Apartment Investment and Management Company
Annual Report 2006

Plain-text annual report

A I M C O A N N U A L R E P O R T A P A R T M E N T I N V E S T M E N T A N D M A N A G E M E N T C O M P A N Y 2006 was a successful year for Aimco. In 2006, Aimco delivered solid financial results through better processes and better execution. The company experienced solid rental rate growth, sustained occupancy, and did an outstanding job of managing expenses through improved efficiencies. The company’s increased share price — $56.02 at year-end — is a result of improved operating results and increased investor confidence in the Aimco business plan and the Aimco management team. Total shareholder return was 55.2% for 2006. Aimco ranked 22nd for one-year total return among companies in the S&P 500. During 2006, Aimco was again ranked as one of the most admired real estate companies in Fortune Magazine’s annual poll. Aimco is a real estate investment trust (REIT) with headquarters in Denver, Colorado. Its common stock is included in the S&P 500 and is traded under AIV on the New York Stock Exchange. 1 Our mission To consistently provide quality apartment homes in a respectful environment delivered by a team of people who care. Flamingo Miami Beach, FL Bank Loft Denver, CO (Cover photo) Broadcast Center Los Angeles, CA 216,400 apartments1,256 communities6,000 team membersTo My Fellow Shareholders, I am pleased to report that our company delivered remarkable results in 2006. Total shareholder return was 55.2%, lifting the compounded annual return since our 1994 IPO to 17.2%. These gratifying results are due in important part to the excellent apartment market, now enjoying a solid recovery from the recession period between 2002-2004; they are also due to hard decisions made then to improve Aimco for the longer term. Most fundamentally, they are due to the hard work of the exceptional men and women with 2 whom I am privileged to work every day. 2006 Total Shareholder Return vs. Indices AIV MSCI U.S. REIT INDEX DJIA S&P 500 Our business is providing apartment homes. Operating excellence, measured by customer satisfaction as well as financial outcomes, is its foundation. Jeff Adler and his team have systematically put in place the most effective apart- ment operations of which I am aware. While I am proud that Aimco same store results have exceeded peer average levels for eight quarters in a row, I am even more enthusiastic about what I see ahead. Jeff has identified many opportunities for further improvement and assures me that we are still in “early innings.” In particular, we are focused on leveraging the revolutionary possibilities for apartment operations that result from automation and web- based customer transactions. We have tended to invest in older properties in better locations where land value is a much higher percent of total value than is the case with newer properties. Knowing that depreciation is all too real over time, we like the idea that a significant portion of our investment is in land that is appreciating. Over time, increasing land values create important opportunities: for redevel- oping or upgrading the existing structures, and for re-entitling the land and constructing wholly new structures. As the Aimco portfolio has matured, we find ourselves with an abundance of such opportunities. Redevelopment is an excellent way to make money; correcting obsolescence, extending useful lives, increasing average rents, reducing operating expenses and generating returns on cost ranging from 7.5% to 8.5%. These returns, in markets where property income is valued at cap rates of, say, 5% to 5.5%, create net asset value equal to 35% to 70% of the redevelopment spending. Because we finance our redevelopment spending with non-recourse property debt secured by the value created, we can safely borrow 90% or more of our costs, producing impressive returns on equity. Best of all, it is a short cycle business, and we can alter or even stop our spending on short notice if we are not achieving our targeted outcomes. Tim Beaudin has put in place an outstanding team of experienced real estate professionals who created substantial net asset value in 2006, when Aimco spent $180 million on conventional redevelopment. At year end, we had committed 3 R E S U L T S 55.2% ANNUAL SHAREHOLDER RETURN 22 AIMCO’S RANKING IN S&P 500 TOTAL SHAREHOLDER RETURN 9.5% SAME STORE NET OPERATING INCOME (NOI) GROWTH Aimco Capital Team Meeting Vail, CO Four Quarters Habitat Kendall, FL Chestnut Hill Village Philadelphia, PA Evanston Place Evanston, IL Palazzo at Park La Brea Los Angeles, CA to a total of a half billion dollars of conventional redevelopment spending on 45 properties with more than 18,000 units, and expect spending levels to ramp up to $300 million or so in 2007. Tim’s team is only getting better and has no shortage of opportunities to pursue. David Robertson has built an important business for Aimco by redeveloping properties in our afford- able portfolio using tax credit equity. Redevelopment of rent-subsidized properties, those in which our customers’ rents are subsidized by the government, creates value in the same way as we do in our basic redevelopment business…with the advantage of the required equity being funded by institutional purchasers of federal tax credits awarded by state governments. Income from the transfer of tax credits is deferred and recognized over the next decade, making this a predictable source of future earnings that we see as a growing part of Aimco’s business. Harry Alcock, who assembled the Aimco portfolio during the past dozen years, has largely been a seller at the prices prevailing in the current market. Harry sold properties for $3.6 billion dollars during the past three years, reducing the portfolio by 62,700 units—while keeping the properties that we like best. Harry is focused on a diversified portfolio that balances near-term rent growth with longer- term job growth. Thanks to Harry, we have avoid- ed the very high prices and low current returns that place investment outcomes at the mercy of changes in investor sentiment. Harry is cautious, and I agree with his strategy. As most of you know, the capital markets are somewhat frothy. It can be a treacherous time for investing. Aimco is investing primarily where we see opportunities for value-added activities, where we rely on our own efforts—and the market—to produce investment results. David Robertson now heads all of our transaction businesses. He, Harry and Lance Graber make a formidable team with the tough assignment to ferret out opportu- nities that are not overpriced. Aimco has preferred long duration liabilities, whether property debt or preferred stock. Given that risk-free rates declined 123 basis points from 2000 to 2006 and credit spreads contracted another 113 basis points, we carried significant above-market rate debt. That was my mistake. In 2006, there were substantial opportunities to refund higher-cost liabilities with lower-cost capital. Tom Herzog tasked Patti Fielding to lead this effort, and Patti and her team did a great job. Better yet, she points out that there are more opportunities going forward to lower our weighted average cost of capital. Hopefully, you can sense my conviction that Aimco is “on plan” and executing effectively. The feeling is palpable across the entire Aimco team. We all recognize that we owe an enormous debt to Tom Herzog for our improved organization and operational discipline. Under Tom and his team, there has been an explosion of financial information that drives the business, enables improved execution and increases financial discipline. I should also mention Jim Purvis, head of Human Resources and Miles Cortez, our General Counsel. Jim has been a key architect in designing Aimco organizational structures and in recruiting key leaders; Miles has sorted out the contingent liabilities created by our rapid growth and established the controls appropriate for our scale and the world of regulation and litigation in which contemporary business finds itself. There are many others, too many to mention here, whose contributions have been critical to the success of the past few years. It is my privilege and pleasure to work with them. In closing, I thank my colleagues on the Aimco Board: lead director Lanny Martin together with Jim Bailey, Dick Ellwood, Dusty Rhodes and Mike Stein. You have provided sage counsel and reliable friendship. The Aimco shareholders and all Aimco are in your debt. Sincerely, Terry Considine Chairman and CEO 5 Conventional Redevelopment Spending 4 Terry Considine, Chairman & Chief Executive Officer Aimco Town Hall Meeting • Denver, CO Flamingo Miami Beach, FL Aimco Team Members Aimco Town Hall Meeting • Denver, CO Aimco Conventional Operations 2006 was a banner year for Aimco’s Conventional Operations team. Together we achieved new highs in occupancy, rents and NOI growth for a second year. The team continues to build our foundation of operational excellence by deploying processes in fore- casting and scheduling that increase apartment home availability with compressed cycle times, improved product quality, lower costs and higher rents. We continue to invest in cost-effective automation that improves performance and enables team members to focus on customer service. Implementation of electronic revenue management, procurement, on-line rent payment, and lease document generation systems is now complete; and we concluded a year-long effort to rewrite our operating standards. An extension of our comprehensive automation program is underway. Our commitment to operational excellence is matched only by the passion of more than 4,000 Conventional Operations team members who are dedicated to building better business practices within a culture devoted to the consistent delivery of great customer experiences. We measure customer satis- faction with the same discipline we use to measure sales, pricing, marketing and expense management. 6 Our enhanced hiring processes, training and career development programs are improving both performance and financial results. 469 communities 135,037 units 9.5% increase in same store net operating income 6.8% increase in same store revenue 94.4% average occupancy Aimco Capital Operations and Asset Management Aimco Capital is among the largest owners and operators of affordable multifamily properties in the United States, with nearly 40,000 units in 36 states, the District of Columbia and Puerto Rico. In addition to owning and operating real estate, we generate income and incremental net asset value through the redevelopment of affordable properties with tax credit equity, and provide asset management services to third-party investors. 2006 was a record year for Aimco Capital on many fronts, including average rents and occupancy in the affordable portfolio, transaction revenues and income, and tax credit equity raised. Aimco Capital’s more than 1,200 property management professionals are passionate about providing quality housing and support services to our residents, most of whom are senior citizens, disabled adults, or individuals and families with fixed or limited incomes. In 2006, Aimco Capital team members received 19 local and national awards for service and quality. We are very proud of the essential work that our dedicated team members do each and every day. Aimco Capital’s nationwide team of 65 asset management professionals had an exceptional year in 2006, with income, net of taxes, from transaction and asset management activities growing to $23 million, up more than 40% from $16 million in 2005. In addition, investor commitments to fund tax credit equity for redevelopment of affordable properties increased to $104 million, up nearly 60% from $66 million in 2005. 336 communities 38,934 units $719 average rent 96.9% occupancy 7 Improving Our Business • electronic revenue management • electronic procurement • electronic lease document generation • on-line rent payments • on-line lease applications $92 MILLION AFFORDABLE PROPERTY NOI R E S U L T S $23 MILLION NOI FROM ASSET MANAGEMENT AND TRANSACTION INCOME (NET OF TAX) Elm Creek Elmhurst, IL One Lytle Place Cincinnati, OH Service Excellence Award Winner • Donna Casterline Community Manager, Sandy Hill Terrace • Norristown, PA with representatives of the National Affordable Housing Management Association Copperwood Apartments Houston, TX Increasing Value: Portfolio Management Portfolio management involves the allocation of investment capital. As we think about portfolio management, we have two central themes: we want a portfolio that is balanced; and we don’t want to pay too much. Our portfolio needs to be: • BALANCED GEOGRAPHICALLY to provide for optimal risk adjusted returns. At year-end 2006, our 469 conventional communities were located in 53 markets. • BALANCED IN TERMS OF PRICE POINTS —We especially like lower price point properties with high land values, because these support redevelopment and entitlement activities. • ACQUIRED AT THE RIGHT PRICE — Historical data shows that investing at low cap rates without a value-added component has usually been a losing strategy. There are, however, low cap rate markets that we like very much, and in fact we have a very large investment today in low cap rate markets. Where we do invest capital in these markets, we look for redevelopment opportunities so that the Aimco investment is made at a higher cap rate. In 2006, Aimco acquired nine properties for $177 million and sold 65 Conventional properties for more than $1.1 billion in gross sales proceeds. In addition, Aimco closed on a transaction structured to provide for the future acquisition of 87 properties containing 1,600 residential units and 42 commercial/retail stores located in the upper Manhattan district of New York City. Aimco also looks for the potential to pursue opportunities to increase the uses permitted by local government for the land we already own. As a result of our entitlement efforts through 2006 — we now have, in effect, land for approximately 4,800 additional units — increasing Aimco’s net asset value with modest incremental cost. 8 Aimco Conventional Top 20 Markets Current Top 20 Markets Markets Exited in 2006 and through 2Q 2007 (projected) 9 R E S U L T S 9 PROPERTIES ACQUIRED 65 CONVENTIONAL PROPERTIES SOLD $1.1+ BILLION GROSS SALES PROCEEDS New acquisition • BaLaye Apartments Tampa, FL Calhoun Beach Club Minneapolis, MN Riverside Park Alexandria, VA Bronson Place Mountlake Terrace, WA The Knolls Colorado Springs, CO Latrobe Washington, D.C. Redevelopment: Balancing Risk and Reward Aimco is committed to ensuring that the upgrading of the physical property is matched by improving the customer experience during all phases of the process. Redevelopment and Construction Services teams work with Community Operations teams to identify the best candidates for reinvestment opportunities and to generate the highest return on Aimco’s redevelopment dollars. In 2006, this balance of risk and reward resulted in redevelopment spending of $233.6 million in 54 communities and 19,938 units between our Conventional and Affordable businesses. Our development pipeline also includes a commitment to achieve cost savings through the deployment of energy conservation programs. 54 active projects at year-end 19,938 units $233.6 million spent on redevelopment in 2006 10 The Hillcreste Los Angeles, CA “I just moved into the community a couple of weeks ago. I can honestly say that living here doesn’t even feel like apartment living. It’s extremely quiet, the residents are all very pleasant and everything is kept so clean! I am thoroughly impressed and pleased. I wanted to thank you for taking the time to show me around Bayberry Hill Estates. You were the friendliest relocation agent I have ever met. Your thoroughness and professionalism would make anyone want to live here. Thank you.” Bayberry Hill Estates Resident, Framingham, MA 11 Before • The Hillcreste Los Angeles, CA After • The Hillcreste Los Angeles, CA Before • The Lodge on the Chattahoochee Atlanta, GA After • The Lodge on the Chattahoochee Atlanta, GA Before • Four Quarters Habitat Kendall, FL After • Four Quarters Habitat Kendall, FL Yorktown Lombard, IL Yorktown Lombard, IL OUR SHARED VALUES: integrity respect collaboration customer-focused performance People At Aimco, every employee is a valued team member. We believe in conducting our business and serving our customers by living our shared values. To build a strong Aimco, we want to attract and keep people who have a strong desire to create a great working environment based on respect, collaboration and integrity. 2006 was a year of marked achievement in continuing to build upon Aimco’s performance culture. Every team member has a performance plan called Managing Aimco Performance (MAP) and the process is embraced from the front line all the way to the CEO. It aligns individual performance with the achievement of Aimco’s business goals and individual rewards. During 2006, we took major steps to enhance our “Aimco Operating Manual — Standards of Execution.” These standards serve as the foundation for our manager development. Both the standards and the training reflect the expertise of our front line operations management team. These new tools set us on a course for 2007 and beyond to build a “best in the industry” operations leadership team focused on customer service and effective business execution. This will improve team member retention and allow us to implement major productivity improvements forward. Aimco’s Human Resources team is leading the way as we build the culture that recognizes Aimco as a leading “employer of choice” in every market where we operate. 12 13 “I have looked at over 15 competing properties recently and my ability to rent a unit at your property with such an enjoyable and professional team was so appreciated ...Thank you again for build- ing this property, hiring such great people, and enabling me to be able to share the Aimco experience.” Belmont Place Resident, Atlanta, GA R E S U L T S 110 INSTRUCTOR-LED TRAINING PROGRAMS 160 SELF-LEARNING E-MODULES 3 AVERAGE NUMBER OF CLASSES COMPLETED PER TEAM MEMBER Aimco Training Team Members of Yacht Club Miami, FL Building Community Inside and Out Aimco is a company with heart. During 2006, we expanded our commitment to the Aimco Cares philanthropic program. Aimco Cares helps build our culture of caring and strengthens the “Aimco Family” by providing 10 company paid volunteer hours to each team member to support local programs that make our communities better. In 2006, Aimco launched the Aimco Family Foundation. Through the foundation, the Aimco Cares Scholarship program awarded 25 higher education scholarships to children of Aimco team members. The new Aimco Cares 4U fund assists team members and their families who are in difficult circumstances from unexpected illness, accidents and natural disasters. Aimco also supports those who serve our country by providing full pay and benefits to team members called to active duty in the military. 14 “I would like to take a moment to let you know how much I appreciate all of the hard work done by Ms. Brown to get me back in my apartment after Tropical Storm Ernesto. I just wanted to let you all know that I’ll never ever forget how she made our transition moving back home a real blessing. Happy New Year to you and your associates and thanks again for allowing Ms. Brown to be our Community Manager. Many thanks to the maintenance staff and contractors also.” City Line Resident, Newport News, VA AIMCO FAMILY FOUNDATION 25 post-secondary scholarships awarded AIMCO CARES 4U Team member crisis fund VOLUNTEERISM Aimco provides 10 company paid volunteer hours per team member each year 15 “College is the stepping stone to my success ... going to a higher learning place is going to help me succeed ... thanks Aimco for this opportunity to help me achieve my goals.” Nathaniel Hughes, Fairborn, OH Aimco Scholarship Recipient Indianapolis, IN • Terry Considine receives Defense Department award from Jerald Jones, Service Tech, Cheswick Vil- lage, for support of team members who serve in the military. Habitat for Humanity • Risk Management Denver, CO Tropical Storm Ernesto Clean-up • City Line Newport News, VA Kephart Plaza Lockhaven, PA Son of Aletha Hughes, Community Manager The Terraces, Kettering, OH Eight of the 25 Aimco Cares Scholarship Winners Patti K. Fielding Executive Vice President, Securities and Debt; and Treasurer Duke Daugherty Senior Vice President, Risk Management BOARD OF DIRECTORS Terry Considine Chairman of the Board, Chief Executive Officer and President James N. Bailey Director, Chairman of the Nominating and Corporate Governance Committee senior managing director, cambridge associates, llc Richard Ellwood Director, private investor J. Landis Martin Lead Independent Director, Chairman of the Compensation and Human Resources Committee founder and managing director, platte river ventures, llc Thomas L. Rhodes Director, chairman and president, national review Michael A. Stein Director, Chairman of the Audit Committee 16 ADVISORY BOARD Roy H. Lambert, Sr. Vero Beach, Florida Richard Morton Miami, Florida Charles R. Considine Emeritus EXECUTIVE OFFICERS Jeffrey W. Adler Executive Vice President, Conventional Property Operations Harry G. Alcock Executive Vice President and Chief Investment Officer Timothy J. Beaudin Executive Vice President and Chief Development Officer Miles Cortez Executive Vice President, General Counsel and Secretary Scott W. Fordham Senior Vice President and Chief Accounting Officer Lance J. Graber Executive Vice President, Aimco Capital Asset Management & Transactions, East Thomas M. Herzog Executive Vice President and Chief Financial Officer James G. Purvis Executive Vice President, Human Resources David Robertson Executive Vice President; President and CEO, Aimco Capital Robert Y. Walker, IV Executive Vice President; and Conventional Property Operations Chief Financial Officer SENIOR, DIVISION AND REGIONAL VICE PRESIDENTS SENIOR VICE PRESIDENTS CORPORATE Scott Anderson Senior Vice President, Technical Accounting Standards Richard K. Barrett Senior Vice President, Strategic Sourcing Donald Baumann, Jr. Senior Vice President, Income Development Lisa R. Cohn Senior Vice President, Assistant General Counsel and Assistant Secretary Steven Cordes Senior Vice President, Transactions Stephen D. Crane Senior Vice President, Property Tax Michael Dodds Senior Vice President, Conventional Operations Melanie G. French Senior Vice President, Learning and Organizational Development Terri C. Heredia Senior Vice President, Talent Eric L. Hilty Senior Vice President, Assistant General Counsel and Assistant Secretary Becky Holeman Senior Vice President, Controller Sherlyn M. Keiling Senior Vice President, Performance Excellence Martha L. Long Senior Vice President, Partnership Transactions Dennis Martin Senior Vice President, Strategic Initiatives H. Lynn Stanfield Senior Vice President, Tax R. Scott Wesson Senior Vice President and Chief Information Officer Craig Zeutzius Senior Vice President, Porfolio Management CONVENTIONAL PROPERTY OPERATIONS DIVISION VICE PRESIDENTS Anthony D’Alto Division Vice President, Gulf Michael Karsner Division Vice President, East Peter K. Kompaniez Founder and Division Vice President, Pacific Thomas Seeger Division Vice President, Midwest REGIONAL VICE PRESIDENTS John Angelo Regional Vice President, Orlando R. Lee Montgomery Senior Vice President, Revenue Management/Analytics Lynn Bora Regional Vice President, Boston and Philadelphia Leeann Morein Senior Vice President, Performance Management William Porter Senior Vice President, Acquisitions Brian Shuman Senior Vice President, Financial Planning and Analysis Patti Shwayder Senior Vice President, Government Relations and Communications John Spiegleman Senior Vice President, Assistant General Counsel and Assistant Secretary Joe Borges Regional Vice President, Houston David H. Carline Regional Vice President, Columbus Paul Gioia Regional Vice President, Chicago Stewart Grounds Regional Vice President, Dallas Regina Harris Regional Vice President, Tidewater Jeffrey Kimes Regional Vice President, Denver Keith Kimmel Regional Vice President, California Dan J. Kistel Regional Vice President, Tampa R. Dennis O’Riley Regional Vice President, Atlanta Stephen C. Peters Regional Vice President, Phoenix Susan Ridgeway Regional Vice President, Rockville Joe Suarez Regional Vice President, South Florida Charles Viale Regional Vice President, Indianapolis AIMCO CAPITAL SENIOR, DIVISION AND REGIONAL VICE PRESIDENTS Jimmy K. Arnold Regional Vice President, Operations, West Kathleen Danilchick Senior Vice President, Finance Derik Hart Senior Vice President, Asset Management & Transactions, West Michael J. Hornbrook Senior Vice President, Asset Management & Transactions, Central Carl J. Ruff, Sr. Senior Vice President, Operations, Central Bruce Schroder Senior Vice President and Chief Operating Officer Peter Stoughton Senior Vice President, Legal Jeffrey Sussman Senior Vice President, Legal O. Cooper Winston Regional Vice President, Operations, Northeast DEVELOPMENT John Bezzant Senior Vice President, Development Chris Bishop Senior Vice President, Development Dennis Bunting Senior Vice President, Construction Services Andrew Cretal Senior Vice President, Development Robert de Grasse Senior Vice President, Technical Standards Brad Hodack Senior Vice President, Construction Services Gary Holt Senior Vice President, Construction Services Anthony V. Ianuale Senior Vice President, Development Daniel Matula Senior Vice President, Development Charles McPhee Senior Vice President, Development Michael Mercier Senior Vice President, Development Randall J. Mullen Senior Vice President, Construction Services Ralph Pickett Senior Vice President, Development Gary Polodna Senior Vice President, Development Chris Shore Senior Vice President, Construction Services Paul Springthorpe Senior Vice President, Head of Construction Services Betsy Weingarten Senior Vice President, Development CORPORATE OFFICE Stanford Place 3 4582 South Ulster Street Parkway Suite 1100 Denver, CO 80237 Telephone: 303.757.8101 Toll Free: 888.789.8600 www.aimco.com STOCK LISTING New York Stock Exchange Symbols: AIV, AIVPRG, AIVPRT, AIVPRU, AIVPRV, AIVPRY LIMITED PARTNER INVESTOR RELATIONS P.O. Box 2347, Greenville, SC Telephone 864.239.1029 Fax 864.239.5812 E-mail: partners@aimco.com STOCK TRANSFER AGENT AND REGISTRAR Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 Telephone 800.730.6001 www.computershare.com INVESTOR RELATIONS INDEPENDENT AUDITORS Toll Free: 888.789.8600 Telephone 303.691.4350 Fax 303.300.3269 Elizabeth Coalson Vice President • Investor Relations Telephone 303.691.4327 Fax 303.713.6902 Ernst & Young LLP Denver, Colorado Readers should carefully review Aimco’s financial statements and notes thereto, as well as the risk factors described in Aimco’s Annual Report on Form 10-K for the year ended December 31, 2006, and other documents filed from time to time with the Securities and Exchange Commission. In 2006, our CEO submitted his annual unqualified corporate governance listing standards certification to the NYSE. Stanford Place 3 4582 South Ulster Street Parkway Suite 1100 Denver, CO 80237 Telephone: 303.757.8101 Toll Free: 888.789.8600 www.aimco.com 

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