligations of consolidated partnerships served by our Asset Management business, as these are not our obligations and they have limited effect on the amount of fees and other amounts we expect to receive in our role as asset manager for these partnerships.
Our leverage strategy seeks to increase financial returns while using leverage with appropriate caution. We target the ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDA to be below 7.0x and we target the ratio of Adjusted EBITDA to Adjusted Interest Expense and Preferred Dividends to be greater than 2.5x. We also focus on the ratios of Proportionate Debt to Adjusted EBITDA and Adjusted EBITDA to Adjusted Interest Expense.
Proportionate Debt, Adjusted EBITDA and Adjusted Interest Expense, as used in these ratios, are non-GAAP financial measures, which are further discussed and reconciled under the Non-GAAP Measures Leverage Ratios heading. Preferred Equity represents

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Aimco’s preferred stock and the Aimco Operating Partnership’s preferred OP Units. Our leverage ratios for the three months ended September 30, 2017 are presented below:
 
Three Months Ended September 30, 2017
Proportionate Debt to Adjusted EBITDA
6.9x
Proportionate Debt and Preferred Equity to Adjusted EBITDA
7.3x
Adjusted EBITDA to Adjusted Interest Expense
3.4x
Adjusted EBITDA to Adjusted Interest Expense and Preferred Dividends
3.1x
We calculate our leverage ratios based on the most recent three month amounts, annualized. We expect improvement in leverage metrics from earnings growth, primarily due to increasing contribution from redevelopment apartment communities and reduction in debt balances due to regularly scheduled debt amortization and apartment community sales, partially offset by the loss of earnings from sold communities. We expect that these activities will reduce our Proportionate Debt to Adjusted EBITDA and Proportionate Debt and Preferred Equity to Adjusted EBITDA ratios by year-end to approximately 6.2x and 6.6x, respectively.
During the three months ended September 30, 2017, we closed or rate locked five non-recourse, fixed-rate, property loans totaling $297.3 million. On a weighted average basis, these loans have a 9.6 year term and an interest rate of 3.43%, 125 basis points more than the corresponding Treasury rates at the time of pricing.
The net effect of 2017 property debt refinancing activities has been to lower our weighted average fixed interest rates by about 10 basis points to 4.75%, generating prospective annual interest savings of approximately $3.0 million.
As of September 30, 2017, we held unencumbered apartment communities with an estimated fair value of approximately $1.8 billion, an increase of approximately12% from December 31, 2016.
Two credit rating agencies rate our creditworthiness using different methodologies and ratios for assessing our credit, and both have rated our credit and outlook as BBB- (stable), an investment grade rating. Although some of the ratios they use are similar to those we use to measure our leverage, there are differences in our methods of calculation and therefore our leverage ratios disclosed above may not be indicative of the ratios that may be calculated by these agencies.
Culture
Our culture is the key to our success. Our emphasis on a collaborative, respectful, and performance-oriented culture is what enables the continuing transformation of the Aimco business. In April 2017, Aimco was recognized by the Denver Post as a Top Work Place. We are one of only a dozen Colorado companies of all sizes who have earned this designation for five consecutive years.
Key Financial Indicators
The key financial indicators that we use in managing our business and in evaluating our operating performance are Economic Income, our measure of total return, and Adjusted Funds From Operations, our measure of current return. In addition to these indicators, we evaluate our operating performance and financial condition using: Pro forma Funds From Operations; Free Cash Flow, or FCF, capitalization rate; net operating income, or NOI, capitalization rate; same store property operating results; average revenue per Aimco apartment home; financial coverage ratios; and net leverage. Certain of these financial indicators are non-GAAP financial measures, which are defined, further described, and for certain of the measures, reconciled to comparable GAAP-based measures, under the Non-GAAP Measures heading.
Results of Operations
Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we redevelop, acquire and dispose of our apartment communities affect our operating results.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements in Item 1.

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Three and Nine Months Ended September 30, 2017 compared to September 30, 2016
Net income attributable to Aimco increased by $4.1 million and decreased by $214.6 million during the three and nine months ended September 30, 2017, respectively, as compared to the September 30, 2016 comparable periods. Net income attributable to the Aimco Operating Partnership increased by $4.8 million and decreased by $224.4 million during the three and nine months ended September 30, 2017, respectively, as compared to the September 30, 2016 comparable periods. The increase in income for Aimco and the Aimco Operating Partnership for the three months ended was due to a variety of factors, including improved operating results. The decrease in income for Aimco and the Aimco Operating Partnership for the nine months ended was primarily due to lower gains on disposition of real estate.
The following paragraphs discuss these and other items affecting the results of operations of Aimco and the Aimco Operating Partnership in more detail.
Property Operations
As described under the preceding Executive Overview heading, our Real Estate segment consists primarily of market rate apartment communities in which we hold a substantial equity ownership interest.
We use proportionate property net operating income to assess 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 consolidated apartment communities we manage. Accordingly, the results of operations of our Real Estate segment discussed below are presented on a proportionate basis and exclude the results of four apartment communities with 142 apartment homes that we neither manage nor consolidate.
We do not include property management revenues, offsite costs associated with property management or casualty-related amounts in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below. Refer to Note 7 of the condensed consolidated financial statements in Item 1 for further discussion regarding our reportable segment, including a reconciliation of these proportionate amounts to the corresponding amounts in our condensed consolidated statements of operations.
Real Estate Proportionate Property Net Operating Income
We classify apartment communities within our Real Estate segment as Same Store and those Outside of Same Store. Same Store apartment communities are those that have reached a stabilized level of operations as of January 1, 2016 and maintained it throughout the current and comparable prior periods, and are not expected to be sold within 12 months. The communities Outside of Same Store are those that do not meet the Same Store definition, including, but not limited to: redevelopment and development apartment communities, which are those currently under construction that have not achieved a stabilized level of operations and those that have been completed in recent years that had not achieved and maintained stabilized operations for both the current and comparable prior year; acquisition apartment communities, which are those we have acquired since the beginning of a two year comparable period; and communities that we expect to sell within twelve months but do not yet meet the criteria to be classified as held for sale.
As of September 30, 2017, as defined by our segment performance metrics, our Real Estate portfolio consisted of 92 Same Store apartment communities with 26,386 apartment homes and 45 communities Outside of Same Store with 12,656 apartment homes.
From December 31, 2016 to September 30, 2017, on a net basis, our Same Store portfolio decreased by nine apartment communities and 4,507 apartment homes. These changes consisted of:
the addition of three redeveloped apartment communities with 974 apartment homes that were classified as Same Store upon maintaining stabilized operations for the entirety of both periods presented;
the addition of one acquired apartment community with 94 apartment homes that was classified as Same Store because we have now owned it for the entirety of both periods presented;
the reduction of five apartment communities with 2,460 apartment homes at which we commenced redevelopment or development activities during the period; and
the reduction of eight apartment communities with 3,115 apartment homes, which are expected to be sold within 12 months, but do not yet meet the criteria to be classified as held for sale.
As of September 30, 2017, our communities Outside of Same Store comprised approximately one-third of our Real Estate portfolio, and included:

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15 apartment communities with 6,375 apartment homes in redevelopment or development;
2 apartment communities with 578 apartment homes recently acquired;
4 apartment communities with 604 apartment homes owned that receive forms of government rental assistance;
14 apartment communities with 1,389 apartment homes that do not meet the definition of Same Store because they are either subject to agreements that limit the amount by which we may increase rents or have not reached or maintained a stabilized level of occupancy as of the beginning of a two year comparable period, often due to a casualty event; and
10 apartment communities with 3,710 apartment homes we expect to sell in the next twelve months but that do not yet meet the criteria to be classified as held for sale.
Prior to 2017, seven of the communities Outside of Same Store were classified as part of our prior Affordable segment. The results of operations for these communities are reflected in both 2017 and 2016 comparable periods in the tables below.
Our Real Estate segment results for the three and nine months ended September 30, 2017 and 2016, as presented below, are based on the apartment community populations as of September 30, 2017.
 
Three Months Ended September 30,
(in thousands)
2017
 
2016
 
$ Change
 
% Change
Rental and other property revenues:
 
 
 
 
 
 
 
Same Store communities
$
148,207

 
$
144,127

 
$
4,080

 
2.8
 %
Communities Outside of Same Store
81,801

 
66,648

 
15,153

 
22.7
 %
Total
230,008

 
210,775

 
19,233

 
9.1
 %
Property operating expenses:
 
 
 
 
 
 
 
Same Store communities
42,289

 
42,776

 
(487
)
 
(1.1
)%
Communities Outside of Same Store
29,057

 
26,157

 
2,900

 
11.1
 %
Total
71,346

 
68,933

 
2,413

 
3.5
 %
Proportionate property net operating income:
 
 
 
 
 
 
 
Same Store communities
105,918

 
101,351

 
4,567

 
4.5
 %
Communities Outside of Same Store
52,744

 
40,491

 
12,253

 
30.3
 %
Total
$
158,662

 
$
141,842

 
$
16,820

 
11.9
 %
For the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, our Real Estate segment’s proportionate property net operating income increased $16.8 million, or 11.9%.
Same Store proportionate property net operating income increased by $4.6 million, or 4.5%. This increase was primarily attributable to a $4.1 million, or 2.8%, increase in rental and other property revenues due to higher average monthly revenues (approximately $50 per Aimco apartment home), comprised primarily of increases in rental rates and a 20 basis point increase in average daily occupancy. Rental rates on renewals transacted during the three months ended September 30, 2017, were 4.5% higher than expiring lease rates, and new lease rates were 1.4% higher than expiring lease rates, resulting in a weighted average increase of 3.0%. Same Store operating expenses decreased by $0.5 million, or 1.1%, primarily due to decreases in insurance costs and controllable operating expenses. During the three months ended September 30, 2017, as compared to 2016, controllable operating expenses, which exclude utility costs, real estate taxes and insurance, decreased by $0.4 million, or 2.0%.
The proportionate property net operating income of communities Outside of Same Store increased by $12.3 million, or 30.3%, due to:
Indigo and One Canal, where our lease-ups were completed earlier in 2017, combined to contribute $5.5 million of incremental property net operating income during the three months ended September 30, 2017, compared to the same period in 2016;
redevelopment leasing activities during the three months ended September 30, 2017, which included 278 apartment homes and helped contribute to incremental redevelopment related property net operating income of $1.7 million as compared to the same period in 2016; and
higher property net operating income of $5.1 million from other communities Outside of Same Store, including the effect of our increased ownership interest in the Palazzo communities from our June 2017 reacquisition of the 47% limited partner interest in the related joint venture.

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Nine Months Ended September 30,
(in thousands)
2017
 
2016
 
$ Change
 
% Change
Rental and other property revenues:
 
 
 
 
 
 
 
Same Store communities
$
439,115

 
$
425,128

 
$
13,987

 
3.3
%
Communities Outside of Same Store
227,005

 
192,994

 
34,011

 
17.6
%
Total
666,120

 
618,122

 
47,998

 
7.8
%
Property operating expenses:
 
 
 
 
 
 
 
Same Store communities
126,929

 
126,534

 
395