A plan by Apartment Investment & Management Co. to split into two separate real estate investment trusts hinges on the idea that investors will see higher value in the company's stabilized apartment buildings once they are decoupled from riskier investments.
The plan drew mixed reviews from equity analysts, and an initial share-price bump faded in the days after its announcement on Sept. 14. Activist investor Jonathan Litt's hedge fund, Land & Buildings Investment Management LLC, published a letter to the company on Sept. 22 demanding a shareholder vote and questioning whether Aimco had fully considered other options, including a company sale.
As of June 30, Land & Buildings owned 0.24% of Aimco's outstanding common stock, according to S&P Global Market Intelligence data.
In a conference call, Aimco Chairman and CEO Terry Considine said the split was not the result of the broader economy, the coronavirus pandemic, the upcoming presidential election or the company's share price, but stemmed instead from "ongoing strategic reflections" over the past roughly two years.
The split, scheduled for mid-December, would spin off Apartment Income REIT, owner of a $10.4 billion portfolio of apartment properties, while the company known as Aimco would retain the legacy company's development and redevelopment businesses, plus roughly $1.3 billion of assets, some of which is likely to sell. Considine will continue as chairman and CEO of both companies, but will step down as chief executive of the new Aimco following a search for his successor.
All parties agree that Aimco's stabilized apartment properties — most of which will transfer to Apartment Income REIT — have consistently drawn lower valuations on the equity market than similar properties owned by competing apartment REITs.
"It has a very underappreciated portfolio," BMO Capital Markets analyst John Kim said in an interview. "Especially in California, Miami, Philadelphia, these are some really high-quality assets."
Explanations for the discount vary. Kim cited investor distaste for the company's relatively high leverage, and for "peculiar" investments such as its purchase of the 1001 Brickell Bay Drive office tower in Miami and its $275 million mezzanine loan on the Parkmerced Apartments property in San Francisco. Truist Securities analyst Michael Lewis said in a note that Aimco is "widely considered an excellent operator of multifamily properties, but a not-so-adept allocator of capital."
Considine, in the conference call, said the split reflects the reality that, "in fact, there are two businesses inside Aimco," while Litt, in his letter, called the split "a thinly veiled attempt by management and the Board of Directors to rid themselves of a decades-long poor track record rather than address the fundamental issues challenging the Company."
Several analysts said the split appears to be a workable solution, "in part because of its responsiveness to shareholders' disdain for the complicated (and sometimes controversial) elements" of the company's story, as SMBC Nikko analyst Richard Anderson wrote.
If Apartment Income REIT's shares were to trade at an earnings multiple roughly equal to the average of the company's apartment REIT peers, they would be worth $42.50 — or $7.50 higher than Aimco's closing price from the last trading session before the split was announced, analysts at Jefferies wrote in a note. At that level, any share price above zero for the new Aimco would represent additional value creation, they noted.
Still, other observers remain skeptical. The new Aimco is "exactly the kind of company REIT investors don't like," BMO's Kim said. "It's got the development, it's got the uneven cash flows, it has higher leverage — and that's going to go up."
While Apartment Income REIT will be less complex and have lower leverage, investors may regret the loss of the Aimco development and redevelopment platforms as engines for growth once multifamily fundamentals and the broader economy improve, he added.
Over the medium term, Considine predicted that Apartment Income REIT will have a higher dividend than the current Aimco, and said the new Aimco will retain its REIT status for at least two years, with less clarity beyond that. The new Aimco is likely to fall out of the S&P 500, and Considine said Apartment Income REIT's future inclusion in the index is unclear.
The split, structured as a taxable spinoff, does not require a shareholder vote, but Land & Buildings said it will file preliminary proxy materials with the SEC requesting a special meeting if Aimco does not agree to a shareholder vote by that time.
Representatives for Aimco and Land & Buildings did not respond to requests for comment.