Stocks

ModernGraham Valuation: Apartment Investment & Management Co. (AIV)

moneyCompany Profile (obtained from Google Finance): Apartment Investment and Management Company (Aimco) is a self-administered and self-managed real estate investment trust (REIT). AIMCO Properties, L.P. (the Aimco Operating Partnership), is a partnership formed to conduct the Company’s business, which is focused on the ownership, management and redevelopment of apartment communities located in the United States. Aimco, through its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, owns an ownership interests in the Aimco Operating Partnership. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership. As of December 31, 2012 , the Company’s portfolio of owned properties consisted of 265 properties with 67,977 apartment units. The Company’s business is organized around two activities: Property Operations and Portfolio Management. During the year ended December 31, 2012, the Company acquired 84 properties in San Diego, 42 in Manhattan and 488 in Phoenix.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0.00 ** See conclusion.
MG Opinion Overvalued
Value Based on 3% Growth $0.00
Value Based on 0% Growth $0.00
Market Implied Growth Rate -28.04%
Net Current Asset Value (NCAV) -$36.84
PEmg -47.57
Current Ratio 0.48
PB Ratio 4.29

Balance Sheet – 9/30/2013 

Current Assets $231,100,000
Current Liabilities $484,900,000
Total Debt $4,829,500,000
Total Assets $6,489,500,000
Intangible Assets $0
Total Liabilities $5,607,400,000
Outstanding Shares 145,920,000

Earnings Per Share

2013 (estimate) $1.11
2012 -$0.95
2011 -$1.57
2010 -$1.73
2009 -$1.75
2008 -$1.51
2007 -$1.14
2006 -$1.29
2005 -$1.23
2004 -$0.36
2003 -$0.25

Earnings Per Share – ModernGraham 

2013 (estimate) -$0.54
2012 -$1.42
2011 -$1.61
2010 -$1.58
2009 -$1.47
2008 -$1.25

Conclusion:

Apartment Investment & Management Co. fares extremely poorly in the ModernGraham valuation model.  First, it does not pass the requirements of either the Defensive Investor or the Enterprising Investor.  This is a result of the high level of debt relative to its current assets, but more than that it is a result of the terrible earnings figures put out by the company.  Earnings drive everything for businesses, even REITs.  Free cash flow is nice, but everything still comes down to earnings.  If a company does not earn money, it will not have cash to eventually trickle back to investors.  Investors seeking to use a value investing approach as is used by ModernGraham would do better by looking at some companies that pass the requirements set forth by Benjamin Graham.  As for a valuation, the company’s consistently negative earnings lead to the valuation model returning a figure of $0.  If there is value here, it would be found through the balance sheet, but the high debt eliminates that as a possibility.

What do you think?  Do you agree that Apartment Investment & Management Co. is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Apartment Investment & Management Co. (AIV) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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