REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors. This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward. Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Apartment Investment and Management Company (AIV) fares in the ModernGraham valuation model.
Company 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 Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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 – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$14.48|
|Value Based on 0% Growth||$8.49|
|Market Implied Growth Rate||16.05%|
|Net Current Asset Value (NCAV)||-$30.90|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Apartment Investment and Management Company is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, lack of earnings stability, and the high PEmg and PB ratios. The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of earnings stability. As a result, value investors following the ModernGraham approach should explore other opportunities at this time. From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.19 in 2010 to an estimated $1.00 in 2014. This demonstrated level of growth supports the market’s implied estimate of 16.05% earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is within a margin of safety relative to the market price.
Be sure to check out previous ModernGraham valuations of Apartment Investment and Management Company (AIV) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Apartment Investment and Management Company (AIV)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Apartment Investment and Management Company (AIV) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from wikipedia; this article is not affiliated with the company in any manner.