ITEM 1. Business
AIMCO Properties, L.P., a Delaware limited partnership (the "Partnership" and together with its consolidated subsidiaries and other controlled entities, the "Company"), was formed on May 16, 1994 to conduct the business of acquiring, redeveloping, leasing, and managing multifamily apartment properties. The Partnership's securities include Partnership Common Units ("common OP Units"), Partnership Preferred Units ("preferred OP Units"), and High Performance Partnership Units ("High Performance Units"), which are collectively referred to as "OP Units." Apartment Investment and Management Company, or AIMCO, is the owner of the General Partner - AIMCO-GP, Inc. - and the Special Limited Partner - AIMCO-LP, Inc., as defined in the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P. as amended, or the Partnership Agreement. The General Partner and Special Limited Partner hold common OP Units of the Partnership. In addition, AIMCO (through the General Partner and Special Limited Partner) is the primary holder of outstanding preferred OP Units. The Limited Partners (as defined in the Partnership Agreement) of the Partnership are individuals or entities that own common OP Units or preferred OP Units other than AIMCO, the General Partner or the Special Limited Partner. After holding the common OP Units for one year, the Limited Partners have the right to redeem their common OP Units for cash, subject to the prior right of the Partnership to elect to acquire some or all of the common OP Units tendered for redemption for cash or in exchange for shares of AIMCO Class A Common Stock. Common OP Units redeemed for AIMCO Class A Common Stock are generally on a one-for-one basis (subject to antidilution adjustments). Preferred OP Units may or may not be redeemable based on their respective terms, as provided for in the Partnership Agreement.
The Partnership, through its operating divisions and subsidiaries, holds substantially all of AIMCO's assets and manages the daily operations of AIMCO's business and assets. All employees of the Company are employees of the Partnership; AIMCO has no employees.
AIMCO is required to contribute to the Partnership all proceeds from offerings of its securities. In addition, substantially all of AIMCO's assets must be owned through the Partnership; therefore, AIMCO is generally required to contribute to the Partnership all assets acquired. In exchange for the contribution of offering proceeds or assets, AIMCO receives additional interests in the Partnership with similar terms (i.e., if AIMCO contributes proceeds of a preferred stock offering, AIMCO (through the General Partner and Special Limited Partner) receives preferred OP Units).
AIMCO frequently consummates transactions for the benefit of the Partnership. For legal, tax or other business reasons, AIMCO may hold title or ownership of certain assets until they can be transferred to the Partnership. However, the Partnership has a controlling financial interest in substantially all of AIMCO's assets in the process of transfer to the Partnership. Except as the context otherwise requires, "we," "our," "us" and the "Company" refer to the Partnership, and the Partnership's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively. Except as the context otherwise requires, "AIMCO" refers to AIMCO and AIMCO's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively.
As of December 31, 2002, we owned or managed a portfolio of 1,788 apartment properties (individually a "property" and collectively the "properties") containing 318,152 apartment units located in 47 states, the District of Columbia and Puerto Rico. Based on apartment unit data compiled by the National Multi Housing Council, as of December 31, 2002, we were the largest owner and operator of apartment properties in the United States. We serve approximately one million residents per year.
As of December 31, 2002, we:
•owned a controlling equity interest in 187,506 apartment units in 728 properties (which we refer to as "consolidated");
•owned a non-controlling equity interest in 73,924 apartment units in 511 properties (which we refer to as "unconsolidated"), of which 64,937 apartment units were managed by us; and
•provided services or managed, for third party owners, 56,722 apartment units in 549 properties, primarily pursuant to long-term agreements (includes 45,187 apartment units in 448 properties that are asset managed only, and not also property managed).
At December 31, 2002, we had 103,452,171 common OP Units, 41,293,016 preferred OP Units and 2,379,084 High Performance Units (includes only those units that have met the required measurement benchmarks and are dilutive - see Note 20 to the consolidated financial statements in Item 8 of this Annual Report) outstanding.
Effective March 3, 2003, our principal executive offices were moved to 4582 South Ulster Street Parkway, Suite 1100, Denver, Colorado 80237. Our telephone number is (303) 757-8101.
We do not maintain a website. However, AIMCO does, and it makes all of its filings with the Securities and Exchange Commission available free of charge as soon as reasonably practicable through its website at www.aimco.com. The information on AIMCO's website is not incorporated into this Annual Report.
2002 Developments
Casden Merger
On March 11, 2002, AIMCO completed the acquisition of Casden Properties, Inc., or Casden, which included the merger of Casden into AIMCO. We refer to this transaction as the Casden Merger. In the Casden Merger AIMCO acquired 4,975 conventional apartment units located in Southern California and 11,027 affordable apartment units located in 25 states. In that transaction, AIMCO also acquired National Partnership Investments Corp., which we refer to as NAPICO, a subsidiary of Casden, which, as general partner and/or limited partner of numerous limited partnerships, has interests in more than 400 properties with more than 41,000 apartment units. AIMCO paid approximately $1.1 billion for the properties and NAPICO, which included an earnout of $15 million as a result of property performance for the period ended December 31, 2001. To fund this acquisition AIMCO issued 3.508 million shares of AIMCO Class A Common Stock and we issued 882,784 common OP Units (valued at $164.9 million and $41.5 million, respectively, based on $47 per share/unit), paid approximately $198 million in cash, acquired title subject to existing mortgage indebtedness of approximately $685 million, and assumed short-term indebtedness of approximately $48 million. AIMCO also incurred approximately $15 million in transaction costs comprised largely of professional fees, which included legal, accounting, tax and acquisition due diligence. AIMCO contributed to the Partnership substantially all of the assets and liabilities acquired in the Casden Merger in exchange for 3.508 million common OP Units.
In connection with the Casden Merger, we borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan that we refer to as the Casden Loan, to pay the cash and transaction costs required to complete the Casden Merger. During 2002, we repaid approximately 60% of the Casden Loan principally with portions of the proceeds from AIMCO's public offering of AIMCO Class A Common Stock, AIMCO's offering of Class R Cumulative Preferred Stock, property sales and other net cash flow from operations. The outstanding balance on the Casden Loan was $115 million at December 31, 2002. For additional information on the Casden Loan see Note 10 of the consolidated financial statements in Item 8 of this Annual Report.
In addition, as part of the Casden Merger AIMCO committed to purchase two properties currently under development, upon satisfactory completion and attainment of 60% occupancy. On November 27, 2002, AIMCO closed on the purchase of The Villas at Park La Brea, a mid-rise apartment community with 250 units for approximately $55.5 million. The Villas at Park La Brea is the first of three phases to be completed as part of the Park La Brea development, which is one of the two development properties AIMCO has committed to purchase. The other two phases of the Park La Brea development are scheduled to be complete sometime in 2003 and 2004. There is not yet a schedule for completion of the second of the two development properties.
New England Properties Acquisition
On August 29, 2002, we completed the acquisition of certain New England area apartment properties. In this acquisition, which we refer to as the New England Properties Acquisition, we acquired 11 conventional garden and mid-rise properties primarily located in the greater Boston, Massachusetts area. The 11 properties include 4,323 apartment units located on approximately 553 acres in the aggregate. The total cost of the acquisition included a purchase price of $500 million for the properties, $2.5 million in transaction costs and $34.2 million of initial capital expenditures (of which $28 million will be spent to complete a kitchen and bath program and $6.2 million will be spent to address other identified property needs). We funded the acquisition through a combination of non-recourse property debt of $308.7 million and $200 million from our credit facility. We expect to repay the borrowings on the credit facility with operating cash flows and proceeds from property sales.
Property Dispositions
During 2002, we sold 53 conventional properties, 26 affordable properties, one commercial property and two senior living facilities for an aggregate sales price of $450.0 million. These sales resulted in net proceeds to the partnerships of $173.7 million after repayment of existing debt and payment of transaction costs (net of cash in the partnerships) totaling $276.3 million. Our share of the net proceeds was $127.1 million and was used to repay a portion of our outstanding short-term indebtedness and for other corporate purposes. Of the total property dispositions, 44 were unconsolidated and accounted for under the equity method.
Debt Assumptions and Financings
On February 14, 2003, we and our lenders amended our revolving credit facility to provide for a $100 million increase, at our option, in the available commitment to $500 million (such commitment in excess of $400 million is not available until it has been syndicated), reduce the minimum fixed charge coverage ratio from 1.60:1 to 1.50:1 through the maturity date and extend the maturity date one year to July 31, 2005. Upon the effective date of the amendment, the margin on LIBOR-based loans and base rate loans was amended to a range between 2.05% to 2.65% and .55% to 1.15%, respectively, based on the fixed charge coverage ratio. For additional information on the credit facility see Note 11 of the consolidated financial statements in Item 8 of this Annual Report.
During the year ended December 31, 2002, we refinanced or closed 93 mortgage loans generating $1,031.7 million of total proceeds at a weighted average interest rate of 4.26%, of which $937.9 million related to consolidated properties (these mortgages do not include the $308.7 million in mortgage loans related to the New England Properties Acquisition that are discussed below). Each loan is non-recourse. Among the 93 loans, 81 are individually secured by one of 81 properties with no cross-collateralization, and 12 loans totaling $228.4 million are cross-collateralized with certain other loans. After repayment of existing debt and payment of transaction costs totaling $832.0 million, our share of the total $199.7 million in net proceeds was $165.8 million, which was used to repay existing short-term debt and for other corporate purposes.
In connection with the New England Properties Acquisition, we closed 11 mortgage loans generating $308.7 million of long-term, fixed rate, fully amortizing notes with a weighted average interest rate of 5.69%. Each loan is non-recourse and is individually secured by one of the 11 properties, with no cross-collateralization.
In connection with the purchase of The Villas at Park La Brea, we closed a $38.0 million, long-term, fixed rate, fully amortizing note with an interest rate of 6.01%. This note is non-recourse and secured by the property.
In addition, in connection with the Casden Merger, we assumed $684.7 million of primarily long-term, fixed-rate, fully amortizing notes payable with a weighted average interest rate of 6.85%. Each of the notes is individually secured by one of 116 properties with no cross-collateralization.
Equity Transactions
Preferred Stock
The Partnership Agreement requires that, whenever AIMCO issues shares of its Class A Common Stock or its preferred stock, the proceeds from such issuances are contributed to the Partnership in exchange for an equal number of common OP Units or preferred OP Units, respectively. In 2002, AIMCO issued $51.1 million of preferred stock in two underwritten public offerings yielding approximately $50.0 million of net proceeds. The total proceeds were contributed by AIMCO to us in exchange for similar classes of preferred OP Units that have the same respective terms as the preferred stock detailed below:
(1)Dividends on the Class R Cumulative Preferred Stock, or Class R Preferred Stock, are paid quarterly in an amount per share equal to $2.50 per year (equivalent to 10% per annum of the $25.00 liquidation preference).
AIMCO Class A Common Stock
In 2002, AIMCO issued $165.0 million of AIMCO Class A Common Stock in connection with the Casden Merger, and contributed substantially all of the assets and liabilities acquired to us in exchange for common OP Units. Additionally, AIMCO issued $369.0 million of AIMCO Class A Common Stock in an underwritten public offering, and contributed the total proceeds to us in exchange for common OP Units.
The following table summarizes AIMCO's significant 2002 issuances of its Class A Common Stock:
In addition, we issued 882,784 common OP Units (valued at $41.5 million, based on $47 per unit) in connection with the Casden Merger, and 331,451 OP Units (valued at $16.9 million) in connection with acquisitions of limited partnership and other interests.
Acquisitions of Limited Partnership Interests
From time to time, we have offered and, in the future, may offer to acquire the interests held by third party investors in certain partnerships for which we act as general partner. Any such acquisitions will require funds to pay the cash purchase price for such interests. During the year ended December 31, 2002, we made separate offers to the limited partners of 323 partnerships to acquire their limited partnership interests, and purchased limited partnership interests for an aggregate of approximately $31.0 million, of which $27.7 million was in cash and the remainder in common OP Units. This compares to the year ended December 31, 2001 when we made separate offers to the limited partners of 261 partnerships to acquire their limited partnership interests, and purchased approximately $178.0 million, of which $135.6 million was in cash and the remainder in common OP Units. Although the reason for this year over year decline is uncertain, we believe four primary factors contributed: improved real estate partnership results (including cash distributions to partners in recent years in increasing amounts resulting in increased returns); the relative attractiveness of investments in real estate as compared to other investment opportunities; greater sensitivity on the part of investors to tax liabilities related to such sales in the current volatile investment marketplace; and less third party equity available in affiliated partnerships as a result of our prior purchases.
Transactions Involving Notes Receivable
During 2002, we completed a thorough collectibility analysis of each of our notes receivable, primarily from unconsolidated real estate partnerships. As a result of this process, we recorded a provision for loan losses of approximately $9.0 million. In addition, we identified transactions (including sales, refinancings, foreclosures and rights offerings) that would provide for collection of certain notes receivable (either in cash or by obtaining title to the property or additional ownership interest in the partnership owning the property). In 2002, we executed such transactions on notes receivable with carrying values of $111.2 million, and based on their fair values, recorded accretion income of approximately $36.8 million.
Financial Information About Industry Segments
We operate in two industry segments: the acquisition, ownership, operation and redevelopment of a diversified portfolio of properties; and providing management and other services relating to the apartment business to third parties and affiliates. For further information on these segments and other related information on the various components of our operations, see Note 24 of the consolidated financial statements in Item 8, and Management's Discussion and Analysis in Item 7, of this Annual Report.
Operating and Financial Strategies
Our principal operating objectives are to increase long-term OP unitholder value by increasing operating cash flows, and to provide long-term, predictable Funds From Operations, or FFO (as defined by the National Association of Real Estate Investment Trusts), per unit, less capital spending for replacements and enhancements. For a description of the meaning of FFO and its use and limitation as an operating measure, see the discussion titled "Funds From Operations" in Item 7 of this Annual Report. We strive to meet our objective by implementing operating and financing strategies that include the following:
•Acquisition of Properties at Less Than Replacement Cost. We attempt to acquire properties at a significant discount to their replacement cost.
•Geographic Diversification. We operate in 47 states, the District of Columbia and Puerto Rico. This geographic diversification insulates us, to some degree, from inevitable downturns in any one market. Our income before depreciation and interest expense, is currently earned in more than 198 local markets. In 2002, the largest single market (Washington, D.C.) contributed approximately 12% to income before depreciation and interest expense, and the five largest markets (Washington, D.C., Chicago, greater Los Angeles, southeast Florida and Houston) together contributed approximately 32%. With the properties acquired through the New England Properties Acquisition, in the last quarter of 2002, the greater Boston market became one of our five largest markets. Although we intend to maintain broad geographic diversification, we plan to concentrate conventional operations in core markets in order to achieve economies of scale in management and operations.
•Market Growth. We seek to operate in markets where population and employment growth are expected to exceed the national average and where we believe we can become a regionally significant owner or manager of properties.
•Price Point Diversification. Our portfolio of properties covers a broad range of average monthly rental rates, with most between $500 and $1,200 per month.
•Product Diversification. Our portfolio of properties spans a wide range of apartment community types, both within and among markets, including garden and high-rise apartments. In addition to community types, we have a wide range of quality, from A to C rated properties, with our principal focus on B rated properties.
•Capital Replacements and Capital Enhancements. We believe that the physical condition and amenities of our apartment properties are important factors in our ability to maintain and increase rental rates. In 2002, we spent approximately $478 per owned apartment unit for Capital Replacements, which are expenditures required to maintain the related asset, and $46 per owned apartment unit for Capital Enhancements, which are expenditures that add a new feature or revenue source at a property.
•Debt Financing. Our strategy is generally to incur debt to increase our return on equity while maintaining acceptable interest coverage ratios. We seek to maintain a ratio of free cash flow to combined interest expense and preferred OP Unit distributions of between 2:1 and 3:1 and to match debt maturities to the character
of the assets financed. For the year ended December 31, 2002, however, we had a ratio of free cash flow to combined interest expense and preferred OP Unit distributions of 1.81:1, and this ratio in prior periods has also deviated from our goal. This ratio is below our desired minimum and primarily resulted from the difficult national economy and weaker operations. Our goal over time is to increase the coverage ratio to 2.2:1 through debt repayment from property sales, debt amortization, conversions of convertible preferred securities, redemptions of preferred securities and improved operating performance. As a comparison to our free cash flow ratio, for the year ended December 31, 2002, we had a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense equal to 2.6:1. We predominantly use long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid the refunding and repricing risks of short-term borrowings. We use short-term debt to fund short-term uses as well as acquisitions and generally expect to repay acquisition borrowings with operating earnings, property sales proceeds or long-term debt financings. As of December 31, 2002, approximately 9% of our outstanding debt was short-term debt and 91% was long-term debt.
•Dispositions. Although we hold all of our properties for investment, we sell properties when they do not meet our investment criteria or are located in areas that we believe do not justify our continued investment, in both cases as compared to alternative uses for our capital. We have identified approximately 300 conventional properties comprising 75,000 apartment units that we characterize as "intermediate-term hold" properties. We intend to sell these properties over the next four years and use the proceeds to fund repayment of short-term debt, improvements to "long-term hold" properties, acquisitions of properties and limited partnership interests, share repurchases or redemptions of preferred securities and other corporate purposes. Approximately 440 conventional properties comprising 130,000 apartment units concentrated in 27 primary markets are what we characterize as "long-term hold" properties.
•Distribution Policy. We pay distributions to our OP Unitholders. We distributed 70.9%, 61.0%, and 59.9% of FFO to holders of common OP Units for the years ended December 31, 2002, 2001 and 2000, respectively. It is the present policy of the General Partner to increase the distribution annually in an amount equal to one-half of the projected increase in Adjusted Funds From Operations, or AFFO (which is FFO adjusted for Capital Replacement and Capital Enhancement spending), subject to minimum distribution requirements applicable to REITs. Beginning with the year ended December 31, 2002, AFFO includes a deduction for Capital Enhancements, a discretionary spending item, as well as a deduction for Capital Replacements. The General Partner considers the discretionary nature of Capital Enhancement spending in its consideration of AFFO as it relates to the distribution policy. The distribution paid in February 2003 of $0.82 per unit, which was the same distribution amount as was paid in each quarter of 2002, represents a distribution of 96% of AFFO (before deducting Capital Enhancements) and 78% of FFO for the quarter ended December 31, 2002. The General Partner continues to monitor the distribution as a percentage of AFFO (before deducting Capital Enhancements). If the payout were to exceed 100% for a sustained period, the General Partner would consider a change in the distribution to match operating profitability.
Growth Strategies
We seek growth through four primary sources - property operations, affordable activities, redevelopment of properties and acquisitions.
Property Operations
We pursue operational growth primarily through the following strategies:
•Revenue Increases. We increase rents where feasible and seek to improve occupancy rates. We are also focused on the automation of on-site operations, as we believe that timely and accurate collection of property performance and resident profile data will enable us to maximize revenue through better property management and leasing decisions. In addition, we intend to continue our emphasis on the quality of our on-site employees through recruiting, training and retention programs, which we believe lead to increased occupancy rates through improved customer service and enhanced performance.
•Controlling Expenses. Cost reductions are accomplished by local focus at the regional operating center level and by taking advantage of economies of scale at the corporate level. As a result of the size of our portfolio and our creation of regional concentrations of properties, we have the ability to spread over a large property base fixed costs for general and administrative expenditures and certain operating functions, such as
purchasing, insurance and information technology. We are automating our supply chain to provide better control over purchasing decisions and to take advantage of volume discounts.
•Ancillary Services. We believe that our ownership and management of properties provide us with unique access to a customer base that allows us to provide additional services and thereby increase occupancy and rents, while also generating incremental revenue. We currently provide cable television, telephone services, appliance rental, and carport, garage and storage space rental at certain properties.
•Resident Selection and Retention. In apartment properties, neighbors are a part of the product together with the location of the property and the physical quality of the apartment units. We have created a resident acquisition and retention department to focus efforts on attracting and retaining residents who are good neighbors and are credit worthy. We are taking a national approach to marketing to take advantage of our scale in media buying, with pricing decisions being made at the regional level.
•Focus on Top Properties. Our conventional properties are ranked by their contribution to free cash flow. We have 25 properties that contribute approximately 23% of our total free cash flow, which we characterize as our "Top 25." In these properties, management decision-making is close to the property level as 20 properties out of the Top 25 properties have community managers that report directly to a Regional Vice President.
Affordable Activities
In 2002, we formed Aimco Capital to integrate our affordable property operations, asset management and transaction activities. Our primary objective with Aimco Capital is to provide a predictable and increasing free cash flow through ownership and expertise in affordable properties and transactions. In order to enhance the value of our affordable properties, we seek to identify redevelopment opportunities and increase rent levels. In addition, we manage assets and transactions generating fees to Aimco Capital.
Redevelopment of Properties
We believe redevelopment of selected properties in superior locations provides advantages over ground-up development, enabling us to generate rents comparable to new properties with relatively lower financial risk, in less time and with reduced delays due to governmental regulation. Our current policy is to generally limit redevelopments to approximately 10% of total common and preferred equity market capitalization, which, as of December 31, 2002 was approximately $5.0 billion. As of December 31, 2002, we had 10 properties with 3,678 units under redevelopment having an estimated total investment (fair market value prior to redevelopment plus new redevelopment spending) of $601 million, of which approximately $34 million remains to be spent. Our share of the estimated total investment is $501 million of which approximately $21 million remains to be spent.
Acquisitions
We believe our acquisition strategies may increase profitability and predictability of earnings by expanding operations in select markets, gaining economies of scale and increasing opportunities to provide ancillary services to residents at acquired properties. We acquire additional properties primarily in three ways:
•Direct Acquisitions. We may directly, including through mergers and other business combinations, acquire individual apartment properties or portfolios of apartment properties and controlling interests in entities that own or control such properties or portfolios. To date, a significant portion of our growth has resulted from the acquisition of other companies that owned or controlled apartment properties.
•Increasing our Interest in Partnerships. For properties where we own a general partnership interest in the property-owning partnership, we may seek to acquire, subject to our fiduciary duties, the interests in the partnership held by third parties for cash or, in some cases, in exchange for OP Units. Since 1996, we have completed over 2,500 tender offers with respect to various partnerships resulting in over 160,000 transactions totaling $826 million in cash and OP Units spent to purchase additional interests in such partnerships.
•Acquisition of Managed Properties. Our property management operations have contributed to our acquisition activities. Since our initial public offering, we have acquired from our managed portfolio 16 properties comprising 5,697 apartment units for total consideration of $189.9 million. In addition, in September 2000, we acquired interests in 167 Oxford properties comprising 36,949 apartment units, which we had managed for a number of years previously, for a total purchase price of approximately $1.2 billion.
Property Management Strategies
We seek to improve the operating results from our property management operations by, among other methods, combining centralized financial control and uniform operating procedures with localized property management decision-making and market knowledge. Currently, our property management operations are organized by our two major business components of conventional and affordable. Our conventional management operations are organized into 15 regional operating centers, each of which is supervised by a Regional Vice-President. As discussed previously, we formed Aimco Capital to integrate our affordable property operations, asset management and transaction activities. Within Aimco Capital, the affordable management operations are organized into four regional operating centers, each of which is supervised by a Regional Vice-President.
Our Taxation
We are treated as a "pass-through" entity for Federal income tax purposes and are not subject to Federal income taxation. Each of our partners, however, is subject to tax on his allocable share of partnership tax items, including partnership income, gains, losses, deductions and credits, or Partnership Tax Items, for each taxable year during which he is a partner, regardless of whether he receives any actual distributions of cash or other property from the Partnership during the taxable year. Generally, the characterization of any particular Partnership Tax Item is determined by us, rather than at the partner level, and the amount of a partner's allocable share of such item is governed by the terms of the Partnership Agreement. The General Partner, is our "tax matters partner" for Federal income tax purposes. The tax matters partner is authorized, but not required, to take certain actions on behalf of us with respect to tax matters.
Taxation of AIMCO
AIMCO has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, commencing with its taxable year ended December 31, 1994, and intends to continue to operate in such a manner. AIMCO's current and continuing qualification as a REIT depends on its ability to meet the various requirements imposed by the Code, through actual operating results, distribution levels and diversity of stock ownership.
If AIMCO qualifies for taxation as a REIT, it will generally not be subject to United States Federal corporate income tax on its net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that generally results from investment in a corporation. If AIMCO fails to qualify as a REIT in any taxable year, its taxable income will be subject to United States Federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if AIMCO qualifies as a REIT, it may be subject to certain state and local income taxes and to United States Federal income and excise taxes on its undistributed income.
If in any taxable year AIMCO fails to qualify as a REIT and incurs additional tax liability, AIMCO may need to borrow funds or liquidate certain investments in order to pay the applicable tax and it would not be compelled to make distributions under the Code. Unless entitled to relief under certain statutory provisions, AIMCO would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. Although AIMCO currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause AIMCO to fail to qualify as a REIT or may cause its Board of Directors to revoke the REIT election.
AIMCO and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment that AIMCO and its stockholders receive may not conform to the United States Federal income tax treatment.
Certain of AIMCO's operations (property management, asset management, risk, etc.) are conducted through Taxable REIT Subsidiaries, each of which we refer to as a TRS. A TRS is a C-corporation that has not elected REIT status and as such is subject to United States Federal corporate income tax. AIMCO uses the TRS format to facilitate its ability to offer certain services and activities to its residents that are not generally considered as qualifying REIT activities.
Competition
In attracting and retaining residents we compete with numerous other housing alternatives. Our properties compete directly with other rental apartments and with single family homes that are available for rent or purchase in the markets in which our properties are located. Our properties also compete for residents with new and existing condominiums. The number of competitive properties in a particular area has a material effect on our ability to lease apartment units at our properties and on the rents we charge. We compete with numerous real estate companies in acquiring, developing and managing apartment properties and in seeking residents to occupy our properties.
Regulation
General
Apartment properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which would adversely affect our cash flows from operating activities. In addition, future enactment of rent control or rent stabilization laws or other laws regulating multifamily housing may reduce rental revenue or increase operating costs in particular markets.
Environmental
Various Federal, state and local laws subject property owners and operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to remedy properly, hazardous substances may adversely affect both occupancy at affected apartment communities and also the ability to sell or finance the affected properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of properties, we could potentially be liable for environmental liabilities or costs associated with our properties or properties we acquire or manage in the future.
There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. We have been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. Prior to March 31, 2002, we generally were insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, our insurance coverage for property damage loss claims arising from the presence of mold has become more limited and generally includes only limited coverage for catastrophic property damage due to mold. In addition, since December 31, 2002, our insurance coverage for personal injury claims related to mold exposure has also become more limited.
We have implemented protocols and procedures to prevent or eliminate mold from our properties and believe that our measures will reduce, or even minimize, the effects that mold could have on our residents. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abatement of mold conditions. However, because the law regarding mold is unsettled and subject to change we can make no assurance that future liabilities resulting from the presence of, or exposure to, mold will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
Affordable Housing
As of December 31, 2002, we owned a controlling equity interest in 137 properties, held a non-controlling equity interest in 383 properties and managed for third parties and affiliates 523 properties that benefit from governmental programs intended to provide housing to people with low or moderate incomes. These programs, which are usually
administered by the United States Department of Housing and Urban Development, or HUD, or state housing finance agencies, typically provide mortgage insurance, favorable financing terms, tax credits or rental assistance payments to the property owners. As a condition of the receipt of assistance under these programs, the properties must comply with various requirements, which typically limit rents to pre-approved amounts. If permitted rents on a property are insufficient to cover costs, a sale of the property may become necessary, which could result in a loss of management fee revenue. We usually need to obtain the approval of HUD in order to manage, or acquire a significant interest in, a HUD-assisted property. We may not always receive such approval.
Laws benefiting disabled persons
Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to our properties, or restrict renovations of the properties. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our properties are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA and the FHAA.
Insurance
We believe that our insurance coverages insure our properties adequately against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood and other perils. AIMCO Assurance Ltd., a Bermuda domiciled insurer wholly owned by us, has a reinsurance contract with a third party insurer to cover 100% of the first $1 million loss from any casualty related to the conventional properties. The affordable properties are insured for the first $1 million through an independent third party carrier. For the policy year ending February 28, 2003, we were insured for any casualty loss in excess of $1 million, up to $230 million, by a combination of several "excess" insurance providers, all of which were at least A-rated. For the policy year ending February 28, 2003, we also have retained an annual aggregate exposure of $4 million above the first $1 million per occurrence. As a result of the Terrorism Risk Insurance Act of 2002, we are currently evaluating the price of offers, mandated by the legislation, to purchase terrorism insurance.
In addition, we have self-insured retentions in workers' compensation and general liability coverage. In workers' compensation, we retain the first $500,000 per incident. We perform regular analyses to ensure adequate reserves for losses. Recent insurance marketplace conditions led to a dramatic increase in general liability insurance premiums. To mitigate proposed increases, we chose to take a self-insured retention. Effective December 31, 2002, AIMCO Assurance Ltd., reinsures 100% of the risk of the first $250,000 of any general liability loss. We have established loss prevention, loss mitigation, claim handling, litigation management, and loss reserving procedures to manage our exposure. Where appropriate, in order to comply with HUD regulations, we separate segments of our properties into different insurance programs.
We believe that our ability to manage successfully these retentions creates a competitive cost advantage relative to other smaller competitors; however the realization of this potential advantage depends upon the skill with which we manage this risk.
Employees
We currently have approximately 7,500 employees, of which approximately 6,500 are at the property level, performing various on-site functions. The balance of our employees manage corporate and regional operations, including investment transactions, legal, financial reporting, accounting, information systems, human resources and other support functions. Fewer than 200 of our employees are represented by unions. We have never experienced a work stoppage and believe we maintain satisfactory relations with our employees.
Risk Factors
The risk factors noted in this section and other factors noted throughout this Annual Report, describe certain risks and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement.
If we are not able successfully to acquire, operate, redevelop and expand properties, our growth and results of operations will be adversely affected.
The selective acquisition, redevelopment and expansion of properties is one component of our growth strategy. However, we may not be able to complete successfully transactions in the future. Although we seek to acquire, operate, develop and expand properties only when such activities increase our net income on a per unit basis, such transactions may fail to perform in accordance with our expectations. When we develop or expand properties, we are subject to the risks that:
•costs may exceed original estimates;
•occupancy and rental rates at the property may be below our projections;
•financing may not be available on favorable terms or at all;
•redevelopment and leasing of the properties may not be completed on schedule; and
•we may experience difficulty or delays in obtaining necessary zoning, land-use, building, occupancy and other governmental permits and authorizations.
We may have difficulty integrating any acquired businesses or properties.
We have grown rapidly. Since our formation in May 1994, we have completed numerous acquisition transactions, expanding our portfolio of owned or managed properties from 132 properties with 29,343 apartment units to 1,788 properties with 318,152 apartment units as of December 31, 2002. These acquisitions have included purchases of properties and interests in entities that own or manage properties, as well as corporate mergers. Our ability to integrate successfully acquired businesses and properties depends, among other things, on our ability to:
•attract and retain qualified personnel;
•integrate the personnel and operations of the acquired businesses;
•maintain standards, controls, procedures and policies; and
•maintain adequate accounting and information systems.
We can provide no assurance that we will be able to accomplish these goals and successfully integrate any acquired businesses or properties. If we fail to integrate successfully such businesses, our results of operations could be adversely affected.
As our size increases, it becomes more difficult for us to achieve a comparably rapid rate of growth in assets.
Our rapid growth since our formation in May 1994 was achieved when we were a smaller company. As a result of our current size, future acquisitions of the same size and magnitude will likely have a smaller effect on us. It may also be more difficult for us to identify and complete acquisitions of greater size that are consistent with our growth strategy.
We are subject to litigation associated with partnership acquisitions that could increase our expenses and prevent completion of beneficial transactions.
We have engaged in, and intend to continue to engage in, the selective acquisition of interests in limited partnerships that own apartment properties. In some cases, we have acquired the general partner of a partnership and then made an offer to acquire the limited partners' interests in the partnership. In these transactions, we may be subject to litigation based on claims that we, as the general partner, have breached our fiduciary duty to our limited partners or that the transaction violates the relevant partnership agreement or state law. Although we intend to comply with our fiduciary obligations and the relevant partnership agreements, we may incur additional costs in connection with the defense or settlement of this type of litigation. In some cases, this type of litigation may adversely affect our desire to proceed with, or our ability to complete, a particular transaction. Any litigation of this type could also have a material adverse effect on our financial condition or results of operations.
Our existing and future debt financing could render us unable to operate, result in foreclosure on our properties or prevent us from making distributions on our equity.
Our strategy is generally to incur debt to increase the return on our equity while maintaining acceptable interest coverage ratios. We seek to maintain a ratio of free cash flow to combined interest expense and preferred OP Unit distributions of between 2:1 and 3:1 and to match debt maturities to the character of the assets financed. For the year ended December 31, 2002, however, we had a ratio of free cash flow to combined interest expense and preferred OP Unit distributions of 1.81:1, and this ratio in prior periods has also deviated from our goal. As a
comparison to our free cash flow ratio, for the year ended December 31, 2002, we had a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense equal to 2.6:1. In addition, the Board of Directors of AIMCO could change this strategy at any time and increase our leverage. Our organizational documents do not limit the amount of debt that we may incur, and we have significant amounts of debt outstanding. Payments of principal and interest may leave us with insufficient cash resources to operate our properties or pay distributions required to be paid in order to maintain AIMCO's qualification as a REIT. We are also subject to the risk that our cash flow from operations will be insufficient to make required payments of principal and interest, and the risk that existing indebtedness may not be refinanced or that the terms of any refinancing will not be as favorable as the terms of existing indebtedness. If we fail to make required payments of principal and interest on any debt, our lenders could foreclose on the properties securing such debt that would result in loss of income and asset value to us. As of December 31, 2002, substantially all of the properties that we owned or controlled were encumbered by debt. As of December 31, 2002, we had $6.2 billion of indebtedness outstanding on a consolidated basis, approximately 93% of which was secured by our properties.
Increases in interest rates may increase our interest expense.
As of December 31, 2002, approximately $1,411.2 million of our debt (22.6% of total debt outstanding) was subject to variable interest rates. Of the total debt subject to variable interest rates, the major components were floating rate tax-exempt bond financing ($786.2 million), floating rate secured notes ($219.0 million), the Casden Loan ($115.0 million) and our credit facility ($291.0 million). Based on this level of debt, an increase in interest rates of 1% would result in our income and cash flows being reduced by $14.1 million on an annual basis and could impair our ability to service our indebtedness and make distributions. Historically, changes in tax-exempt interest rates have been at a ratio less than 1:1 with changes in taxable interest rates. Variable rate tax-exempt bond financing is benchmarked against the Bond Market Association Municipal Swap Index (the "BMA Index"). Since 1981, the BMA Index has averaged 54.2% of the 10-year Treasury Yield. If this relationship continues and based on our level of tax-exempt debt, an increase of 1% in taxable interest rates would result in our income and cash flows being reduced by $10.5 million on an annual basis.
Covenant restrictions may limit our ability to make payments to our investors.
Some of our debt and other securities contain covenants that restrict our ability to make distributions or other payments to our investors unless certain financial tests or other criteria are satisfied. Our credit facilities provide that we may make distributions to our investors during any 12-month period in an aggregate amount that does not exceed the greater of 80% of our Funds From Operations for such period or such amount as may be necessary for AIMCO to maintain its REIT status. Pursuant to the amendment of our credit facilities, effective February 2003, the credit facilities prohibit all distributions if our:
•fixed charge coverage ratio (excluding scheduled amortization of the Casden Loan) is less than 1.50 to 1 through July 31, 2005;
•adjusted fixed charge coverage ratio (including scheduled amortization of the Casden Loan) is less than 1.45 to 1;
•interest coverage ratio is less than 2.25 to 1;
•unsecured debt service coverage ratio is less than 3.00 to 1;
•total combined debt to gross asset value ratio exceeds 0.55 to 1;
•total obligations to gross asset value ratio exceeds 0.65 to 1;
•encumbered property debt coverage ratio is less than 1.60 to 1; or
•consolidated net worth is less than the sum of $3.2 billion and 85% of the net proceeds of any securities issuances after September 30, 2002.
Our outstanding classes of preferred OP Units prohibit the payment of distributions on our common OP Units if we fail to pay the distributions to which the holders of the preferred OP Units are entitled. In addition, our 61/2% convertible debentures prohibit the payment of distributions on our OP Units if we elect to defer payments of interest on these convertible debentures, which we may have the right to do for up to 60 months. If we are unable to pay distributions, AIMCO may fail to qualify as a REIT. This would subject AIMCO to corporate taxation and reduce our ability to make distributions to our investors.
We depend on distributions and other payments from our subsidiaries that they may be prohibited from making to us.
We depend on distributions and other payments from our subsidiaries in order to satisfy our financial obligations and make payments to our investors. The ability of our subsidiaries to make such distributions and other payments
depends on their earnings and may be subject to statutory or contractual limitations. As an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors. To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of their debt or other obligations that are senior to our claims.
Changes in the real estate market may limit our ability to generate Funds From Operations.
Our ability to make payments to our investors depends on our ability to generate Funds From Operations in excess of required debt payments and capital expenditure requirements. Funds From Operations and the value of our properties may be adversely affected by events or conditions beyond our control, including:
•the general economic climate;
•competition from other apartment communities and other housing options;
•local conditions, such as an increase in unemployment or an increase in the supply of apartments, that might adversely affect apartment occupancy or rental rates;
•changes in governmental regulations and the related cost of compliance;
•increases in operating costs (including real estate taxes) due to inflation and other factors, which may not necessarily be offset by increased rents;
•changes in tax laws and housing laws, including the enactment of rent control laws or other laws regulating multifamily housing;
•changes in interest rates and the availability of financing; and
•the relative illiquidity of real estate investments.
Laws benefiting disabled persons may result in our incurrence of unanticipated expenses.
Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to our properties, or restrict renovations of the properties. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our properties are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA and the FHAA.
Affordable housing regulations may limit rent increases at some of our properties, reducing our revenue and, in some cases, causing us to sell properties that we might otherwise continue to own.
As of December 31, 2002, we owned a controlling equity interest in 137 properties, held a non-controlling equity interest in 383 properties and managed for third parties and affiliates 523 properties that benefit from governmental programs intended to provide housing to people with low or moderate incomes. These programs, which are usually administered by HUD or state housing finance agencies, typically provide mortgage insurance, favorable financing terms or rental assistance payments to the property owners. As a condition of the receipt of assistance under these programs, the properties must comply with various requirements, which typically limit rents to pre-approved amounts. If permitted rents on a property are insufficient to cover costs, a sale of the property may become necessary, which could result in a loss of management fee revenue. We usually need to obtain the approval of HUD in order to manage, or acquire a significant interest in, a HUD-assisted property. We may not always receive such approval.
We depend on the chief executive officer and president of AIMCO; our operations might be harmed if we lost their services.
Although we have entered into employment agreements with the Chairman and Chief Executive Officer of AIMCO, Terry Considine, and the Vice Chairman and President of AIMCO, Peter K. Kompaniez, the loss of either of their services could have a material adverse effect on our operations.
As a REIT, AIMCO is subject to substantial risks related to its compliance with the tax laws.
AIMCO May Fail to Qualify As a REIT. AIMCO believes that it operates in a manner that enables it to meet the requirements for qualification as a REIT for Federal income tax purposes; however, future economic, market, legal,
tax or other considerations may cause it to fail to qualify as a REIT, or its board of directors may determine to revoke its REIT status. If AIMCO fails to qualify, or revokes its status, as a REIT, AIMCO will not be allowed a deduction for dividends paid to its stockholders in computing its taxable income, and AIMCO will be subject to Federal income tax at regular corporate rates. This would substantially reduce the funds available for payment to AIMCO's investors.
In addition, the failure of AIMCO to qualify as a REIT would trigger the following consequences:
•AIMCO would be obligated to repurchase a material amount of its preferred stock, plus accrued and unpaid dividends to the date of repurchase; and
•AIMCO would be in default under its primary credit facility and certain other loan agreements.
REIT Distribution Requirements Limit AIMCO's Available Cash. As a REIT, AIMCO is subject to annual distribution requirements, which limit the amount of cash it has available for other business purposes, including amounts to fund its growth.
Legislative or Other Actions Affecting REITs Could Have a Negative Impact on AIMCO. The rules dealing with Federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service, or IRS, and the United States Treasury Department. Changes to the tax laws (which may have retroactive application) could adversely affect AIMCO investors. AIMCO cannot predict how changes in the tax law might affect it or its investors. For example, under recently enacted legislation, effective January 1, 2001, if any of AIMCO's management companies were deemed to operate or manage a health care or lodging facility, AIMCO would fail to qualify as a REIT. While AIMCO believes that, since January 1, 2001, none of AIMCO's management companies have operated or managed any health care or lodging facilities, the statute provides little guidance as to the definition of a health care or lodging facility. Accordingly, AIMCO cannot assure you that the IRS will not contend that any of AIMCO's management companies operate or manage a health care or lodging facility, resulting in AIMCO's disqualification as a REIT.
AIMCO May Be Subject to Other Tax Liabilities. Even if AIMCO qualifies as a REIT, AIMCO and its subsidiaries may be subject to certain Federal, state and local taxes on its income and property. Any such taxes would reduce AIMCO's operating cash flow.
The FBI has issued an alert regarding potential terrorist threats involving apartment buildings - a risk for which we are partially insured.
On May 6, 2002 and February 7, 2003, respectively, the Federal Bureau of Investigation and the United States Department of Homeland Security issued alerts regarding potential terrorist threats involving apartment buildings. Threats of future terrorist attacks, such as those announced by the FBI and the Department of Homeland Security, could have a negative effect on rent and occupancy levels at our properties. The effect that future terrorist activities or threats of such activities could have on our business cannot presently be determined. If we incur a loss at a property as a result of an act of terrorism, we could lose all or a portion of the capital we have invested in the property, as well as the anticipated future revenue from the property. The recent enactment by the United States Congress of the Terrorism Risk Insurance Act, or TRIA, has resulted in terrorism coverage exclusions being invalidated, pending formal mandated notice from our carriers of terrorism coverage pricing. We are currently reviewing these quotes so as to make a determination as to whether the cost is reasonable. Prior to the enactment of TRIA, and because we have a highly diversified and geographically dispersed portfolio of residential properties, our lenders generally have not required us to purchase terrorism insurance. If in the future we decide to purchase such insurance, or if our lenders require us to purchase such insurance, the cost could have a negative effect on our consolidated financial condition or results of operations taken as a whole.
Insurance coverage is becoming more expensive and more difficult to obtain.
The current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language. Recent developments have resulted in significant increases in our insurance premiums and have made it more difficult to obtain certain types of insurance. As an example, many insurance carriers are excluding mold-related risks from their policy coverages, or are adding significant restrictions to such coverage. Although we make use of many alternative methods of risk financing that enable us to insulate ourselves to some degree from variation in coverage language and cost, continued deterioration in insurance market place conditions may have a negative effect on our operating results.
Limits on ownership of AIMCO shares in AIMCO's charter may result in the loss of economic and voting rights by purchasers that violate share limits.
AIMCO's charter limits ownership of its common stock by any single stockholder to 8.7% of the outstanding shares, or 15% in the case of certain pension trusts, registered investment companies and Mr. Considine. The charter also limits ownership of AIMCO's common stock and preferred stock by any single stockholder to 8.7% of the value of the outstanding common stock and preferred stock, or 15% in the case of certain pension trusts, registered investment companies and Mr. Considine. The charter also prohibits anyone from buying shares if the purchase would result in AIMCO losing its REIT status. This could happen if a share transaction results in fewer than 100 persons owning all of AIMCO's shares or results in five or fewer persons, applying certain attribution rules of the Internal Revenue Code, owning 50% or more of the value of all of AIMCO's shares. If you or anyone else acquires shares in excess of the ownership limit or in violation of the ownership requirements of the Internal Revenue Code for REITs:
•the transfer will be considered null and void;
•AIMCO will not reflect the transaction on its books;
•AIMCO may institute legal action to enjoin the transaction;
•AIMCO may demand repayment of any dividends received by the affected person on those shares;
•AIMCO may redeem the shares;
•the affected person will not have any voting rights for those shares; and
•the shares (and all voting and dividend rights of the shares) will be held in trust for the benefit of one or more charitable organizations designated by us.
AIMCO may purchase the shares held in trust at a price equal to the lesser of the price paid by the transferee of the shares or the then current market price. If the trust transfers any of the shares, the affected person will receive the lesser of the price he paid for the shares or the then current market price. An individual who acquires shares that violate the above rules bears the risk that the individual:
•may lose control over the power to dispose of such shares; may not recognize profit from the sale of such shares if the market price of the shares increases;
•may be required to recognize a loss from the sale of such shares if the market price decreases; and
•may be required to repay AIMCO any distributions received from AIMCO as a result of his ownership of such shares.
AIMCO's charter and Maryland law may limit the ability of a third party to acquire control of AIMCO.
Ownership Limit. The 8.7% ownership limit discussed above may have the effect of precluding acquisition of control of AIMCO by a third party without the consent of AIMCO's board of directors.
Preferred Stock. AIMCO's charter authorizes its board of directors to issue up to 510,587,500 shares of capital stock. As of December 31, 2002, 454,962,738 shares were classified as Class A Common Stock, and 55,624,762 shares were classified as preferred stock. Under the charter, AIMCO's board of directors has the authority to classify and reclassify any of AIMCO's unissued shares of capital stock into shares of preferred stock with such preferences, rights, powers and restrictions as AIMCO's board of directors may determine. The authorization and issuance of preferred stock could have the effect of delaying or preventing someone from taking control of AIMCO, even if a change in control were in stockholders' best interests.
Maryland Business Statutes. As a Maryland corporation, AIMCO is subject to various Maryland laws which may have the effect of discouraging offers to acquire AIMCO and of increasing the difficulty of consummating any such offers, even if AIMCO's acquisition would be in the best interests of Limited Partners. The Maryland General Corporation Law restricts mergers and other business combination transactions between AIMCO and any person who acquires beneficial ownership of shares of AIMCO's stock representing 10% or more of the voting power
without AIMCO's board of directors' prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and two-thirds of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides that a person who acquires shares of AIMCO stock that represent 10% or more of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote, excluding the control shares. Maryland law provides, among other things, that the board of directors has broad discretion in adopting stockholders' rights plans and has the sole power to fix the record date, time and place for special meetings of the stockholders. In addition, Maryland law provides that corporations which:
•have three directors who are not employees of the entity or related to an acquiring person; and
•are subject to the reporting requirements of the Securities Exchange Act of 1934,
may elect in their charter or bylaws or by resolution of the board of directors to be subject to all or part of a special subtitle, which provides that:
•the corporation will have a staggered board of directors;
•any director may be removed only for cause, and by the vote of two-thirds of the votes entitled to be cast in the election of directors generally even if a lesser proportion is provided in the charter or bylaws;
•the number of directors may only be set by the board of directors, even if the procedure is contrary to the charter or bylaws;
•vacancies may only be filled by the remaining directors, even if the procedure is contrary to the charter or bylaws; and
•the secretary of the corporation may call a special meeting of stockholders at the request of stockholders only on the written request of the stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting, even if the procedure is contrary to the charter or bylaws.
To date, AIMCO has not made any of the elections described above.
ITEM 2.
ITEM 2. Properties
Our properties are located in 47 states, the District of Columbia and Puerto Rico. Conventional property operations are headed by six Division Vice Presidents who together oversee 15 regional operating centers. Affordable property operations are managed through Aimco Capital, with one Division Vice President overseeing four regional operating centers. The following table sets forth information on all of our property operations as of December 31, 2002:
At December 31, 2002, we owned a controlling equity interest in 728 properties containing 187,506 apartment units, which we refer to as "consolidated." These consolidated properties contain, on average, 260 apartment units, with the largest property containing 2,907 apartment units. These properties offer residents a range of amenities, including swimming pools, clubhouses, spas, fitness centers, tennis courts and saunas. Many of the apartment units offer design and appliance features such as vaulted ceilings, fireplaces, washer and dryer hook-ups, cable television, balconies and patios. Additional information on our consolidated properties is contained in "Schedule III, Real Estate and Accumulated Depreciation" in this Annual Report. At December 31, 2002, we held a non-controlling equity interest in 511 properties containing 73,924 apartment units, which we refer to as "unconsolidated." In addition, we provided services or managed for third parties 549 other properties containing 56,722 apartment units. This includes 45,187 apartment units in 448 properties that are asset-managed only, not also property managed, by us. Our total portfolio of 1,788 properties contain, on average, 201 apartment units, with the largest property
containing 2,907 apartment units, and includes 47 properties with 8,987 apartment units that are not currently managed by us.
Substantially all of our consolidated apartment properties are encumbered by mortgage indebtedness. At December 31, 2002, we had aggregate mortgage indebtedness totaling $5,827.7 million, which was secured by 708 properties with a combined net book value of $8,862.8 million, having an aggregate weighted average interest rate of 6.45%, not including $50.9 million of liabilities related to assets held for sale. As of December 31, 2002, we had a total of 49 mortgage loans, with an aggregate principal balance outstanding of $573.4 million, that were each secured by property and cross-collateralized with certain other mortgage loans. See the financial statements set forth in Item 8 of this Annual Report for additional information about our indebtedness.
ITEM 3.
ITEM 3. Legal Proceedings
See Note 12 to the consolidated financial statements in Item 8 of this Annual Report for information regarding legal proceedings, which information is incorporated by reference in this Item 3.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5.
ITEM 5. Market Price for the Registrant's Common Equity and Related Stockholder Matters
There is no public market for the OP Units, and we do not intend to list the OP Units on any securities exchange. In addition, the Partnership Agreement restricts the transferability of OP Units. The following table sets forth the cash distributions per common OP Unit in each quarterly period during the two years ended December 31, 2002 and 2001:
On March 5, 2003, there were 103,424,351 common OP Units outstanding, held by approximately 3,050 unitholders of record.
During 2002, we completed tender offers for limited partnership interests resulting in the issuance of 331,451 common OP Units and issued 882,784 common OP Units in connection with the Casden Merger. Each of these transactions was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof or Regulation D thereunder.
During the year ended December 31, 2002, we issued to AIMCO, in exchange for cash or the conversion of Class Ten Partnership Preferred Units, 2,000,000 Class R Preferred Units. All the proceeds were used to repay indebtedness or for general corporate purposes. We issued to AIMCO, in exchange for cash or Class Ten Partnership Preferred Units, 8,000,000 common OP Units. We also issued to AIMCO, in connection with the Casden Merger, 3.508 million common OP Units, 7,934,920 Class Ten Partnership Preferred Units, and 1,124,041 Class Eleven Partnership Preferred Units. All of the Class Ten Partnership Preferred Units have been converted into either Class R Preferred Units or common OP Units. Each of these transactions was also exempt from registration under the Securities Act, pursuant to Section 4(2) thereof or Regulation D thereunder.
ITEM 6.
ITEM 6. Selected Financial Data
The following selected financial data is based on our audited historical financial statements. This information should be read in conjunction with such financial statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein or in previous filings with the Securities and Exchange Commission.
(1)Certain reclassifications have been made to 2001, 2000, 1999 and 1998 amounts to conform to the 2002 presentation. These reclassifications primarily represent presentation changes related to discontinued operations resulting from the adoption of Statement of Financial Accounting Standard No. 144 in 2002. Also, effective January 1, 2001, we began consolidating our previously unconsolidated subsidiaries. Prior to this date, we had significant influence over, but did not control, certain subsidiaries. Accordingly, such investments were accounted for under the equity method, and as a result, the periods prior to 2001 are not comparable.
(2)In 2002, includes approximately 33,000 units that were acquired as part of the Casden Merger, and were asset managed by us only, and not also property managed.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the financial statements incorporated by reference in Item 8 of this Annual Report. The following discussion of results of operations is based on net income calculated under accounting principles generally accepted in the United States, or GAAP. In addition to net income, we measure our economic profitability based on Funds From Operations, or FFO, less Capital Replacement and Capital Enhancement spending, which we refer to as Adjusted Funds From Operations, or AFFO. See the discussion of FFO and AFFO as supplemental measurements under the heading "Funds From Operations" in this Item 7.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions. We believe that the following critical accounting policies, among others, involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Impairment of Long-Lived Assets
Real estate and other long-lived assets are recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, we will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate undiscounted future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.
Real estate investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of our real estate investments. These factors include:
•the general economic climate;
•competition from other apartment communities and other housing options;
•local conditions, such as an increase in unemployment or an increase in the supply of apartments, that might adversely affect apartment occupancy or rental rates;
•changes in governmental regulations and the related cost of compliance; and
•changes in market rental rates.
Any adverse changes in these factors could cause an impairment in our assets, including real estate and investments in unconsolidated real estate partnerships.
Notes Receivable and Interest Income Recognition
We generally recognize interest income earned from our investments in notes receivable when the collectibility of such amounts is both probable and estimable. The notes receivable were either extended by us and are carried at the face amount plus accrued interest ("par value notes") or were made by predecessors whose positions we acquired usually at a discount ("discounted notes").
We continue to assess the collectibility or impairment of each note on a periodic basis. Under the cost recovery method, we carry the discounted notes at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. Based upon closed or pending transactions (which include sales, refinancing, foreclosures and rights offerings), we have determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, we are recognizing accretion income, on a prospective basis over the estimated remaining life of the loans, as the difference between the carrying value of the discounted notes and the estimated collectible value. If we had not been able to complete certain transactions, our accretion income would have decreased by $16.0 million for the year ended December 31, 2002. Accretion income recognized in any given period is based on the ability to complete transactions to monetize the notes receivable and the difference between the carrying value and the estimated collectible value of the notes; therefore, accretion income in future periods could vary and could result in lower accretion income than in prior periods.
Allowance for Losses on Notes Receivable
In estimating the collectibility of notes receivable, management's judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each borrower. Allowances are based on management's opinion of an amount that is adequate to absorb losses in the existing portfolio. The allowance for losses on notes receivable is established through a provision for loss based on management's evaluation of the risk inherent in the notes receivable portfolio, the composition of the portfolio, specific impaired notes receivable and current economic conditions. Such evaluation, which includes a review of notes receivable on which full collectibility may not be reasonably assured, considers among other matters, full realizable value or the fair value of the underlying collateral, economic conditions, historical loss experience, management's estimate of probable credit losses and other factors that warrant recognition in providing for an adequate allowance for losses on notes receivable. During the years ended December 31, 2002 and 2001, we identified and recorded $9.0 million and no losses on notes receivable, respectively. We will continue to monitor and assess these notes and changes in required reserves may occur in the future due to changes in the market environment.
Capitalized Costs
We capitalize direct and indirect costs (including salaries, interest, real estate taxes and other costs) incurred in connection with redevelopment, initial capital expenditures, Capital Enhancement and Capital Replacement activities. Indirect costs that do not relate to the above activities, including general and administrative expenses, are charged to expense as incurred. The amounts capitalized depend on the volume, timing and costs of such activities. As a result, changes in costs and activities may have a significant effect on our results of operations and cash flows if the costs being capitalized are not proportionately increased or reduced, as the case may be. Based on the level of capital spending during 2002, if capital activities had decreased during the year by 10%, we could have had additional operating expenses of between $2.5 million and $5.9 million. Additionally, if capital activities had increased during the year by 10%, we could have had lower operating expenses of between $2.5 million and $5.9 million. See further discussion under the heading "Capital Expenditures."
Results of Operations
Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001
Net Income
We recognized net income of $206.2 million, and net income attributable to common unitholders of $98.6 million, for the year ended December 31, 2002, compared to net income of $121.1 million, and net income attributable to common unitholders of $20.9 million, for the year ended December 31, 2001. Net income attributable to common unitholders represents net income less distributions accrued on preferred OP Units for that period.
The following paragraphs discuss the results of operations in detail.
Consolidated Rental Property Operations
Rental and other property revenues from our consolidated properties totaled $1,405.7 million for the year ended December 31, 2002, compared with $1,224.7 million for the year ended December 31, 2001, an increase of $181.0 million, or 14.8%. This increase in consolidated rental and other property revenues was principally a result of the following:
•$148.7 million of the increase related to operations of the properties acquired through three direct purchases in 2001, ten months of operations of the properties acquired through the Casden Merger and four months of operations of the properties acquired in the New England Properties Acquisition in 2002;
•$70.2 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated at the end of 2001, one property that was first consolidated in the second quarter of 2002, 27 properties that were first consolidated in the third quarter of 2002 and 56 properties that were first consolidated in the fourth quarter of 2002;
•$14.1 million of an offsetting decrease related to the disposition of 25 apartment properties in 2001 (results of 2002 dispositions were included in discontinued operations); and
•$8.6 million of an offsetting decrease related to a 0.70% decrease in same store revenues. See further discussion of same store results under the heading "Conventional Same Store Property Operating Results."
Property operating expenses for our consolidated properties, consisting of on-site payroll costs, utilities (net of reimbursements received from residents), contract services, property management fees, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $561.4 million for the year ended December 31, 2002, compared with $465.7 million for the year ended December 31, 2001, an increase of $95.7 million or 20.5%. This increase in property operating expenses was principally a result of the following:
•$58.8 million of the increase related to operations of the properties acquired through three direct purchases in 2001, ten months of operations of properties acquired in the Casden Merger and four months of operations of the properties acquired in the New England Properties Acquisition in 2002;
•$36.4 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated at the end of 2001, one property that was first consolidated in the second quarter of 2002, 27 properties that were first consolidated in the third quarter of 2002 and 56 properties that were first consolidated in the fourth quarter of 2002;
•$4.3 million of the increase related to a 0.90% increase in same store operating expense. See further discussion of same store results under the heading "Conventional Same Store Property Operating Results;"
•$3.1 million of the increase was related to properties in the redevelopment portfolio becoming ready for their intended use, and as a result certain operating expenses are no longer being capitalized; and
•$8.8 million of an offsetting decrease related to the disposition of 25 apartment properties in 2001 (results of 2002 dispositions were included in discontinued operations).
Consolidated Investment Management Business
Income from the consolidated investment management business, which is primarily earned from unconsolidated real estate partnerships and the minority interest share of consolidated real estate partnerships, for which we are the general partner, was $18.3 million for the year ended December 31, 2002, compared to $27.6 million for the year ended December 31, 2001, a decrease of $9.3 million or 33.7%. This decrease in income from the consolidated investment management business was principally a result of the following:
•$13.2 million of the decrease related to reduced fees billed for construction supervisory management services in 2002. These fees were calculated and billed to the real estate partnerships based on a percentage of volume of construction activities. In addition, lower costs were incurred and therefore lower billings occurred as a result of the ongoing management initiative to contain costs;
•$7.3 million of the decrease related to an increase in insurance costs in the property hazard program. These increased costs were the result of historical claim losses from prior years;
•$5.5 million of the decrease related to increased ownership in and number of consolidated real estate partnerships, which results in an additional elimination of management fee income and the associated property operating expense;
•$4.5 million of the decrease related to a net reduction in fees including: $6.9 million decrease in refinancing and disposition fees, due to decreased refinancing transactions (28 in 2002 compared to 59 in 2001) resulting in lower fees earned; and $7.7 million decrease in fees earned for services provided to third parties due to a planned reduction in third party asset management. This decrease was offset by a $10.1 million increase in asset management and developer fees related to the NAPICO acquisition in 2002;
•$2.5 million of the decrease related to additional depreciation expense related primarily to the new site solutions hardware and software purchases in late 2001 and early 2002;
•$14.7 million of an offsetting increase related to the reduced amortization of intangibles, of which $6.8 million was due to property management and asset management contract intangibles that were fully amortized in 2001, and $7.9 million was attributable to the elimination of goodwill amortization in
accordance with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"); and
•$9.3 million of an offsetting increase related to lower compensation and health insurance expense resulting from a change in plan administrator and a reduction in work force, in part due to planned reduction in third party property management and management cost reduction initiatives.
Consolidated General and Administrative Expenses
Consolidated general and administrative expenses of $20.3 million for the year ended December 31, 2002 increased by $1.8 million from the $18.5 million of such expenses for the year ended December 31, 2001. This increase was principally a result of increased professional fees, primarily incurred in connection with the evaluation of the loan receivable portfolio.
Consolidated Other Expenses
Consolidated other expenses were $10.2 million for the year ended December 31, 2002 compared to $6.4 million for the year ended December 31, 2001. In 2002, these expenses included the following:
•$3.1 million related to payments in settlement of claims asserted against us, including litigation and arbitration;
•$2.2 million related to the write-off of costs related to potential acquisitions that were not completed;
•$0.9 million was primarily related to severance and hiring costs, and costs associated with the transition of certain accounting functions from Greenville, South Carolina to our headquarters in Denver, Colorado; and
•$4.0 million related to personnel costs associated with annual compensation.
In 2001, we incurred $6.4 million of other expenses comprised of consulting fees paid to a specialized third party vendor in connection with a systematic and comprehensive effort to improve our business processes and financial controls.
Consolidated Provision for Losses on Accounts, Fees and Notes Receivable
Consolidated provision for losses on accounts, fees and notes receivable was $9.0 million for the year ended December 31, 2002, compared to $6.6 million for the year ended December 31, 2001. In 2002, all $9.0 million related to provision for losses on notes receivable, which provision was determined based on our review in 2002 of the collectibility of each loan made to affiliated partnerships within our loan receivable portfolio. We will continue to monitor these loans and assess the collectibility of each loan on a periodic basis. In 2001, there was no provision for losses on notes receivable as all $6.6 million related to additional allowance for possible losses on accounts, fees and other contingencies.
Consolidated Depreciation of Rental Property
Consolidated depreciation of rental property decreased $38.5 million, or 11.8%, to $288.6 million for the year ended December 31, 2002, compared to $327.1 million for the year ended December 31, 2001. This decrease was principally a result of the following:
•$69.0 million of the decrease related to the change in useful lives of assets made in 2001, which was consistent with management's expectations. During 2001, we completed a comprehensive review of our real estate related depreciation. As a result of this review, we changed our estimate of the remaining useful lives for our buildings. We believe the change better reflects the remaining useful lives of the assets and is consistent with prevailing industry practice. This change in useful lives increased net income by approximately $85.4 million in 2002 over 2001, of which a portion was recognized as an increase to equity in earnings of unconsolidated real estate partnerships. The recognition of this change in useful lives resulted in an increase in basic and diluted earnings per unit of $0.87 and $0.86, respectively, for the year ended December 31, 2002;
•$0.8 million of the decrease related to the disposition of 25 apartment properties in 2001 (results of 2002 dispositions were included in discontinued operations);
•$24.0 million of an offsetting increase related to depreciation of the properties acquired through three direct purchases in 2001, ten months of depreciation of the properties acquired in the Casden Merger and four months of depreciation of the properties acquired in the New England Properties Acquisition in 2002; and
•$13.2 million of an offsetting increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated at the end of 2001, one property that was first consolidated in the second quarter of 2002, 27 properties that were first consolidated in the third quarter of 2002 and 56 properties that were first consolidated in the fourth quarter of 2002.
Consolidated Interest Expense
Consolidated interest expense, which includes the amortization of deferred financing costs together with any prepayment penalties incurred, totaled $339.7 million for the year ended December 31, 2002, compared with $297.5 million for the year ended December 31, 2001, an increase of $42.2 million, or 14.2%. The increase was principally a result of the following:
•$34.8 million of the increase related to interest on additional property debt acquired through three direct purchases in 2001, ten months of interest on additional property debt acquired in the Casden Merger and four months of interest on the debt related to the New England Properties Acquisition in 2002;
•$17.8 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated at the end of 2001, one property that was first consolidated in the second quarter of 2002, 27 properties that were first consolidated in the third quarter of 2002 and 56 properties that were first consolidated in the fourth quarter of 2002;
•$2.3 million of the increase related to increased interest expense on our revolving credit facility and term loan. We had an average balance outstanding during the year ended December 31, 2002 of $500.4 million (including the Casden Loan), and an average balance outstanding for the year ended December 31, 2001 of $236.1 million (including the term loan we borrowed for the acquisition of interests in the Oxford properties). The cost of such borrowings was at a weighted average interest rate of 4.43% compared to 7.06%, respectively;
•$10.9 million of an offsetting decrease related to an overall decrease in variable interest rates of approximately 1.5% from the prior year; and
•$2.4 million of an offsetting decrease related to the disposition of 25 apartment properties in 2001 (results of 2002 dispositions were included in discontinued operations).
Consolidated Interest and Other Income
Consolidated interest and other income increased $9.7 million, or 14.2%, to $78.1 million for the year ended December 31, 2002, compared with $68.4 million for the year ended December 31, 2001. This increase was principally a result of the following:
•$26.9 million of the increase related to accretion income increasing from $9.9 million, net of allocated expenses of $4.4 million, for the year ended December 31, 2001, compared to $36.8 million, net of allocated expenses of $1.0 million, for the year ended December 31, 2002. This increase in accretion income was due to more completed transactions resulting in accretion occurring in 2002 than in 2001;
•$4.4 million of the increase related to interest earned on notes receivable due from AIMCO that were issued in connection with the sale of certain properties to AIMCO, and in connection with AIMCO's acquisition of The Villas at Park La Brea (see Note 14 to the consolidated financial statements in Item 8 of this Annual Report).
•$18.4 million of an offsetting decrease related to a decrease in recognized gain on certain tax-exempt bonds that were held in 2001 and sold in the second quarter of 2002; and
•$3.8 million of an offsetting decrease related to lower interest on money market and interest bearing accounts, as interest rates on deposit accounts have decreased approximately 1.5% from the prior year, while the average cash balances outstanding for both periods remained consistent.
Equity in Earnings (Losses) of Unconsolidated Real Estate Partnerships
Equity in earnings of unconsolidated real estate partnerships totaled $0.7 million for the year ended December 31, 2002, compared with a loss of $16.7 million for the year ended December 31, 2001, a change of $17.4 million. This change was principally due to the change in estimate of useful lives of the underlying real estate assets completed by us in 2001, which resulted in lower depreciation expense of approximately $16.0 million. See the previous discussion on the change in estimate of useful lives of assets under the heading "Consolidated Depreciation of Rental Property."
Minority Interest in Consolidated Real Estate Partnerships
Minority interest in consolidated real estate partnerships totaled $15.1 million for the year ended December 31, 2002, compared to $37.6 million for the year ended December 31, 2001, a decrease of $22.5 million. This decrease is primarily a result of our purchase of additional interests in consolidated real estate partnerships and a reduction in net income, thereby reducing the minority interest allocation.
Gain (Loss) on Dispositions of Real Estate
Loss on dispositions of real estate, primarily by unconsolidated entities, totaled $27.9 million for the year ended December 31, 2002, compared to a gain of $18.8 million for the year ended December 31, 2001, a change of $46.7 million. Part of this change was a result of our adoption of Statement of Financial Accounting Standard No. 144, Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("SFAS 144") effective January 1, 2002, where we now report assets held for sale (as defined by SFAS 144) and assets sold in the current period, as discontinued operations. Due to this adoption, for the year ended December 31, 2002, gain (loss) on dispositions of real estate does not include any gain or loss associated with the disposal of consolidated properties that were classified as discontinued operations during 2002. For 2001, however, gain (loss) on dispositions of real estate included gain or loss associated with the disposal of all properties sold. The properties sold in both periods, as well as the properties held for sale, were considered by management to be inconsistent with our long-term investment strategy. Gain (loss) on properties sold were determined on a property by property basis and are not entirely comparable year over year due to individual property differences.
Included in gain (loss) on dispositions of real estate we recorded a loss of approximately $28.0 million. This $28.0 million loss resulted primarily from a change in estimate due to better insight into information related to the finalization of the recording of purchase price accounting to appropriate entities acquired in past acquisitions and the related historical estimation process in determining the carrying value of assets sold. The recognition of this amount in the current period is considered to be a change in estimate associated with the historical estimated gain or loss on the sale of these properties. The recognition of this change in estimate resulted in a decrease in basic earnings per unit of $0.29 and diluted earnings per unit of $0.28 for the year ended December 31, 2002. In addition to the $28.0 million loss discussed above, we recorded approximately $9.0 million of impairment losses on investments in unconsolidated real estate partnerships, offset by approximately $9.0 million of net casualty gains.
Distributions to Minority Partners in Excess of Income
Distributions to minority partners in excess of income decreased $19.4 million to $27.0 million for the year ended December 31, 2002, compared to $46.4 million for the year ended December 31, 2001. When real estate partnerships consolidated in our financial statements make cash distributions in excess of net income, generally accepted accounting principles require us, as the majority partner, to record a charge equal to the minority partners' excess of distributions over net income when the partnership is in a deficit equity position, even though we do not suffer any economic effect, cost or risk. This decrease was due to a reduced level of distributions being made by the consolidated real estate partnerships as a result of lower refinancing activity, and our increased ownership of such partnerships.
Discontinued Operations
Income from discontinued operations was $2.7 million for the year ended December 31, 2002, compared to income of $4.1 million for the year ended December 31, 2001, a change of $1.4 million. As a result of the adoption of SFAS 144, effective January 1, 2002, we now report assets classified as held for sale (as defined by SFAS 144) and assets sold in the current period, as discontinued operations. For the year ended December 31, 2002,
discontinued operations included the operations of the properties sold and classified as held for sale in 2002 and the associated gain (loss) on the disposition of the properties. For the year ended December 31, 2001, discontinued operations included the 2001 operations of the properties sold and classified as held for sale in 2002. There were no gains or losses on assets sold in 2001 included in discontinued operations for the year ended December 31, 2001. The change in discontinued operations was primarily related to a net gain on disposals of $1.4 million for the year ended December 31, 2002. We incurred net losses of $11.0 million from the sale of certain senior living facilities, which we deemed non-strategic assets. In addition, approximately $3.0 million of impairment losses were recorded on properties that were classified as held for sale. These losses were partially offset by $15.0 million in net gains on the sale of other discontinued operations properties. The properties sold, as well as the properties classified as held for sale, were considered by management to be inconsistent with our long-term investment strategy. See Note 27 to the consolidated financial statements in Item 8 of this Annual Report for more details on discontinued operations.
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
Effective January 1, 2001, we began consolidating our previously unconsolidated subsidiaries (see Note 6 to the consolidated financial statements in Item 8 of this Annual Report). Prior to this date, we had significant influence over, but did not have control of, such subsidiaries. Accordingly, such investments were accounted for under the equity method. Under the equity method, our pro-rata share of the earnings or losses of the entity for the periods being presented was included in equity in losses of unconsolidated subsidiaries. In order for a meaningful analysis of the financial statements to be made, the revenues and expenses for the unconsolidated subsidiaries for the year ended December 31, 2000, have been included in the following analysis as though they had been consolidated, and as a result the 2000 amounts are different than the historical information as previously reported. All significant intercompany revenues and expenses have been eliminated. Dollar amounts are in thousands.
Net Income
We recognized net income of $121.1 million, and net income attributable to common unitholders of $20.9 million, for the year ended December 31, 2001, compared to net income of $109.7 million, and net income attributable to common unitholders of $39.5 million for the year ended December 31, 2000. Net income attributable to common unitholders represents net income less distributions accrued on preferred OP Units for that period.
The following paragraphs discuss the results of operations in detail.
Consolidated Rental Property Operations
Rental and other property revenues from consolidated properties totaled $1,224.7 million for the year ended December 31, 2001, compared with $1,028.5 million for the year ended December 31, 2000, an increase of $196.2 million, or 19.1%. This increase in consolidated rental and other property revenues was principally a result of the following:
•$130.0 million of the increase related to operations of the properties acquired through three direct purchases in 2001 and operations of the properties acquired through the Oxford acquisition and 12 other properties acquired in the third and fourth quarters of 2000;
•$58.5 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated in 2001 and 79 properties that were first consolidated after the first quarter of 2000;
•$38.2 million of the increase related to a 3.6% increase in same store revenues; and
•$34.9 million of an offsetting decrease related to the disposition of 25 properties in 2001 and 22 properties after the first quarter of 2000.
Property operating expenses from our consolidated properties, consisting of on-site payroll costs, utilities (net of reimbursements received from residents), contract services, property management fees, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $465.7 million for the year ended December 31, 2001, compared with $429.6 million for the year ended December 31, 2000, an increase of $36.1 million or 8.4%. This increase in consolidated property operating expenses was principally a result of the following:
•$37.8 million of the increase related to operations of the properties acquired through three direct purchases in 2001 and operations of the properties acquired through the Oxford acquisition and 12 other properties acquired in the third and fourth quarters of 2000;
•$25.6 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated in 2001 and 79 properties that were first consolidated after the first quarter of 2000;
•$18.0 million of the increase related to a 4.4% increase in same store expenses;
•$26.9 million of an offsetting decrease related to the capitalization of construction-related costs; and
•$18.2 million of an offsetting decrease related to the disposition of 25 properties in 2001 and 22 properties after the first quarter of 2000.
Consolidated Investment Management Business
Income from the consolidated investment management business, which is primarily earned from unconsolidated real estate partnerships and the minority interest share of consolidated real estate partnerships, for which we are the general partner, was $27.6 million for the year ended December 31, 2001, compared with $39.2 million for the year ended December 31, 2000, a decrease of $11.6 million or 29.6%. This decrease in consolidated investment management business was principally a result of the following:
•$22.0 million of the decrease related to the reduction in the number of properties managed, including approximately 225 for third parties;
•$6.6 million of the decrease related to increased amortization of intangibles from additional property and asset management contract intangibles that were acquired as part of the acquisition of the Oxford properties;
•$5.6 million of the decrease related to losses from health and property casualty insurance claims;
•$2.5 million of the decrease related to the increased ownership in controlled, consolidated partnerships, which requires additional elimination of management fee income and the associated property management expense;
•$10.3 million of an offsetting increase related to fees resulting from additional construction supervisory management services in 2001. These fees were calculated and billed to the real estate partnerships based on a percentage of volume of construction activities;
•$9.7 million of an offsetting increase related to increased capitalization of direct and indirect costs related to construction, redevelopment, Capital Enhancement and Capital Replacement activities; and
•$4.6 million of an offsetting increase related to additional accounting and other fees earned from the Oxford properties, which were acquired by us in September 2000.
Consolidated General and Administrative and Other Expenses
Consolidated general and administrative expenses remained consistent, with $18.5 million for the year ended December 31, 2001 compared with $18.1 million for the year ended December 31, 2000.
We incurred $6.4 million of consulting fees paid to a specialized third party vendor for the year ended December 31, 2001 in connection with a systematic and comprehensive effort to improve our business processes and financial controls. This effort resulted in identifying many initiatives to eliminate work and reduce costs. Three of the main themes were to increase focus on the operation of the conventional properties, strengthen corporate support to field operations and increase focus on the realization of equity values embedded in our portfolio of affordable properties. In 2001, we transferred affordable property management to a team separate from conventional property management, and reduced our business of providing property management services to unrelated third parties from 60,669 units at the end of 2000 to 31,520 units by the end of 2001, in order to focus on the operation of conventional properties. We have strengthened a number of our corporate functions including: purchasing, which has provided for lower costs; marketing, to improve traffic; human resources, to improve the recruitment, training and retention of top performers; financial control, to provide more timely financial information; and information technology systems, which includes the pending installation of an on site property management program.
Additionally, for the year ended December 31, 2001, we provided for an additional allowance of $6.6 million for possible losses on accounts, fees and other contingencies.
Consolidated Depreciation of Rental Property
Consolidated depreciation of rental property totaled $327.1 million for the year ended December 31, 2001, compared with $290.6 million for the year ended December 31, 2000, an increase of $36.5 million or 12.6%. This increase was principally a result of the following:
•$51.5 million of the increase related to operations of the properties acquired through three direct purchases in 2001 and operations of the properties acquired through the Oxford acquisition and 12 other properties acquired in the third and fourth quarters of 2000;
•$12.9 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated in 2001 and 79 properties that were first consolidated after the first quarter of 2000;
•$12.0 million of the increase related to depreciable additions to same store properties;
•$34.0 million of an offsetting decrease related to the change in useful lives of assets. During 2001, we completed a comprehensive review of our real estate related depreciation. As a result of this review, we changed our estimate of the remaining useful lives for our buildings. Effective July 1, 2001 for certain assets and October 1, 2001 for the majority of the portfolio, we extended useful lives of these assets from a weighted average composite life of 25 years to a weighted average composite life of 30 years. This change increased net income by approximately $36.0 million or $0.42 per diluted unit in 2001. We believe the change better reflects the remaining useful lives of the assets and is consistent with prevailing industry practice; and
•$7.8 million of an offsetting decrease related to the disposition of 25 properties in 2001 and 22 properties after the first quarter of 2000.
Consolidated Interest Expense
Consolidated interest expense, which includes the amortization of deferred financing costs, totaled $297.5 million for the year ended December 31, 2001, compared with $274.3 million for the year ended December 31, 2000, an increase of $23.2 million or 8.5%. This increase was principally a result of the following:
•$38.4 million of the increase related to operations of the properties acquired through three direct purchases in 2001 and operations of the properties acquired through the Oxford acquisition and 12 other properties acquired in the third and fourth quarters of 2000;
•$13.2 million of the increase related to the purchase of controlling interests in, and the subsequent consolidation of, real estate partnerships. These real estate partnerships included six properties that were first consolidated in 2001 and 79 properties that were first consolidated after the first quarter of 2000;
•$14.1 million of an offsetting decrease related to lower interest expense on our line of credit. We had lower average balances outstanding during the year, and the cost of such borrowing was at a weighted average interest rate of 6.64% for the year ended December 31, 2001 compared to 8.95% for the year ended December 31, 2000;
•$7.3 million of an offsetting decrease related to a reduction in interest expense paid on our mandatorily redeemable convertible preferred securities, as approximately 2.4 million and 0.2 million of these securities were converted into AIMCO Class A Common Stock in late 2000 and in 2001, respectively; and
•$6.3 million of an offsetting decrease related to the disposition of 25 properties in 2001 and 22 properties occurring after the first quarter of 2000.
Consolidated Interest and Other Income
Consolidated interest and other income decreased $2.1 million or 3.0% from $70.5 million for the year ended December 31, 2000, compared to $68.4 million for the year ended December 31, 2001. This decrease was principally the result of the following:
•$16.5 million of the decrease related to a reduction in accretion income of discounted notes from $26.4 million, net of allocated expenses of $4.3 million, for the year ended December 31, 2000 to $9.9 million, net of allocated expenses of $4.4 million, for the year ended December 31, 2001. This decrease in accretion income was due to fewer loans and fewer transactions completed that resulted in accretion income;
•$10.0 million of the decrease related to lower interest from money market and interest bearing accounts as interest rates on deposit accounts had decreased approximately 200 basis points from the prior year, as well as we had lower average cash balances ($87.8 million in 2001, compared to $113.8 million in 2000) due to the paydown of certain obligations and distributions to minority interest partners; and
•$26.1 million of an offsetting increase related to the gain recognized from the sale of certain tax-exempt bonds.
Equity in Earnings (Losses) of Unconsolidated Real Estate Partnerships
Equity in losses from unconsolidated real estate partnerships totaled $16.7 million for the year ended December 31, 2001, compared to earnings of $5.2 million for the year ended December 31, 2000, a decrease of $21.9 million. The acquisition of interests in the Oxford properties in 2000 contributed $2.1 million to the earnings of unconsolidated real estate partnerships. However, this was offset by the purchase of additional partnership interests which resulted in the related properties being consolidated and contributing to consolidated rental revenues and expenses (six properties in 2001 and 79 properties in 2000).
Minority Interest in Consolidated Real Estate Partnerships
Minority interest in consolidated real estate partnerships totaled $37.6 million for the year ended December 31, 2001, compared to $27.5 million for the year ended December 31, 2000, a change of $10.1 million. The change was primarily a result of our purchase of additional interests in real estate partnerships, thereby reducing the minority interest allocation.
Distributions to Minority Partners in Excess of Income
Distributions to minority partners in excess of income increased $22.0 million from $24.4 million for the year ended December 31, 2000 to $46.4 million for the year ended December 31, 2001. When real estate partnerships consolidated in our financial statements make cash distributions in excess of net income, generally accepted accounting principles require us, as the majority partner, to record a charge equal to the minority partners' excess of distribution over net income when the partnership is in a deficit equity position, even though we do not suffer any economic effect, cost or risk. The increase for the year occurred due to increased refinancing and operating activity, resulting in an increased amount of cash distributions to minority interest partners.
Gain on Dispositions of Real Estate
Gain on dispositions of real estate totaled $18.8 million for the year ended December 31, 2001, compared to $26.3 million for the year ended December 31, 2000, a decrease of $7.5 million. The sales in both periods are of properties that are considered by management to be inconsistent with our long-term investment strategy. Gains (losses) on properties sold were determined on a property by property basis and are not entirely comparable year over year due to individual property differences.
Discontinued Operations
Income from discontinued operations was $4.1 million for the year ended December 31, 2001, compared to $4.4 million for the year ended December 31, 2000. As a result of the adoption of SFAS 144, effective January 1, 2002, we now report assets classified as held for sale (as defined by SFAS 144) and assets sold in the current period, as discontinued operations. This change has resulted in certain reclassifications of 2001 and 2000 financial statement amounts, as all results of operations for those properties sold or classified as held for sale in 2002 must be included in a separate component of income on the consolidated statements of income for all comparable periods. For the year ended December 31, 2001 and 2000, discontinued operations included the operations of the properties sold or classified as held for sale in 2002. There are no gains or losses on assets sold in 2001 or 2000 included in discontinued operations for the years ended December 31, 2001 and 2000. See Note 27 to the consolidated financial statements in Item 8 of this Annual Report for more information on discontinued operations.
Conventional Same Store Property Operating Results
We define "same store" properties as conventional apartment properties in which our ownership interest exceeds 10% and operations are stabilized for over one year in the comparable periods of 2002 and 2001. "Total portfolio" includes same store properties plus conventional acquisition and redevelopment properties. The following table summarizes the unaudited conventional rental property operations on a "same store" and a "total portfolio" basis (dollars in thousands):
Same store net operating income decreased $11.6 million, or 1.6%, for the year ended December 31, 2002 compared to the year ended December 31, 2001. Revenues decreased $8.0 million, or 0.7%, primarily due to lower average rent (down $1 per unit), lower occupancy (down 0.8%), and increased bad debt; all of which were somewhat offset by an increase in ancillary income. Expenses increased by $3.6 million, or 0.9%, primarily due to an increase of $5.3 million in property taxes as well as increased insurance expense of $1.5 million as the cost of property hazard insurance coverage rose in March 2002. These increases were somewhat offset by reductions in other categories. Same store expenses for both periods presented above are net of capitalized costs. The same store net operating results above represent 88.0% and 92.0% of total Free Cash Flow for the years ended December 31, 2002 and 2001, respectively.
Funds From Operations
We believe that FFO and AFFO, when considered with the financial data determined in accordance with GAAP, provide investors with an understanding of our ability to incur and service debt and make capital expenditures. These supplemental measures capture real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than machinery, computers or other personal property. The Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed in accordance with GAAP, excluding gains and losses from extraordinary items, disposals of depreciable real estate property, net of related income taxes, plus real estate related depreciation and amortization (excluding amortization of financing costs), including depreciation for unconsolidated real estate partnerships and joint ventures and discontinued operations. We calculate FFO based on the NAREIT definition, plus amortization of intangibles, plus distributions to minority partners in excess of income and less distributions on preferred OP Units. We calculate FFO (diluted) by adding back the interest expense and preferred distributions relating to convertible units whose conversion is dilutive to FFO. FFO should not be considered an alternative to net income or net cash flows from operating activities, as calculated in accordance with GAAP, as an indication of our performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund future cash needs. In addition, although FFO is a measure used for comparability in assessing the performance of real estate investment trusts, there can be no assurance that our basis for computing FFO is comparable with that of other real estate investment trusts.
For the years ended December 31, 2002, 2001 and 2000, our FFO is calculated as follows (amounts in thousands):
Contribution to Free Cash Flow
We look at our Free Cash Flow as a means of monitoring the operations of the components of our business. In this regard, in addition to the year-to-year comparative discussion, we have provided disclosure (see Note 24 to the consolidated financial statements in Item 8 of this Annual Report) on the contribution (separated between consolidated and unconsolidated activity) to our Free Cash Flow from several components of our business, and a reconciliation of Free Cash Flow to FFO, less Capital Replacements and Capital Enhancements, and to net income for the years ended December 31, 2002, 2001 and 2000. We define Free Cash Flow as FFO, less Capital Replacements and Capital Enhancements, plus interest expense and preferred OP Unit distributions.
The following table summarizes the contributions to our Free Cash Flow (dollars in thousands):
Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001
Total Free Cash Flow contributed was $806.7 million and $784.2 million in 2002 and 2001, respectively, an increase of $22.5 million or 2.9%.
The real estate Free Cash Flow contribution was $745.8 million and $701.1 million in 2002 and 2001, respectively, an increase of $44.7 million or 6.4%. Real estate contribution to total Free Cash Flow increased to 92% in 2002 from 89% in 2001. The increase was primarily due to acquisitions ($88.7 million), offset by a decrease due to increased Capital Replacement and Capital Enhancement spending ($32.1 million), and a decrease in same store operating results ($12.6 million).
The property and asset management income within the investment management business contributed $13.4 million (2%) and $32.5 million (4%) to Free Cash Flow in 2002 and 2001, respectively. This decrease is primarily a result of (a) a reduction in fees related to construction supervisory management services, (b) a reduction in management fees and other income earned due to a decrease in the number of properties managed, including third parties, (c) an increase in losses from property casualty insurance claims, and (d) a reduction due to the increased ownership in and number of consolidated real estate partnerships, which results in additional elimination of management fee income and the associated property operating expense. These decreases in Free Cash Flow were partially offset by increases in Free Cash Flow as a result of a decrease in compensation and health insurance expense. Activity based fees contributed $8.9 million (1%) and $13.8 million (2%) to Free Cash Flow in 2002 and 2001, respectively. Activity based fees are earned on partnership refinancing, sales and other transactions. This decrease was primarily due to decreased refinancing transactions resulting in fees (28 in 2002 compared to 59 in 2001).
Recurring interest income increased $1.2 million primarily as a result of an increase in interest income from AIMCO offset by a decrease in interest income from money market and interest bearing accounts. In 2002, there was a $4.4 million increase related to interest earned on notes receivable due from AIMCO that were issued in connection with the sale of certain properties to AIMCO and in connection with AIMCO's acquisition of The Villas at Park La Brea, whereas there was no such income in 2001. Money market and interest bearing accounts decreased $3.8 million as interest rates on deposit accounts have decreased approximately 1.5% from the prior year, while the average cash balances outstanding for both periods remained consistent. The transactional related interest income contribution was $44.5 million (6%) and $36.0 million (5%) of Free Cash Flow contribution in 2002 and 2001, respectively, an increase of $8.5 million. Transactional interest income was comprised of gain on sale of bonds and accretion income on discounted notes. We hold investments in both par value notes receivable and discounted notes receivable. Accretion income on discounted notes increased $26.9 million from 2001 due to more completed transactions in 2002. Offsetting this increase was a decrease of
$18.4 million related to the recognized gain on sale of certain tax-exempt bonds that were held in 2001 and sold in the second quarter of 2002.
Contributions to conventional real estate Free Cash Flow for 2002, 2001 and 2000 before adjustment for minority interest were as follows (dollars in thousands):
The conventional real estate contribution to Free Cash Flow was $741.0 million and $732.8 million in 2002 and 2001, respectively, an increase of $8.2 million or 1.1%. The increase was primarily due to acquisitions ($53.7 million), offset by a decrease due to increased Capital Replacement and Capital Enhancement spending ($26.9 million), a decrease in same store operating results ($12.6 million), and a decrease due to 2001 dispositions ($5.3 million).
The changes in the composition of conventional real estate contribution resulted in an increase in contribution from properties with an average monthly rent greater than $900 per unit to 32% from 24% in 2001, and a decrease in contribution from properties with an average monthly rent below $600 per unit to 23% from 24% in 2001. The changes were due to acquisitions offset by decreases in property operations and dispositions.
Note 24 to the consolidated financial statements in Item 8 of this Annual Report provides additional detail on each component of Free Cash Flow. We believe this disclosure is complementary to the results of operations discussed above.
Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
Total Free Cash Flow contributed was $784.2 million and $674.6 million in 2001 and 2000, respectively, an increase of $109.6 million or 16.2%.
The real estate Free Cash Flow contribution was $701.1 million and $575.9 million in 2001 and 2000, respectively, an increase of $125.2 million or 21.7%. Real estate contribution to total Free Cash Flow increased to 89% in 2001 from 85% in 2000. The increase was due to improvements in property operations (96%), acquisitions (2%) and limited partnership acquisitions (2%).
The property and asset management income within the investment management business contributed $32.5 million (4%) and $41.0 million (6%) to Free Cash Flow in 2001 and 2000, respectively. This decrease is primarily a result of (a) a reduction in management fees and other income earned due to a decrease in the number of properties managed, including third parties, (b) an increase in losses from health and property casualty insurance claims and (c) a reduction due to the increased ownership in controlled, consolidated partnerships, which requires additional elimination of management fee income and the associated property management expense. These decreases in Free Cash Flow were partially offset by increases in Free Cash Flow as a result of (a) an increase in property and asset management income resulting from additional fees due to the acquisition of the Oxford properties in September 2000, (b) an increase in property and asset management income as we earned additional construction supervisory management services in 2001 and (c) an increase in the capitalization of direct and indirect costs related to construction, redevelopment, Capital Enhancement and Capital Replacement activities. Activity based fees contributed $13.8 million (2%) and $7.4 million (1%) to Free Cash Flow in 2001 and 2000, respectively. Activity based fees are earned on partnership refinancing, sales and other transactions. The increase in fee income is due to increased refinancing fees of $10.4 million in 2001, compared to $4.0 million in 2000.
Recurring interest income decreased $9.6 million primarily as a result of a decrease in interest income from money market and interest bearing accounts. We had $78.1 million in cash as of December 31, 2001, compared to
$157.1 million at December 31, 2000 due to the paydown of certain obligations such as the term loan and revolving credit facility, and interest rates on deposit accounts having decreased approximately 200 basis points. The transactional related interest income contribution was $36.0 million (5%) and $26.4 million (4%) of Free Cash Flow contribution in 2001 and 2000, an increase of $9.6 million. Transactional interest income was comprised of gain on sale of bonds and accretion income on discounted notes. We hold investments in both par value notes receivable and discounted notes. Accretion income on discounted notes decreased $16.5 million from 2000 due to fewer loans and fewer transactions completed. However, this was offset by a $26.1 million gain recognized from the sale of certain tax-exempt bonds.
The conventional real estate contribution to Free Cash Flow was $732.8 million and $587.6 million in 2001 and 2000, respectively, an increase of $145.2 million or 24.7%. The increase was due to improvements in property operations (96%), acquisitions (2%) and acquisition of limited partnership interests (2%).
The changes in the composition of conventional real estate contribution resulted in an increase in contribution from properties with an average monthly rent greater than $900 per unit to 24% from 14% in 2000, and a decrease in contribution from properties with an average monthly rent below $600 per unit to 24% from 37% in 2000. The changes were due to improvements in property operations, acquisitions, limited partnership acquisitions and dispositions.
Note 24 to the consolidated financial statements in Item 8 of this Annual Report provides additional detail on each component of Free Cash Flow. We believe this disclosure is complementary to the results of operations discussed above.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through the sale or maturity of existing assets or by the acquisition of additional funds through working capital management. Both the coordination of asset and liability maturities and effective working capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as determined by rental rates, occupancy levels and operating expenses related to our portfolio of apartment properties, as well as cash flow from operations generated by our investment management business.
Our principal demands for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital expenditures, acquisitions of and investments in properties and distributions paid to unitholders. We consider our cash provided by operating activities to be adequate to meet short-term liquidity demands. In the event that there continues to be an economic downturn or the national economy continues to deteriorate and the cash provided by operating activities is no longer adequate, we have additional means, such as short-term borrowing availability, to help us meet our short-term liquidity demands. We use our revolving credit facility for general corporate purposes and to fund investments on an interim basis. We expect to meet our long-term liquidity requirements, such as debt maturities and property acquisitions, through long-term borrowings, both secured and unsecured, the issuance of debt or equity securities (including OP Units), the sale of properties and cash generated from operations.
At December 31, 2002, we had $99.6 million in cash and cash equivalents, an increase of $21.5 million from December 31, 2001. In addition, we had $224.9 million of restricted cash ($70 million of which was acquired in the Casden Merger), primarily consisting of reserves and impounds held by lenders for bond sinking funds, capital expenditures, property taxes and insurance. In addition, cash, cash equivalents and restricted cash are held by partnerships that are not presented on a consolidated basis. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows in Item 8 of this Annual Report.
Operating Activities
For the year ended December 31, 2002, our net cash provided by operating activities was $496.7 million, compared to $491.8 million for the year ended December 31, 2001. This decline is due primarily to the economic downturn in the national economy and the related deterioration in our operating activities, as well as an increase in our level of operating assets, partially offset by a decrease in our operating liabilities.
Investing Activities
For the year ended December 31, 2002, our net cash used in investing activities was $873.8 million compared to $140.6 million for the year ended December 31, 2001. In 2002 our investing activities related to investments in acquisitions and our existing real estate assets through capital expenditures and redevelopment, as well as dispositions of apartment properties. See further discussion on capital expenditures under the heading "Capital Expenditures."
Our acquisitions included the Casden Merger and the New England Properties Acquisition. In addition, we acquired the Villas at Park La Brea and made various acquisitions of limited partnership interests held by third party investors in certain partnerships for which we act as the general partner. See Note 4 to the consolidated financial statements in this Annual Report for further discussion on these activities.
Although we hold all of our properties for investment, we sell properties when they do not meet our investment criteria or are located in areas that we believe do not justify our continued investment, in both cases as compared to alternative uses for our capital. The table below shows our dispositions during the year ended December 31, 2002:
We are currently marketing for sale certain real estate properties that are inconsistent with our long-term investment strategies (as determined by management from time to time). Proceeds from 2003 dispositions are expected to be at levels above that of 2002, and are planned to be used to reduce debt and fund capital and other operating needs.
Financing Activities
For the year ended December 31, 2002, net cash provided by financing activities was $398.6 million compared to net cash used in financing activities of $430.2 million for the year ended December 31, 2001. In 2002 our financing activities related to mortgage financing, short-term debt financing, issuance of common and preferred equity, payment of our distributions and payment of our principal debt amortization.
During the year ended December 31, 2002, we refinanced or closed 93 mortgage loans generating $1,031.7 million of total proceeds at a weighted average interest rate of 4.26%, of which approximately $937.9 million related to consolidated properties (these mortgages do not include the $308.7 million in mortgage loans related to the New England Properties Acquisition that are discussed below). Each loan is non-recourse. Among the 93 loans, 81 are individually secured by one of 81 properties with no cross-collateralization, and 12 loans totaling $228.4 million are cross-collateralized with certain other mortgage loans. After repayment of existing debt and payment of transaction costs totaling $832.0 million, our share of the total $199.7 million in net proceeds was $165.8 million which was used to repay existing short-term debt and for other corporate purposes. Further details on these mortgage loans are shown in the table below:
In connection with the Casden Merger, we assumed $684.7 million of primarily long-term, fixed-rate, fully amortizing notes payable with a weighted average interest rate of 6.85%. Each of the notes is individually secured by one of 116 properties with no cross-collateralization.
In connection with the New England Properties Acquisition, we closed 11 mortgage loans generating $308.7 million of long-term, fixed rate, fully amortizing notes with a weighted average interest rate of 5.69%. Each loan is non-recourse and is individually secured by one of the 11 properties, with no cross-collateralization.
In connection with our purchase of The Villas at Park La Brea, we closed a $38.0 million, long-term, fixed rate, fully amortizing note with an interest rate of 6.01%. This note is non-recourse and secured by the property.
As of December 31, 2002, substantially all of the Company's owned or controlled properties and 86.5% of our total assets were encumbered by or served as collateral for debt. As of December 31, 2002, we had total secured outstanding indebtedness of $6,233.7 million, comprised of $4,582.9 million of secured long-term financing, $1,244.8 million of secured tax-exempt long-term bond financing and $406.0 million in secured short-term financing. As of December 31, 2002, approximately 22.6% of our indebtedness bears interest at variable rates, of which $786.2 million, or 12.6%, is tax-exempt bond financing. As of December 31, 2002, we had a total of 49 mortgage loans, with an aggregate principal balance outstanding of $573.4 million that were cross-collateralized with certain other mortgage loans. Other than these loans, none of our debt is subject to cross-collateralization provisions. The weighted average interest rate on our long-term secured notes payable and tax-exempt bonds was 6.49%, with a weighted average maturity of 14 years as of December 31, 2002.
In 2002 AIMCO issued the following equity:
•3.5 million shares of AIMCO Class A Common Stock, valued at $164.9 million, in connection with the Casden Merger;
•2.0 million shares of Class R Preferred Stock, par value $0.01 per share, in two registered public offerings, with total net proceeds of approximately $50 million used to repay short-term indebtedness; and
•8.0 million shares of AIMCO Class A Common Stock in a registered public offering at a net price of $46.17 per share. The total net proceeds of approximately $369 million were used to repay outstanding indebtedness on the revolving credit facility and a portion of the Casden Loan.
The net proceeds of the above issuances were contributed by AIMCO to us in exchange for similar classes of common and preferred OP Units. In addition, we issued 882,784 common OP Units in connection with the Casden Merger and 331,451 common OP Units in connection with the acquisition of limited partnership interests.
It is the present policy of the General Partner to increase the distribution annually in an amount equal to one-half of the projected increase in AFFO subject to minimum distribution requirements to maintain its REIT status. The General Partner considers the discretionary nature of Capital Enhancement spending in its consideration of AFFO as it relates to the distribution policy. The distribution paid in February 2003 of $0.82 per unit, which was the same distribution amount as was paid in each quarter of 2002, represents a distribution of 96% of AFFO (before deducting Capital Enhancements) and 78% of FFO for the quarter ended December 31, 2002. The General Partner continues to monitor the distribution as a percentage of AFFO (before deducting Capital Enhancements). If the payout were to exceed 100% for a sustained period, the General Partner would consider a change in the distribution to match operating profitability.
On November 7, 2001, we and AIMCO filed a shelf registration statement with the Securities and Exchange Commission, or SEC, with respect to an aggregate of $822 million of debt and equity securities of AIMCO and $500 million of our debt securities, all of which was carried forward from AIMCO's 1998 shelf registration statement. The SEC declared the registration statement effective on November 9, 2001. As of December 31, 2002, AIMCO had approximately $400 million of debt and equity available and we had $500 million of debt available under this registration statement. We expect to finance acquisitions of real estate interests with the issuance of equity and debt securities under the shelf registration statement as well as with cash from operations or short-term borrowings.
Credit Facility and Term Loan
On February 14, 2003, we and our lenders amended our revolving credit facility to increase the available commitment, at our option, to $500 million (such commitment in excess of $400 million is not available until it has been syndicated), reduce the minimum fixed charge coverage ratio from 1.60:1 to 1.50:1 through the maturity date and extend the maturity date one year to July 31, 2005. Upon the effective date of the amendment, the margin on LIBOR-based loans and base rate loans was amended to a range between 2.05% to 2.65% and .55% to 1.15%, respectively, based on the fixed charge coverage ratio. In addition, we and our lenders amended the Casden Loan with the same reduction in the fixed charge coverage ratio as stated above for the credit facility, through maturity, and to eliminate mandatory prepayments for the remainder of the term using proceeds from equity, sales or refinancing proceeds (except as such proceeds arise from transactions of the properties acquired in the Casden Merger).
The financial covenants contained in the amended and restated revolving credit facility and the Casden Loan require us to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, and an interest coverage ratio of 2.25 to 1.0. In addition, the amended and restated revolving credit facility and the Casden Loan limit us from distributing more than 80% of our Funds From Operations over any 12-month period (or such amounts as may be necessary for AIMCO to maintain its status as a REIT). Finally, the fixed charge coverage ratio requirement for the quarter ended June 30, 2002 through February 13, 2003 (at which time the coverage ratios were further amended as indicated above) was 1.60:1. As of December 31, 2002, we were in compliance with all financial covenant requirements.
Future Capital Needs
We expect to fund any future acquisitions, redevelopment and capital improvements principally with proceeds from property sales, short-term borrowings and operating cash flows. As of December 31, 2002, we had 10 properties with 3,678 units under redevelopment having an estimated total investment (fair market value prior to redevelopment plus new redevelopment spending) of $601 million, of which approximately $34 million remains to be spent. Our share of the estimated total investment is $501 million of which approximately $21 million remains to be spent.
During 2003, we have:
•$178.9 million of scheduled maturities of property debt that we expect to refinance;
•$134.6 million of scheduled principal amortization payments on property debt that we expect to pay with operating cash flows and proceeds from property sales; and
•$406.0 million of short-term debt ($291.0 million on the credit facility and $115.0 million on the Casden Loan) that we expect to repay a portion of with operating cash flows and proceeds from property sales.
Capital Expenditures
For the year ended December 31, 2002, we spent a total of $82.9 million and $8.0 million on Capital Replacements (expenditures required to maintain the related asset) and on Capital Enhancements (expenditures that add a new feature or revenue source at a property), respectively.
Capital Replacements spending has increased for two primary reasons: a general increase in spending to maintain our assets; and an increase in capitalized costs. In addition to Capital Replacements, we monitor Capital Enhancements, which we distinguish from Capital Replacements. Capital Enhancements are costs incurred to add additional rental square footage, a new building or a new revenue producing feature. For example, replacement of existing kitchen appliances is a Capital Replacement, however, if the same replacements are done in connection with an extensive remodeling project then they are characterized as a Capital Enhancement. Because the distinction between Capital Replacements and Capital Enhancements is not consistently applied across REITs and because there is a risk of partial substitution between Capital Replacements and Capital Enhancements, we monitor and report both Capital Replacements and Capital Enhancements and deduct both in our calculation of AFFO.
The table below details our actual spending on Capital Replacements and Capital Enhancements based on a per unit and total dollar basis (based on approximately 173,000 units) for the year ended December 31, 2002 and reconciles it to our 2002 Consolidated Statement of Cash Flows:
In addition, we capitalized approximately $8.8 million of our share of indirect costs related to these activities for the year ended December 31, 2002, increasing our share of Capital Replacement ($90.4 million) and Capital Enhancement ($9.2 million) spending to $99.6 million. We funded these expenditures with cash provided by operating activities, working capital reserves, and borrowings under our credit facility.
For the year ended December 31, 2002, we spent a total of $170.9 million for initial capital expenditures, or ICE, (expenditures at a property that have been identified, at the time the property is acquired, as expenditures to be incurred within one year of the acquisition, which in this period relates primarily to the properties acquired in the
Casden Merger) and redevelopment (expenditures that substantially upgrade the property). The following table reconciles our share of those expenditures to our 2002 Consolidated Statement of Cash Flows (in millions):
In addition, we capitalized approximately $15.4 million of our share of direct and indirect costs related to these activities for the year ended December 31, 2002, increasing our share of ICE and redevelopment spending to $186.3 million. We funded these expenditures with cash provided by operating activities, working capital reserves, and borrowings under our credit facility.
During 2001 and 2002, we refined our process for identifying and capitalizing certain indirect costs, which include the implementation of a detailed time reporting system to measure such activities more accurately. As a result of the refined process, we capitalized approximately $40.7 million of our share of indirect costs for the year ended December 31, 2002, compared to approximately $48.1 million for the year ended December 31, 2001, for a reduction of approximately $7.4 million.
Off-Balance Sheet Arrangements
We own general and limited partner interests in unconsolidated real estate partnerships, which interests were acquired through acquisitions, direct purchases and separate offers to other limited partners. Our total ownership interests in these unconsolidated real estate partnerships range from 1% to 55%. However, based on the provisions of the related partnership agreements, which grant varying degrees of control, we are not deemed to have control of these partnerships sufficient to require or permit consolidation for accounting purposes. There are no lines of credit, side agreements, financial guarantees, or any other derivative financial instruments related to or between us and our unconsolidated real estate partnerships. Accordingly, our maximum risk of loss related to these unconsolidated real estate partnerships is limited to the aggregate carrying amount of our investment in the unconsolidated real estate partnerships and any outstanding notes receivable as reported in our consolidated financial statements. See Note 5 to the consolidated financial statements in Item 8 of this Annual Report for additional information on our unconsolidated real estate partnerships.
Contractual Obligations
This table summarizes information contained elsewhere in this Annual Report regarding contractual obligations and commitments (amounts in thousands):
(1)The development fee payments above were established in connection with the Casden Merger and AIMCO's commitment as it relates to the Casden Development Company, LLC. AIMCO agreed to pay $2.5 million per quarter for five years up to an aggregate amount of $50.0 million to Casden Development Company, LLC as a retainer on account for redevelopment services. Additionally, AIMCO has committed to invest up to $50 million for a 20% limited liability company interest in Casden Properties, LLC, a newly formed company controlled by third parties. As of December 31, 2002, AIMCO had invested $11.7 million (see Note 4 to the consolidated financial statements in Item 8 of this Annual Report for additional information).
ITEM 7a.
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure relates to changes in interest rates. We are not subject to any foreign currency exchange rate risk or commodity price risk, or any other material market rate or price risks. We use predominantly long-term, fixed-rate and self-amortizing non-recourse mortgage debt in order to avoid the refunding and repricing risks of short-term borrowings. We use short-term debt financing and working capital primarily to fund short-term uses and acquisitions and generally expect to refinance such borrowings with cash from operating activities, property sales proceeds or long-term debt financings.
We had $1,411.2 million of variable rate debt outstanding at December 31, 2002, which represented 22.6% of our total outstanding debt. Of the total variable debt, the major components were floating rate tax-exempt bond financing ($786.2 million), floating rate secured notes ($219.0 million), the Casden Loan ($115.0 million), and the credit facility ($291.0 million). Based on this level of debt, an increase in interest rates of 1% would result in our income and cash flows being reduced by $14.1 million on an annual basis. Historically, changes in tax-exempt interest rates have been at a ratio less than 1:1 with changes in taxable interest rates. Variable rate tax-exempt bond financing is benchmarked against the Bond Market Association Municipal Swap Index (the "BMA Index"). Since 1981, the BMA Index has averaged 54.2% of the 10-year Treasury Yield. If this relationship continues and based on our level of tax-exempt debt, an increase of 1% in taxable interest rates would result in our income and cash flows being reduced by $10.5 million on an annual basis. At December 31, 2002, the Company had $4,822.5 million of fixed-rate debt outstanding. As of December 31, 2001, based on our level of variable debt of $853.4 million, an increase in interest rates of 1% would have resulted in our income and cash flows being reduced by $8.5 million on an annual basis. The year ended December 31, 2002 had an increased potential reduction of $5.6 million as compared to the year ended December 31, 2001 due to our increased variable debt balance in 2002, as a result of our acquisitions and newly consolidated properties.
As of December 31, 2002, the scheduled principal amortization and maturity payments for our consolidated secured notes payable and consolidated secured tax-exempt bonds were as follows (dollars in thousands):
The estimated aggregate fair value of our cash and cash equivalents, receivables, payables and short-term secured debt as of December 31, 2002 approximate their carrying value due to their relatively short-term nature. Management further believes that the fair value of our variable rate secured tax-exempt bond debt and variable rate secured long-term debt approximate their carrying values. The fair value for our fixed-rate debt agreements were estimated based on the quoted market rate for the same or similar issues. The carrying amount of our fixed-rate debt at December 31, 2002 was $4.8 billion compared to the computed fair value of $5.5 billion (see Note 3 to the consolidated financial statements in Item 8
ITEM 8. Financial Statements and Supplementary Data
The independent auditor's report, consolidated financial statements and schedule listed in the accompanying index are filed as part of this report and incorporated herein by this reference. See "Index to Financial Statements" on page.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
All of the executive officers of our General Partner also serve as executive officers of AIMCO. Accordingly, the information below reflects the directors of our General Partner and the executive officers of both our General Partner and AIMCO. The officers of AIMCO and our General Partner are elected annually by their respective Boards of Directors.
The following is a biographical summary of the experience of the current directors of our General Partner and executive officers of our General Partner and AIMCO for the past five years or more.
Terry Considine. Mr. Considine has been Chairman of the Board of Directors and Chief Executive Officer since July 1994. Mr. Considine serves as Chairman and Chief Executive Officer of American Land Lease, Inc., another public real estate investment trust and successor to Asset Investors Corporation and Commercial Assets, Inc. Mr. Considine devotes his time to his responsibilities at AIMCO on a full time basis, and the balance to American Land Lease, Inc.
Peter K. Kompaniez. Mr. Kompaniez has been Vice Chairman of the Board of Directors since July 1994 and was appointed President in July 1997. Mr. Kompaniez has also served as Chief Operating Officer of NHP Incorporated after it was acquired by AIMCO in December 1997.
Harry G. Alcock. Mr. Alcock served as a Vice President from July 1996 to October 1997, when he was promoted to Senior Vice President - Acquisitions. Mr. Alcock served as Senior Vice President - Acquisitions until October 1999, when he was promoted to Executive Vice President and Chief Investment Officer. Mr. Alcock has had responsibility for acquisition and financing activities of the Company since July 1994.
Miles Cortez. Mr. Cortez was appointed Executive Vice President, General Counsel and Secretary in August 2001. Prior to joining the Company, Mr. Cortez was the senior partner of Cortez Macaulay Bernhardt & Schuetze LLC, a Denver law firm, from December 1997 through September 2001. From August 1993 through November 1997, Mr. Cortez was a partner at McKenna & Cuneo LLP in Denver. He served as president of the Colorado Bar Association from 1996 to 1997 and the Denver Bar Association from 1982 to 1983.
Joseph DeTuno. Mr. DeTuno was appointed Executive Vice President - Redevelopment in February 2001 and previously served as Senior Vice President - Property Redevelopment from August 1997 to February 2001. Prior to joining the Company, Mr. DeTuno was President and founder of JD Associates, a full service real estate consulting, advisory and project management company that he founded in 1990.
Patti K. Fielding. Ms. Fielding was appointed Executive Vice President - Securities and Debt in February 2003. She is responsible for securities and debt financing and the treasury department. From January 2000 to February 2003, Ms. Fielding served as Senior Vice President - Securities and Debt. Ms. Fielding joined the Company in February 1997 and served as Vice President-Tenders, Securities and Debt until January 2000. Prior to joining the Company, Ms. Fielding was a Vice President with Hanover Capital Partners from 1996 to 1997, Vice Chairman, Senior Vice President and Principal of CapSource Funding Corp from 1993 to 1995, and Group Vice President with Duff & Phelps Rating Co. from 1987 to 1993.
Patrick J. Foye. Mr. Foye was appointed Executive Vice President in May 1998. He is responsible for AIMCO's continuous improvement initiative, acquisitions of partnership securities, consolidation of minority interests, and corporate and other acquisitions. Prior to joining the Company, Mr. Foye was a Merger and Acquisitions Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998.
Lance J. Graber. Mr. Graber has been Executive Vice President since October 1999. His principal business function is overseeing dispositions, refinancings, redevelopments and other transactions within AIMCO Capital's portfolio of affordable properties. Prior to joining the Company, Mr. Graber was a Director at Credit Suisse First Boston from 1994 to May 1999, during which time he supervised a staff of seven in the making of principal investments in hotel, multi-family and assisted living properties.
Paul J. McAuliffe. Mr. McAuliffe has been Executive Vice President since February 1999 and was appointed Chief Financial Officer in October 1999. From May 1996 until he joined the Company, Mr. McAuliffe was Senior Managing Director of Secured Capital Corp.
Ronald D. Monson. Mr. Monson was appointed Executive Vice President and Head of Property Operations in February 2001. Previously, he served as Regional Vice President from March 1997 to May 1998, when he was promoted to Senior Vice President of the Midwest Division. Mr. Monson served as Senior Vice President of the Midwest Division until January 1999, when he was appointed Senior Vice President of the Far West Division. From April 1994 to February 1997, Mr. Monson was a Regional Vice President for Great Atlantic Property Management.
Thomas C. Novosel. Mr. Novosel was appointed Senior Vice President and Chief Accounting Officer in April 2000. From October 1993 until he joined the Company, Mr. Novosel was a partner at Ernst & Young LLP, where he served as the director of real estate advisory services for the southern Ohio Valley area offices but did not work on any assignments related to the Company.
James G. Purvis. Purvis was appointed Executive Vice President - Human Resources in February 2003. Prior to joining AIMCO, from October 2000 to February 2003, Mr. Purvis served as the Vice President of Human Resources at SomaLogic, Inc. a privately held biotechnology company in Boulder, Colorado. From July 1997 to October 2000, Mr. Purvis was the principal consultant for O3C Global Organization Solutions, a global human resources strategy and technology consulting company based in Colorado and London. From March 1996 to July 1997 Mr. Purvis served as the Senior Vice President of Employee Relations at TCI, Inc.
David Robertson. Mr. Robertson has been Executive Vice President since February 2002, and was appointed President and Chief Executive Officer of AIMCO Capital in October 2002. He is responsible for property operations, asset management and transaction activities within AIMCO Capital's portfolio of affordable properties. Prior to joining the Company, Mr. Robertson was a member of the investment-banking group at Smith Barney from 1991 to 1996, where he was responsible for real estate investment banking transactions in the western United States, and was part of the Smith Barney team that managed AIMCO's initial public offering in 1994. Since February 1996, Mr. Robertson has been Chairman and Chief Executive Officer of Robeks Corporation, a privately held chain of specialty food stores.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the Securities Exchange Act requires the General Partner's executive officers and directors, and persons who own more than ten percent of a registered class of OP Units, to file reports (Forms 3, 4 and 5) of unit ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and beneficial owners of more than ten percent of the OP Units are required by Securities and Exchange Commission regulations to furnish us with copies of all such forms that they file.
Based solely on our review of the copies of Forms 3, 4 and 5 and the amendments thereto received by it for the year ended December 31, 2002, or written representations from certain reporting persons that no Forms 5 were required to be filed by those persons, we believe that during the period ended December 31, 2002, all filing requirements were complied with by our executive officers, directors and beneficial owners of more than ten percent of the OP Units, except that Mr. Ellwood inadvertently omitted a report for a purchase by his wife of 200 shares on November 26, 2002, which was reported on December 31, 2002.
ITEM 11.
ITEM 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid for each of the three fiscal years ended December 31, 2002 to the directors of the General Partner and the Chief Executive Officer and each of the four other most highly compensated executive officers of the General Partner and AIMCO (the "Named Executive Officers"). Information regarding stock options and other stock based compensation payable by AIMCO has been included for informational purposes since we will issue to AIMCO additional OP Units upon exercise of such stock options and the contribution to us of the net proceeds therefrom.
(1)Restricted stock and stock options were awarded in January 2001 and 2002, respectively, with respect to fiscal years 2000 and 2001. Stock options were awarded in February 2003 with respect to fiscal year 2002.
(2)Includes all incentive cash compensation earned by the Chief Executive Officer and each of the Named Executive Officers.
(3)The value of the 2001 restricted stock awards at December 31, 2002 was $404,034 and $171,958 for Messrs. McAuliffe and Graber, respectively. Such value is determined by the market price, $37.48, for AIMCO's Class A Common Stock at the last day of the last fiscal year. The number of shares subject to 2000 restricted stock awards held by Messrs. McAuliffe and Graber at the end of fiscal year 2002 was 10,780 shares and 4,588 shares, respectively. With respect to Mr. McAuliffe's 10,780 shares, 8,028 are subject to restrictions that lapse on the second (40%), third (20%), fourth (20%) and fifth (20%) anniversaries of the award and 2,752 are subject to restrictions that lapse on the first (34%), second (33%) and third (33%) anniversaries of the award, thus restrictions have lapsed with respect to 935 shares of this award. The value of the 2000 restricted stock awards at the end of the last fiscal year was $944,308 for Mr. McAuliffe. Such value is determined by the market price, $37.48, for AIMCO's Class A Common Stock at the last day of the last fiscal year. The number of shares subject to 2000 restricted stock awards held by Mr. McAuliffe at the end of the last fiscal year was 25,195 shares. Restrictions lapse on the first (34%), second (33%) and third (33%) anniversaries of the award,
thus restrictions have lapsed with respect to 16,880 shares of this award. Holders of restricted stock awards are entitled to receive the dividends thereto commencing on the date of grant.
(4)This number reflects two option grants, each of which were made on February 3, 2003. Of the total, 150,442 vest 34% on the first anniversary of the award and 33% vests on each of the second and third anniversaries of the award and 464,602 vest 40% on the second anniversary of the award and 20% on each of the third, fourth and fifth anniversaries of the award.
(5)As part of 2002 compensation, on May 1, 2003, Mr. Kompaniez will be granted a restricted stock grant of 11,210 shares, which shares will vest 40% on the second anniversary of the award and 20% on each of the third, fourth and fifth anniversaries of the award. Because the closing market price on date of grant is not known, the dollar value of the grant cannot be calculated at this time. At December 31, 2002, such an award would have had a value of $420,151 based on the market price, $37.48, for AIMCO's Class A Common Stock at the last day of the last fiscal year. Holders of restricted stock awards are entitled to receive the dividends thereto commencing on the date of grant.
(6)This number reflects two option grants, each of which were made on February 3, 2003. Of the total, 139,381 vest 34% on the first anniversary of the award and 33% vests on each of the second and third anniversaries of the award and 40,929 vest 40% on the second anniversary of the award and 20% vests on each of the third, fourth and fifth anniversaries of the award.
(7)As part of 2002 compensation, on May 1, 2003, Mr. McAuliffe will be granted a restricted stock grant of 22,008 shares, which shares will vest 40% on the second anniversary of the award and 20% on each of the third, fourth and fifth anniversaries of the award. Because the closing market price on date of grant is not known, the dollar value of the grant cannot be calculated at this time. At December 31, 2002, such an award would have had a value of $824,860 based on the market price, $37.48, for AIMCO's Class A Common Stock at the last day of the last fiscal year. Holders of restricted stock awards are entitled to receive the dividends thereto commencing on the date of grant.
(8)This number reflects two option grants, each of which were made on February 3, 2003. Of the total, 84,071 vest 34% on the first anniversary of the award and 33% vests on each of the second and third anniversaries of the award and 66,372 vest 40% on the second anniversary of the award and 20% vests on each of the third, fourth and fifth anniversaries of the award.
(9)Mr. Robertson was not an employee of the Company prior to February 2002.
(10)As part of 2002 compensation, on May 1, 2003, Mr. Robertson will be granted a restricted stock grant of 24,759 shares, which shares will vest 40% on the second anniversary of the award and 20% on each of the third, fourth and fifth anniversaries of the award. Because the closing market price on date of grant is not known, the dollar value of the grant cannot be calculated at this time. At December 31, 2002, such an award would have had a value of $927,967 based on the market price, $37.48, for AIMCO's Class A Common Stock at the last day of the last fiscal year. Holders of restricted stock awards are entitled to receive the dividends thereto commencing on the date of grant.
(11)This number reflects two option grants, each of which were made on February 3, 2003. Of the total 84,071 vest 34% on the first anniversary of the award and 33% vests on each of the second and third anniversaries of the award and 77,434 vest 40% on the second anniversary of the award and 20% vests on each of the third, fourth and fifth anniversaries of the award.
(12)As part of 2002 compensation, on May 1, 2003, Mr. Graber will be granted a restricted stock grant of 12,390 shares, which shares will vest 40% on the second anniversary of the award and 20% on each of the third, fourth and fifth anniversaries of the award. Because the closing market price on date of grant is not known, the dollar value of the grant cannot be calculated at this time. At December 31, 2002, such an award would have had a value of $464,377 based on the market price, $37.48, for AIMCO's Class A Common Stock at the last day of the last fiscal year. Holders of restricted stock awards are entitled to receive the dividends thereto commencing on the date of grant.
(13)This number reflects two option grants, each of which were made on February 3, 2003. Of the total, 84,071 vest 34% on the first anniversary of the award and 33% vests on each of the second and third anniversaries of the award and 123,894 vest 40% on the second anniversary of the award and 20% vests on each of the third, fourth and fifth anniversaries of the award.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Information on options granted in 2003 for the 2002 fiscal year to the Named Executive Officers is set forth in the following table.
(1)Under the terms of the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan (the "1997 Stock Plan"), the plan administrator retains discretion, subject to certain restrictions, to modify the terms of outstanding options. The exercise price of incentive options granted under the 1997 Stock Plan equal the fair market value of a share of AIMCO Class A Common Stock on the date of grant. The exercise price of non-qualified options issued under the 1997 Stock Plan generally equals the fair market value of a share of AIMCO's Class A Common Stock on the date of grant.
(2)For 150,442 options and 139,381 options for Messrs. Considine and Kompaniez, respectively and for 84,071 options for each of Messrs. McAuliffe, Robertson and Graber, vesting is on the first (34%), second (33%) and third (33%) anniversaries of the grant date of February 3, 2003. For 464,602 options, 40,929 options, 66,372 options, 77,434 options and 123,894 options for Messrs. Considine, Kompaniez, McAuliffe, Robertson and Graber, respectively, vesting is on the second (40%), third (20%), fourth (20%) and fifth (20%) anniversaries of the grant date of February 3, 2003.
(3)The estimated present value at grant date of option grants in 2003 has been calculated using the Black-Scholes option pricing model based on the following assumptions: an estimated time until exercise of 5 years, a volatility of 19.5%, a risk-free interest rate of 3.52% and a dividend yield of 9.0%. The real value of these options depends on the actual performance of AIMCO's Class A Common Stock during the applicable period and upon when options are exercised. No gain to the optionee is possible without an increase in the share price, which would benefit all shareholders as well.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
Information on option exercises during 2002 by the Named Executive Officers, and the value of unexercised options held by Named Executive Officers at December 31, 2002 is set forth in the following table.
(1)Includes: 615,044 shares, 180,310 shares, 150,442 shares, 161,505 shares and 207,965 shares subject to options granted to Messrs. Considine, Kompaniez, McAuliffe, Robertson and Graber, respectively, in February 2003.
(2)Market value of underlying securities at fiscal year-end, less the exercise price. Market value is determined based on the closing price of AIMCO's Class A Common Stock on the New York Stock Exchange on December 31, 2002 of $37.48 per share.
EMPLOYMENT ARRANGEMENTS
Each of Messrs. Considine and Kompaniez receive annual cash compensation pursuant to employment contracts with the Company. The initial two-year term of each of these contracts expired in July 1996 but the contracts are automatically renewed for successive one-year terms unless the officer is terminated by the Company. The base salary payable under the employment contracts is subject to annual review and adjustment by the Compensation and Human Resources Committee of the Board of Directors of AIMCO. The base annual salaries of Messrs. Considine and Kompaniez were $200,000 each for 2002. Each of Messrs. Considine and Kompaniez are also eligible for a bonus set by the Compensation and Human Resources Committee. See "Compensation and Human Resources Committee Report to Stockholders."
The employment contracts provide that upon a change in control of AIMCO or a termination of employment under certain circumstances, the employee will be entitled to a payment equal to three times the average annual salary for the previous three years. The contracts provide that during the term of the contract and for one year thereafter in no event will the employees engage in the acquisition, development, operation or management of other multifamily rental apartment properties outside of AIMCO. In addition, the contracts provide that the employees will not engage in any active or passive investment in property relating to multifamily rental apartment properties, with the exception of the ownership of up to 1% of the securities of any publicly-traded company involved in those activities.
Effective in January 2002, AIMCO entered into certain non-competition and non-solicitation agreements with a number of employees, including Messrs. Considine, Kompaniez, McAuliffe, Robertson and Graber. Pursuant to the agreements, in consideration for payment of certain bonus and restricted stock, each of these executives agreed that during the term of his employment with AIMCO and for a period of two (2) years following the termination of his employment, except in circumstances where there was a change in control of AIMCO, he could not (i) be employed by a competitor of AIMCO named on a schedule to the agreement, (ii) solicit other AIMCO employees to leave AIMCO's employ or (iii) solicit customers of AIMCO to terminate their relationship with AIMCO. The agreements further required that the executives protect AIMCO's trade secrets and confidential information.
The agreements provide that in order to enforce the above-noted non-competition condition following the executive's termination of employment by AIMCO without cause, each of Messrs. Considine, Kompaniez, McAuliffe, Robertson and Graber will receive, for a period not to exceed the earlier of twenty-four (24) months following such termination or the date of acceptance of employment with a non-competitor, (i) severance pay in an amount, if any, to be determined by AIMCO in its sole discretion, and (ii) following payment of such
severance, a monthly payment equal to two-thirds (2/3) of such executive's monthly base salary at the time of termination.
For purposes of these agreements, "cause" is defined to mean, among other things, the executive's (i) breach of the agreement, (ii) failure to perform required employment services, (iii) misappropriation of AIMCO's funds or property, (iv) indictment, conviction, plea of guilty or plea of no contest to a crime involving fraud or moral turpitude, or (v) negligence, fraud, breach of fiduciary duty, misconduct or violation of law.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information available to the Company, as of March 1, 2003, with respect to OP Units of the Company held by (i) each director of the General Partner and the five most highly compensated executive officers of the General Partner who were serving as of December 31, 2001; (ii) all directors and executive officers as a group; and (iii) those persons known to the Company to be the beneficial owners (as determined under the rules of the Securities and Exchange Commission) of more than 5% of such OP Units. Unless otherwise indicated, each person has sole voting and investment power with respect to the securities beneficially owned by that person. The business address of each of the following directors and executive officers is 4582 South Ulster Street Parkway, Suite 1100, Denver, Colorado 80237, unless otherwise specified.
*Less than 1.0%
(1)Represents the number of OP Units and Class I High Performance Partnership Units ("Class I Units") beneficially owned, divided by the total number of OP Units and Class I Units outstanding.
(2)Includes 840,801 common OP Units and 1,589,372 Class I Units that represent 8.7% of OP Units outstanding and 66.8% of Class I Units outstanding, respectively. The 840,801 common OP Units include 179,735 common OP Units held by an entity in which Mr. Considine has sole voting and investment power, 2,300 common OP Units held by Titahotwo, RLLLP ("Titahotwo"), a Registered Limited Liability Limited Partnership in which Mr. Considine's brother is the trustee for the sole general partner and for which Mr. Considine disclaims beneficial ownership, and 157,698 common OP Units held by Mr. Considine's spouse, Elizabeth Considine, for which Mr. Considine disclaims beneficial ownership. All Class I Units are held by Titahotwo.
(3)Includes 317,875 Class I Units that represent 0.4% of OP Units outstanding and 13.4% of Class I Units outstanding, respectively. The Class I Units include 158,938 units held by two trusts established by Mr. Kompaniez for his children for which he serves as trustee and disclaims beneficial ownership. Also includes 36,535 common OP Units, 23,625 of which are held indirectly by a corporation in which Mr. Kompaniez has a 75% interest, and the 7,870 common OP Units attributable to the 25% stockholder unaffiliated with Mr. Kompaniez are excluded pursuant to a contractual arrangement that prohibits Mr. Kompaniez from exercising voting or dispositive power over the 7,870 common OP Units. Mr. Kompaniez has no pecuniary interest in nor beneficial ownership of these 7,870 common OP Units.
(4)Represents Class I Units, which constitute less than 1% of all Class I Units outstanding.
(5)Includes 877,616.50 common OP Units and 2,053,154 Class I Units, which represent less than 1% of OP Units outstanding and 86.3% of Class I Units outstanding, respectively.
(6)Represents OP Units.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
From time to time, we have entered into various transactions with certain of our executive officers and directors. We attempt to price such transactions based on fair market value, and believes that the transactions are on terms that are as favorable to us as could be achieved with unrelated third parties.
In 2002, we sold to a limited liability company owned by members of senior management and other employees of the Company (approximately 45% by a Considine family partnership, approximately 11% by Mr. Kompaniez and approximately 44% by other employees) an aggregate of 4,398 Class V High Performance Partnership Units, or Class V Units, for approximately $938,000. The sale was approved by AIMCO's stockholders at its 2002 Annual Stockholders' Meeting.
Based upon the total return of AIMCO's Class A Common Stock during 2001 and 2002, compared to the Morgan Stanley REIT Index, and a 23.2% minimum return, the Class III Units were valued at $0 as of January 1, 2003 and the allocable investment made by the holders of $1,792,764 was lost.
Based upon the total return of AIMCO's Class A Common Stock during 2001 and 2002, compared to the Morgan Stanley REIT Index, and a 23.2% minimum return, the Class IV Units were valued at $0 for the period of January 1, 2001 through December 31, 2002, however, the full measurement period ends on December 31, 2003.
Based on the total return of AIMCO's Class A Common Stock during 2002, compared to the Morgan Stanley REIT Index, and a 11% minimum return, the Class V Units were valued at $0 for the period of January 1, 2002 through December 31, 2002, however, the full measurement period ends on December 31, 2004.
We are currently proposing if approved by AIMCO's stockholders at its 2003 Annual Stockholders' Meeting to issue up to 5,000 Class VI High Performance Partnership Units to a limited liability company that we expect will be owned by members of senior management and other employees of the Company (approximately 40% by a Considine family partnership, approximately 10% by Mr. Kompaniez, and approximately 50% by other employees) for $958,000.
STOCK PURCHASE LOANS
From time to time, prior to the effectiveness of the Sarbanes-Oxley Act of 2002 in July 2002, AIMCO made loans to its executive officers to finance their purchase of shares of AIMCO Class A Common Stock from AIMCO. In February 2002, AIMCO sold to Mr. Robertson 68,603 shares of AIMCO Class A Common Stock for a purchase price of $3,000,009. The purchase price was equal to the closing price of AIMCO's Class A Common Stock on the New York Stock Exchange on the date of sale. In payment for such shares, Mr. Robertson executed a promissory note payable to AIMCO bearing interest at 6.75% per annum, payable quarterly, and due in 2012. In order to comply with the Sarbanes-Oxley Act of 2002, AIMCO no longer provides loans to executive officers and will not make any material modification to any existing loans to executive officers. The following table sets forth certain information with respect to stock purchase loans to executive officers.
LOANS RELATED TO HIGH PERFORMANCE UNITS
From time to time, prior to the effectiveness of the Sarbanes-Oxley Act of 2002 in July 2002, we made loans to certain of our executive officers and employees to finance their investment in High Performance Units through a limited liability company owned by a limited number of our employees. Each loan is a full recourse loan repayable pursuant to an installment payment or a payroll deduction plan. No such loans have been made to Messrs. Considine or Kompaniez. The following table sets forth certain information with respect to these loans. The employees named below are the Named Executive Officers. Other executive officers and non-executive officers who received loans are grouped in the "other employees" category. In order to comply with the Sarbanes-Oxley Act of 2002, we no longer provide loans to executive officers and will not make any material modification to any existing loans to executive officers. The following table sets forth certain information with respect to loans to executive officers.
ITEM 14.
ITEM 14. Controls and Procedures
Our principal executive officer and principal financial officer have within 90 days of the filing date of this annual report, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls since the date of evaluation. We do not believe any significant deficiencies or material weaknesses exist in our internal controls. Accordingly, no corrective actions have been taken.
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a)(1)
The financial statements listed in the Index to Financial Statements on Page of this report are filed as part of this report and incorporated herein by reference.
(a)(2)
The financial statement schedule listed in the Index to Financial Statements on Page of this report is filed as part of this report and incorporated herein by reference.
(a)(3)
The Exhibit Index is included on page 53 of this report and incorporated herein by reference.
(b)
Reports on Form 8-K for the quarter ended December 31, 2002:
None.
INDEX TO EXHIBITS (1)
EXHIBIT NO.
DESCRIPTION
2.1
Acquisition Agreement, dated as of June 28, 2000, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., NHP Management Company and AIMCO/NHP Properties, Inc., as Buyers, and Leo E. Zickler, Francis P. Lavin, Robert B. Downing, Mark E. Schifrin, Marc B. Abrams, and Richard R. Singleton, as Sellers (Exhibit 2.1 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, is incorporated herein by this reference)
2.2
Agreement and Plan of Merger, dated as of November 29, 2000, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., AIMCO/OTEF, LLC and Oxford Tax Exempt Fund II Limited Partnership (Annex A to AIMCO's Registration Statement on Form S-4 filed December 1, 2000, is incorporated herein by this reference)
2.3
Agreement and Plan of Merger, dated as of December 3, 2001, by and among Apartment Investment and Management Company, Casden Properties, Inc. and XYZ Holdings LLC (Exhibit 2.1 to AIMCO's Current Report on Form 8-K, filed December 6, 2001, is incorporated herein by this reference)
10.1
Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 29, 1994 as amended and restated as of October 1, 1998 (Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by this reference)
10.2
First Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of November 6, 1998 (Exhibit 10.9 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by this reference)
10.3
Second Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of December 30, 1998 (Exhibit 10.1 to Amendment No. 1 to AIMCO's Current Report on Form 8-K/A, filed February 11, 1999, is incorporated herein by this reference)
10.4
Third Amendment to Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of February 18, 1999 (Exhibit 10.12 to AIMCO's Annual Report on Form 10-K for the year ended December 31 1998, is incorporated herein by this reference)
10.5
Fourth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of March 25, 1999 (Exhibit 10.2 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, is incorporated herein by this reference)
10.6
Fifth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of March 26, 1999 (Exhibit 10.3 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999, is incorporated herein by this reference)
EXHIBIT NO.
DESCRIPTION
10.7
Sixth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of March 26, 1999 (Exhibit 10.1 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999, is incorporated herein by this reference)
10.8
Seventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of September 27, 1999 (Exhibit 10.1 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, is incorporated herein by this reference)
10.9
Eighth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of December 14, 1999 (Exhibit 10.9 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated herein by reference)
10.10
Ninth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of December 21, 1999 (Exhibit 10.10 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated hereby by reference)
10.11
Tenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of December 21, 1999 (Exhibit 10.11 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated herein by reference)
10.12
Eleventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of January 13, 2000 (Exhibit 10.12 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated herein by reference)
10.13
Twelfth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of April 19, 2000 (Exhibit 10.2 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, is incorporated herein by this reference)
10.14
Thirteenth Amendment to the Third and Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of August 7, 2000 (Exhibit 10.1 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2000, is incorporated herein by this reference)
10.15
Fourteenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of September 12, 2000 (Exhibit 10.1 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended September 30, 2000, is incorporated herein by this reference)
10.16
Fifteenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of September 15, 2000 (Exhibit 10.2 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended September 30, 2000, is incorporated herein by this reference)
10.17
Sixteenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of September 15, 2000 (Exhibit 10.3 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended September 30, 2000, is incorporated herein by this reference)
10.18
Seventeenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of November 10, 2000 (Exhibit 10.4 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended September 30, 2000, is incorporated herein by this reference)
10.19
Eighteenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of November 16, 2000 (Exhibit 10.19 to AIMCO's Annual Report on Form 10-K/A for the fiscal year 2000, is incorporated herein by this reference)
10.20
Nineteenth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of February 28, 2001 (Exhibit 10.20 to AIMCO's Annual Report on Form 10-K/A for the fiscal year 2000, is incorporated herein by this reference)
EXHIBIT NO.
DESCRIPTION
10.21
Twentieth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of March 19, 2001 (Exhibit 10.21 to AIMCO's Annual Report on Form 10-K/A for the fiscal year 2000, is incorporated herein by this reference)
10.22
Twenty-first Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of May 10, 2001 (Exhibit 10.1 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.23
Twenty-second Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of June 20, 2001 (Exhibit 10.2 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.24
Twenty-third Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 20, 2001 (Exhibit 10.3 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.25
Twenty-fourth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of August 1, 2001 (Exhibit 10.4 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.26
Twenty-fifth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 2, 2001 (Exhibit 10.5 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.27
Twenty-sixth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 2, 2001 (Exhibit 10.6 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.28
Twenty-seventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of July 2, 2001 (Exhibit 10.7 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended June 30, 2001, is incorporated herein by this reference)
10.29
Twenty-eighth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of March 25, 2002 (Exhibit 10.1 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended March 31, 2002, is incorporated herein by this reference)
10.30
Twenty-ninth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of March 11, 2002 (Exhibit 10.2 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended March 31, 2002, is incorporated herein by this reference)
10.31
Thirtieth Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of April 1, 2002 (Exhibit 10.3 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended March 31, 2002, is incorporated herein by this reference)
10.32
Thirty-first Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of April 10, 2002 (Exhibit 10.4 to the Quarterly Report on Form 10-Q of AIMCO Properties, L.P. for the quarterly period ended March 31, 2002, is incorporated herein by this reference)
10.33
Thirty-second Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of May 14, 2002 (Exhibit 10.1 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, is incorporated herein by this reference)
EXHIBIT NO.
DESCRIPTION
10.34
Thirty-third Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of November 27, 2002 (Exhibit 10.34 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by this reference)
10.35
Fourth Amended and Restated Credit Agreement ("BofA Credit Agreement") among Apartment Investment and Management Company, AIMCO Properties, L.P., AIMCO/Bethesda Holdings, Inc., NHP Management Company, Bank of America, N.A., Fleet National Bank, First Union National Bank, and the other financial institutions party thereto, dated as of March 11, 2002 (Exhibit 10.29 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference)
10.35.1
Second Amendment to Fourth Amended and Restated Credit Agreement, dated as of August 2, 2002, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., AIMCO/Bethesda Holdings, Inc., NHP Management Company, Bank of America, N.A. and the Lenders listed therein (Exhibit 10.2 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 is incorporated herein by this reference)
10.35.2
Fifth Amended and Restated Credit Agreement, dated as of February 14, 2003, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., AIMCO/Bethesda Holdings, Inc., NHP Management Company, Bank of America, N.A. and the Lenders listed therein (Exhibit 10.35.2 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by this reference)
10.36
Payment Guaranty (Revolver Guarantors), dated as of March 11, 2002, by the guarantor signors thereto in favor of Bank of America, N.A. and the lenders party to the BofA Credit Agreement (Exhibit 10.30 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference)
10.37
Payment Guaranty (Casden Guarantors), dated as of March 11, 2002, by the guarantor signors thereto in favor of Bank of America, N.A. and the lenders party to the BofA Credit Agreement (Exhibit 10.31 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference)
10.38
Interim Credit Agreement ("Lehman Credit Agreement") among Apartment Investment and Management Company, AIMCO Properties, L.P., NHP Management Company, Lehman Commercial Paper, Inc., and the other financial institutions party thereto, dated as of March 11, 2002 (Exhibit 10.32 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference)
10.38.1
Second Amendment, dated as of August 2, 2002, to the Interim Credit Agreement, dated as of March 11, 2002, by and among AIMCO Properties, L.P., NHP Management Company, Apartment Investment and Management Company, Lehman Commercial Paper Inc., Lehman Brothers Inc., and each lender from time to time party thereto (Exhibit 10.3 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 is incorporated herein by this reference)
10.38.2
Third Amendment, dated as of February 14, 2003 to the Interim Credit Agreement, dated as of March 11, 2002, by and among AIMCO Properties, L.P., NHP Management Company, Apartment Investment and Management Company, Lehman Commercial Paper Inc., Lehman Brothers Inc., and each lender from time to time party thereto (Exhibit 10.38.2 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by this reference)
10.39
Payment Guaranty (Casden Guarantors), dated as of March 11, 2002, by the guarantor signors thereto in favor of Lehman Commercial Paper, Inc. and the lenders party to the Lehman Credit Agreement (Exhibit 10.33 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference)
10.40
Payment Guaranty (Non-Casden Guarantors), dated as of March 11, 2002, by the guarantor signors thereto in favor of Lehman Commercial Paper, Inc. and the lenders party to the Lehman Credit Agreement (Exhibit 10.34 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by this reference)
EXHIBIT NO.
DESCRIPTION
10.41
Consent and Voting Agreement, dated December 3, 2001, by and among Apartment Investment and Management Company, certain stockholders of Casden Properties, Inc., and Casden Park, La Brea, Inc., set forth on the signature pages thereto (Exhibit 2.2 to AIMCO's Current Report on Form 8-K, filed December 6, 2001, is incorporated herein by this reference)
10.42
Master Indemnification Agreement, dated December 3, 2001, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., XYZ Holdings LLC, and the other parties signatory thereto (Exhibit 2.3 to AIMCO's Current Report on Form 8-K, filed December 6, 2001, is incorporated herein by this reference)
10.43
Tax Indemnification and Contest Agreement, dated December 3, 2001, by and among Apartment Investment and Management Company, National Partnership Investments, Corp., and XYZ Holdings LLC and the other parties signatory thereto (Exhibit 2.4 to AIMCO's Current Report on Form 8-K, filed December 6, 2001, is incorporated herein by this reference)
10.44
Purchase Agreement, dated March 21, 2002, by and among Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers Equity Income Fund, Inc. and Apartment Investment and Management Company (Exhibit 1.1 to AIMCO's Current Report on Form 8-K, dated March 25, 2002, is incorporated herein by this reference)
10.45
Placement Agency Agreement, dated March 21, 2002, by and among Apartment Investment and Management Company, AIMCO Properties, L.P., Merrill Lynch & Co., and Merrill Lynch, Pierce, Fenner & Smith Incorporated (Exhibit 1.2 to AIMCO's Current Report on Form 8-K, dated March 25, 2002, is incorporated herein by this reference)
10.46
Employment Contract, executed on July 29, 1994, by and between AIMCO Properties, L.P., and Peter Kompaniez (Exhibit 10.44A to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by this reference)*
10.47
Employment Contract executed on July 29, 1994 by and between AIMCO Properties, L.P. and Terry Considine (Exhibit 10.44C to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by this reference)*
10.48
Apartment Investment and Management Company 1998 Incentive Compensation Plan (Annex B to AIMCO's Proxy Statement for Annual Meeting of Stockholders to be held on May 8, 1998, is incorporated herein by this reference)*
10.49
Apartment Investment and Management Company 1997 Stock Award and Incentive Plan (October 1999) (Exhibit 10.26 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated herein by this reference) *
10.50
Form of Restricted Stock Agreement (1997 Stock Award and Incentive Plan) (Exhibit 10.11 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, is incorporated herein by this reference)*
10.51
Form of Incentive Stock Option Agreement (1997 Stock Award and Incentive Plan) (Exhibit 10.42 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by this reference)*
10.52
Apartment Investment and Management Company Non-Qualified Employee Stock Option Plan, adopted August 29, 1996 (Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, is incorporated herein by this reference)*
10.53
Amended and Restated Apartment Investment and Management Company Non-Qualified Employee Stock Option Plan (Annex B to AIMCO's Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 1997, is incorporated herein by this reference)*
10.54
The 1994 Stock Incentive Plan for Officers, Directors and Key Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P., and Subsidiaries (Exhibit 10.40 to Annual Report on Form 10-K of Ambassador Apartments, Inc. for the year ended December 31, 1997, is incorporated herein by this reference)*
EXHIBIT NO.
DESCRIPTION
10.55
Amendment to the 1994 Stock Incentive Plan for Officers, Directors and Key Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P. and Subsidiaries (Exhibit 10.41 to Ambassador Apartments, Inc. Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by this reference)*
10.56
The 1996 Stock Incentive Plan for Officers, Directors and Key Employees of Ambassador Apartments, Inc., Ambassador Apartments, L.P., and Subsidiaries, as amended March 20, 1997 (Exhibit 10.42 to Ambassador Apartments, Inc. Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by this reference)*
10.57
Insignia 1992 Stock Incentive Plan, as amended through March 28, 1994 and November 13, 1995 (Exhibit 10.1 to Insignia Financial Group, Inc. Annual Report on Form 10-K for the year ended December 31, 1997, is incorporated herein by this reference)*
10.58
NHP Incorporated 1990 Stock Option Plan (Exhibit 10.9 to NHP Incorporated Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by this reference)*
10.59
NHP Incorporated 1995 Incentive Stock Option Plan (Exhibit 10.10 to NHP Incorporated Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by this reference)*
10.60
Summary of Agreement for Sale of Stock to Executive Officers (Exhibit 10.104 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by this reference)*
21.1
List of Subsidiaries
23.1
Consent of Ernst & Young LLP
99.1
Agreement re: disclosure of long-term debt instruments
99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1)Schedule and supplemental materials to the exhibits have been omitted but will be provided to the Securities and Exchange Commission upon request.
*Management contract
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 25th day of March, 2003.
AIMCO PROPERTIES, L.P.
By: AIMCO-GP, Inc., its General Partner
/s/ TERRY CONSIDINE Terry Considine
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ TERRY CONSIDINE Terry Considine
Chairman of the Board and Chief Executive Officer
March 25, 2003
PETER K. KOMPANIEZ Peter K. Kompaniez
Vice Chairman, President and Director
March 25, 2003
/s/ PAUL J. MCAULIFFE Paul J. McAuliffe
Executive Vice President and
Chief Financial Officer
March 25, 2003
/s/ THOMAS C. NOVOSEL Thomas C. Novosel
Senior Vice President and
Chief Accounting Officer
March 25, 2003
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Terry Considine, certify that:
1.I have reviewed this annual report on Form 10-K of AIMCO Properties, L.P.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003
/s/ TERRY CONSIDINE Terry Considine
Chairman and Chief Executive Officer of AIMCO-GP, Inc.,
(equivalent of chief executive officer of AIMCO Properties, L.P.)
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Paul J. McAuliffe, certify that:
1.I have reviewed this annual report on Form 10-K of AIMCO Properties, L.P.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003
/s/ PAUL J. MCAULIFFE Paul J. McAuliffe
Executive Vice President and Chief Financial Officer of AIMCO-GP, Inc.
(equivalent of chief financial officer of AIMCO Properties, L.P.)
AIMCO PROPERTIES, L.P.
REPORT OF INDEPENDENT AUDITORS
The Partners
AIMCO Properties, L.P.
We have audited the accompanying consolidated balance sheets of AIMCO Properties, L.P. as of December 31, 2002 and 2001, and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AIMCO Properties, L.P. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Partnership adopted Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," as of January 1, 2002. As a result, the accompanying consolidated financial statements for 2001 and 2000, referred to above, have been restated to conform to the presentation adopted in 2002 in accordance with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 7, 2003
except for Note 28, as to which the date is February 14, 2003
AIMCO PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001
(In Thousands)
See notes to consolidated financial statements.
AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands, Except Per Unit Data)
See notes to consolidated financial statements.
AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
See notes to consolidated financial statements.
AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
See notes to consolidated financial statements.
AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands)
See notes to consolidated financial statements.
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1 - Organization
AIMCO Properties, L.P., a Delaware limited partnership (the "Partnership" and together with its consolidated subsidiaries and other controlled entities, the "Company"), was formed on May 16, 1994 to conduct the business of acquiring, redeveloping, leasing, and managing multifamily apartment communities. The Partnership's securities include Partnership Common Units ("common OP Units"), Partnership Preferred Units ("preferred OP Units"), and High Performance Partnership Units ("High Performance Units"), which are collectively referred to as "OP Units." Apartment Investment and Management Company ("AIMCO") is the owner of the General Partner - AIMCO-GP, Inc. - and Special Limited Partner - AIMCO-LP, Inc., as defined in the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P. as amended (the "Partnership Agreement"). The General Partner and Special Limited Partner hold common OP Units of the Partnership. In addition, AIMCO (through the General Partner and Special Limited Partner) is the primary holder of outstanding preferred OP Units. The Limited Partners (as defined in the Partnership Agreement) of the Partnership are individuals or entities that own common OP Units or preferred OP Units other than AIMCO, the General Partner or the Special Limited Partner. After holding the common OP Units for one year, the Limited Partners have the right to redeem their common OP Units for cash, subject to the prior right of the Partnership to elect to acquire some or all of the common OP Units tendered for redemption for cash or in exchange for shares of AIMCO Class A Common Stock. Common OP Units redeemed for AIMCO Class A Common Stock are generally on a one-for-one basis (subject to antidilution adjustments). Preferred OP Units may or may not be redeemable based on their respective terms, as provided for in the Partnership Agreement. Except as the context otherwise requires, "AIMCO" refers to AIMCO and AIMCO's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively.
The Partnership, through its operating divisions and subsidiaries, holds substantially all of AIMCO's assets and manages the daily operations of AIMCO's business and assets. All employees of the Company are employees of the Partnership; AIMCO has no employees.
AIMCO is required to contribute to the Partnership all proceeds from offerings of its securities. In addition, substantially all of AIMCO's assets must be owned through the Partnership; therefore, AIMCO is generally required to contribute to the Partnership all assets acquired. In exchange for the contribution of offering proceeds or assets, AIMCO receives additional interests in the Partnership with similar terms (i.e., if AIMCO contributes proceeds of a preferred stock offering, AIMCO (through the General Partner and Special Limited Partner) receives preferred OP Units).
AIMCO frequently consummates transactions for the benefit of the Partnership. For legal, tax or other business reasons, AIMCO may hold title or ownership of certain assets until they can be transferred to the Partnership. However, the Partnership has a controlling financial interest in substantially all of AIMCO's assets in the process of transfer to the Partnership.
As of December 31, 2002, the Company owned or managed a portfolio of 1,788 apartment properties (individually a "property" and collectively the "properties") containing 318,152 apartment units located in 47 states, the District of Columbia and Puerto Rico. Based on apartment unit data compiled by the National Multi Housing Council, as of December 31, 2002, the Company was the largest owner and operator of apartment properties in the United States. The Company serves approximately one million residents per year.
As of December 31, 2002, the Company:
•owned a controlling equity interest in 187,506 apartment units in 728 properties (which the Company refers to as "consolidated");
•owned a non-controlling equity interest in 73,924 apartment units in 511 properties (which the Company refers to as "unconsolidated"), of which 64,937 apartment units were managed by us; and
•provided services or managed, for third party owners, 56,722 apartment units in 549 properties, primarily pursuant to long-term agreements (includes 45,187 apartment units in 448 properties that are asset managed only, and not also property managed).
At December 31, 2002, the Partnership had 103,452,171 common OP Units, 41,293,016 preferred OP Units and 2,379,084 High Performance Units (includes only those units that have met the required measurement benchmarks and are dilutive - see Note 20) outstanding.
NOTE 2 - Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Partnership, its majority owned subsidiaries and consolidated real estate partnerships. Pursuant to a Management and Contribution Agreement between the Partnership and AIMCO, the Partnership has acquired, in exchange for interests in the Partnership, the economic benefits of subsidiaries of AIMCO in which the Partnership does not have an interest, and AIMCO has granted the Partnership a right of first refusal to acquire such subsidiaries' assets for no additional consideration. Pursuant to the agreement, AIMCO has also granted the Partnership certain rights with respect to assets of such subsidiaries. Effective January 1, 2001, as a result of the Company acquiring all of the voting stock of certain previously unconsolidated subsidiaries, the Company began consolidating the results of operations of these subsidiaries (see Note 6). As used herein, and except where the context otherwise requires, "partnership" refers to a limited partnership or a limited liability company and "partner" refers to a limited partner in a limited partnership or a member in a limited liability company. Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. All significant intercompany balances and transactions have been eliminated in consolidation. The assets of consolidated real estate partnerships owned or controlled by AIMCO or the Partnership generally are not available to pay creditors of AIMCO or the Partnership.
Impairment of Long-Lived Assets
Real estate and other long-lived assets are recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, the Company will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company would recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. As of December 31, 2002, management believes that no impairments exist based on periodic reviews. No impairment losses were recognized for the years ended December 31, 2002, 2001 and 2000.
Real Estate and Depreciation
Direct costs associated with the acquisition of ownership or control of properties are capitalized as a cost of the assets acquired, and are depreciated over the estimated useful lives of the related assets. "Initial Capital Expenditures" or "ICE" are those costs considered necessary by the Company in its investment decision to correct deferred maintenance or improve a property. "Capital Enhancements" are costs incurred that add a material new feature or increase the revenue potential of a property. ICE and Capital Enhancement costs are capitalized and depreciated over the estimated useful lives of the related assets, generally 5 - 15 years.
Expenditures in excess of $250 that maintain an existing asset, which has a useful life of more than one year are capitalized as "Capital Replacement" expenditures and depreciated over the estimated useful life of the asset. Expenditures for ordinary repairs, maintenance and apartment turnover costs are expensed as incurred.
In 2001, the Company completed a comprehensive review of its real estate related depreciation including property-by-property analyses of more than 500 properties producing more than 90% of the Company's Free Cash Flow from real estate. As a result of this review, the Company has changed its estimate of the remaining useful lives for its real estate assets. Effective July 1, 2001 for certain assets and October 1, 2001 for the majority of the portfolio, the Company extended the useful lives of the assets from a weighted average composite life of 25 years, to a weighted average composite life of 30 years. This change increased net income by approximately $85 million, or $0.86 per diluted unit and $36 million, or $0.42 per diluted unit for 2002 and 2001, respectively. The Company believes the change reflects the remaining useful lives of the assets and is consistent with prevailing industry practice.
Depreciation is calculated on the straight-line method based on a 13 to 40 year life for buildings and improvements and five years for furniture, fixtures and equipment.
Redevelopment and Other Capital Expenditure Activities
The Company capitalizes direct and indirect costs (including interest, real estate taxes and other costs) in connection with the redevelopment, ICE, Capital Enhancement and Capital Replacement needs of its owned or controlled properties. Indirect costs that do not relate to the above activities, including general and administrative expenses are charged to expense as incurred. Interest and other costs of $18.0 million and $40.7 million, $16.8 million and $48.1 million, and $10.1 million and $15.6 million were capitalized for the years ended December 31, 2002, 2001 and 2000, respectively. Capitalized costs are included in redevelopment, ICE, and Capital Replacement and Capital Enhancement spending and are reflected in associated returns from these related assets.
Cash Equivalents
The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash includes capital replacement reserves, completion repair reserves, bond sinking fund amounts and tax and insurance impound accounts held by lenders.
Deferred Costs
Deferred financing fees and costs incurred in obtaining financing are capitalized and amortized over the terms of the related loan agreements and are charged to interest expense.
Deferred leasing commissions and concessions incurred in connection with leasing efforts are capitalized and amortized over the terms of the related lease and are charged to property operating expense.
Notes Receivable Primarily From Unconsolidated Real Estate Partnerships and Related Interest Income and Provision for Losses
Notes receivable primarily from unconsolidated real estate partnerships are carried at the lower of cost or fair value and consist substantially of subordinated notes receivable (where the Company is the general partner and issuer), the ultimate repayment of which is subject to a number of variables, including the performance and value of the underlying real estate property and the ultimate timing of such repayments. The notes receivable were either extended by the Company and are carried at the face amount plus accrued interest ("par value notes") or were made by predecessors whose positions have been acquired at a discount and are carried at the acquisition amount using the cost recovery method ("discounted notes"). Under the cost recovery method, the discounted notes are carried at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. The carrying amounts of notes receivable approximate their fair value in consideration of interest rates, market conditions and other qualitative factors (see Note 7).
The Company assesses the collectibility of each note on a periodic basis through a review of the collateral, the property operations, the value of the underlying real estate property and the borrower's ability to repay the loan. Loan losses on notes receivable are charged to expense and an allowance account is established when the Company believes the principal balance will not be fully recovered.
Income on the par value notes receivable is recorded as earned in accordance with the terms of the related loan agreements. The Company recognizes interest income earned from its investments in discounted notes receivable based upon whether the collectibility of such amounts is both probable and estimable. The accrual of interest on either par value or discounted notes is discontinued when, in the opinion of the Company, impairment has occurred in the value of the collateral property securing the loan. Income on nonaccrual loans, or loans that are otherwise not performing in accordance with their terms, is recorded on a cost recovery basis. Interest income is ultimately collected in cash or through foreclosure of the property securing the note or through obtaining an additional equity interest in the partnership that owns the property.
Based upon closed or pending transactions (which include sales, refinancings, foreclosures and rights offerings), the Company has determined that certain discounted notes are collectible for amounts greater than their carrying value. Accordingly, the Company is recognizing accretion income on certain discounted notes on a prospective basis over the estimated remaining life of the loans, equal to the difference between the carrying value of the discounted notes and the estimated collectible value.
Investments in Unconsolidated Real Estate Partnerships
The Company owns general and limited partnership interests in real estate partnerships that own apartment properties. Investments in real estate partnerships in which the Company has significant influence but does not have control are accounted for under the equity method. Under the equity method, the Company's pro-rata share of the earnings or losses of the entity for the periods being presented is included in equity in earnings (losses) from unconsolidated real estate partnerships (see Note 5).
Investments in Unconsolidated Subsidiaries
Effective January 1, 2001, the Company acquired control and began consolidating its previously unconsolidated subsidiaries (see Note 6). Prior to this date, the Company had significant influence but did not have control. Accordingly, such investments were accounted for under the equity method. Under the equity method, the Company's pro-rata share of the losses of the entity for the period being presented was included in equity in losses from unconsolidated subsidiaries. As a result of this consolidation in 2001, the results of operations of the investment management business increased substantially in 2001 over 2000.
Other Assets
Included in other assets is goodwill associated with the purchase of property management businesses that had previously been amortized on a straight-line basis over twenty years. Also included in other assets are other intangible assets for purchased management contracts that are amortized on a straight-line basis over terms ranging from five to twenty years. In July 2001, the FASB issued Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires the Company to perform impairment tests at least annually on all goodwill and other indefinite lived intangible assets. The Company adopted the requirements of SFAS 142 beginning January 1, 2002, and has completed the goodwill impairment testing required by SFAS 142 and did not identify any impairments. See Note 19 for the impact of the adoption of the non-amortization provision of SFAS 142 on net income and income from continuing operations and earnings per unit for the year ended December 31, 2002.
Minority Interest in Consolidated Real Estate Partnerships
Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners' share of the underlying net assets of the Company's consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners' excess of distributions over net income when the partnership has deficit equity, even though the Company does not suffer any economic effect, cost or risk. This charge is classified in the consolidated statements of income as distributions to minority partners in excess of income. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case the Company recognizes 100% of the losses in operating earnings, even though the Company does not suffer any economic effect, cost or risk. With regard to such consolidated real estate partnerships, approximately $7.0 million in losses related to the minority interest ownership were charged to operations for the year ended December 31, 2002, $1.9 million for the year ended December 31, 2001 and no losses were charged to operations for the year ended December 31, 2000.
Revenue Recognition
The Company's properties have operating leases with apartment residents with terms generally of twelve months or less. Rental revenue related to these leases is recognized on an accrual basis when due from residents in accordance with SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." In accordance with the Company's standard lease terms, rental payments are generally due on a monthly basis. Any concessions given at the inception of the lease are amortized over the life of the lease. Property management and asset management fees are recognized when earned.
Gain (Loss) on Dispositions of Real Estate and Discontinued Operations
As a result of the Company's adoption of Statement of Financial Accounting Standard No. 144, Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("SFAS 144") effective January 1, 2002, the Company now reports assets held for sale (as defined by SFAS 144) and assets sold in the current period as discontinued operations. As a result, gain (loss) on dispositions of real estate does not include any gain or loss associated with the disposal of consolidated properties that were classified as discontinued operations during 2002. For the year ended December 31, 2002, gain (loss) on dispositions of real estate only included gain or loss on disposals of real estate held by unconsolidated real estate partnerships and casualty gain or loss on all properties. For the periods ended December 31, 2001 and 2000, gain (loss) on dispositions of real estate included gain or loss associated with all properties.
For the year ended December 31, 2002, discontinued operations included the operations of the properties sold and classified as held for sale in 2002 and the associated gain (loss) on the disposition of the properties. For the year ended December 31, 2001 and 2000, discontinued operations included the 2001 and 2000 operations of the properties sold and classified as held for sale in 2002, while no gains or losses on assets sold in 2001 or 2000 were included.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally comprised of amounts receivable from residents and non-affiliated real estate partnerships for which the Company provides property management and other services. The Company evaluates all accounts receivable from residents and an allowance is established for amounts greater than 30 days past due. The accounts receivable relating to residents are presented net of an allowance for doubtful accounts of approximately $4.1 million and $1.9 million in 2002 and 2001, respectively. The Company evaluates all accounts receivable from non-affiliated real estate partnerships and an allowance is established for amounts greater than 120 days past due. The accounts receivable relating to non-affiliated real estate partnerships are presented net of an allowance for doubtful accounts of approximately $3.9 million and $1.6 million in 2002 and 2001, respectively.
Accounts Receivable and Allowance for Doubtful Accounts from Affiliates
Accounts receivable from affiliates are generally comprised of amounts receivable from real estate partnerships in which the Company has an ownership interest related to property management and other services provided to the real estate partnerships. The Company evaluates all accounts receivable balances from affiliates on a periodic basis, and an allowance is established for the amounts deemed to be uncollectible. The accounts receivable from affiliates are presented net of an allowance for doubtful accounts of approximately $4.1 million and $5.6 million in 2002 and 2001, respectively.
Derivative Financial Instruments
The Company predominately uses long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid, among other things, risk related to fluctuating interest rates. Where the Company does use variable-rate debt, occasionally the Company enters into short-term economic hedges, such as interest rate swap agreements and interest rate cap agreements, to reduce its exposure to interest rate fluctuations. The interest rate swap agreements are generally utilized by the Company to modify the Company's exposure to interest rate risk by converting the variable-rate debt to a fixed rate. The interest rate cap agreements utilized by the Company effectively limit the Company's exposure to interest rate risk by providing a ceiling on the underlying variable rate debt. Normally, the interest rate caps are embedded within the original debt contract and are considered clearly and closely related to the debt contract and, therefore, are not measured as separate derivative instruments. Free standing interest rate exchange agreements were not material.
Insurance
Management believes that the Company's insurance coverages insure its properties adequately against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood and other perils. AIMCO Assurance Ltd., a Bermuda domiciled insurer wholly owned by the Company, has a reinsurance contract with a third party provider to cover 100% of the first $1
million loss from any casualty related to the conventional properties. The affordable properties are insured for the first $1 million through an independent third party carrier. For the policy year ending February 28, 2003, the Company was insured for any casualty loss in excess of $1 million, up to $230 million, by a combination of several "excess" insurance providers, all of which were at least A-rated. For the policy year ending February 28, 2003, the Company also has retained an annual aggregate exposure of $4 million above the first $1 million per occurrence. As a result of the Terrorism Risk Insurance Act of 2002, the Company is currently evaluating the price of offers, mandated by the legislation, to purchase terrorism insurance. In addition to the above, the Company has self-insured retentions in workers' compensation liability coverage. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience and are recorded in the operations of the investment management business.
Income Taxes
Income or losses of the Partnership are allocated to the partners of the Partnership for inclusion in their respective income tax returns. Accordingly, no provision or benefit for income taxes has been made in the accompanying financial statements. AIMCO has elected to be taxed as a Real Estate Investment Trust (REIT), as defined under the Internal Revenue Code of 1986, as amended. In order for AIMCO to qualify as a REIT, at least 95% of AIMCO's gross income in any year must be derived from qualifying sources. The activities of subsidiaries engaged in the investment management business are not qualifying sources.
As a REIT, AIMCO generally will not be subject to United States Federal income taxes at the corporate level on its net income that is distributed to its stockholders if it distributes at least 90% (95% prior to 2001) of its REIT taxable income to its stockholders. REITs are also subject to a number of other organizational and operational requirements. If AIMCO fails to qualify as a REIT in any taxable year, its taxable income will be subject to United States Federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if AIMCO qualifies as a REIT, it may be subject to certain state and local income taxes and to United States Federal income and excise taxes on its undistributed income.
Certain taxable REIT subsidiaries of the Company account for income taxes using the liability method. Deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for Federal income tax purposes, and are measured using the enacted tax rates and laws that will be in effect when the differences reverse.
Earnings Per Unit
Earnings per unit is calculated based on the weighted average number of common and common OP Unit equivalents and dilutive convertible units and securities outstanding during the period. Diluted earnings per unit also includes the effect of potential issuances of additional common OP Units if stock options and warrants were exercised or converted into AIMCO Class A Common Stock (see Note 18).
Fair Value of Financial Instruments
The aggregate fair value of the Company's cash and cash equivalents, receivables, payables and short-term secured debt as of December 31, 2002 approximates their carrying value due to their relatively short-term nature. Management further believes that the fair value of the Company's variable rate secured tax-exempt bond debt and secured long-term debt approximate their carrying value. For the fixed rate secured tax-exempt bond debt and secured long-term debt, fair values have been based on estimates using present value techniques (see Note 3). These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent market quotes and, in many cases, may not be realized in immediate settlement of the instrument.
Concentration of Credit Risk
Financial instruments that potentially could subject the Company to significant concentrations of credit risk consist principally of notes receivable primarily from unconsolidated real estate partnerships. Concentrations of credit risk with respect to notes receivable primarily from unconsolidated real estate partnerships are limited due to the large number of partnerships comprising the Company's partnership base, the geographic diversity of the underlying properties, and the number of partnership distributions.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States 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.
Reclassifications
Certain items included in the 2001 and 2000 financial statements amounts have been reclassified to conform to the 2002 presentation.
NOTE 3 - Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.
Cash and cash equivalents
The carrying amounts of cash and cash equivalents reported in the balance sheet for cash and short-term investments classified as cash equivalents approximate those assets' fair value.
Bonds receivable and retained residual interest
The carrying amounts of bonds receivable and retained residual interests included in other assets in the balance sheet approximate those assets' fair values. The Company generally estimates fair value of the bonds receivable and the retained residual interests based on the present value of future expected cash flows of the bonds, which are derived from the underlying properties' operations. The fair value of both the bonds receivable and the retained residual interests, based on the underlying properties that secure the bonds, are estimated using management's best estimates of the key assumptions - capitalization rates and discount rates commensurate with the risks involved.
Mortgages payable
The fair value of the Company's borrowings under its variable rate agreements approximate their carrying value. The fair value for the Company's fixed-rate debt agreements is estimated based on the quoted market prices for the same or similar issues. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent market quotes and, in many cases, may not be realized in immediate settlement of the instrument. The carrying amount of accrued interest approximates fair value. These balances do not include liabilities related to assets classified as held for sale as these are considered short-term liabilities and their carrying values are considered to approximate their fair values.
The carrying amounts and fair values of the Company's financial instruments at December 31, 2002 and 2001 are as follows (in thousands):
NOTE 4 - Mergers and Acquisitions
Casden Merger
On March 11, 2002, AIMCO completed the acquisition of Casden Properties Inc. ("Casden") pursuant to an Agreement and Plan of Merger dated as of December 3, 2001, by and among AIMCO, Casden and XYZ Holdings LLC. The acquisition of Casden included the merger of Casden into AIMCO, and the merger of a subsidiary of AIMCO into another REIT affiliated with Casden (collectively, the "Casden Merger"). The approximately $1.1 billion acquisition is comprised of the following:
•17 properties comprised of 4,975 conventional apartment units located in Southern California;
•99 properties comprised of 11,027 affordable apartment units located in 25 states; and
•National Partnership Investments Corp. ("NAPICO"), a subsidiary of Casden, which as general and/or limited partner of numerous limited partnerships has interests in more than 400 properties with more than 41,000 units.
In addition, as part of the Casden Merger, AIMCO has committed to do the following:
•purchase two properties currently under development that will have a total of 1,731 units, for minimum deferred consideration of $619 million, which is payable upon satisfactory completion and attainment of 60% occupancy (on November 27, 2002, AIMCO purchased one phase of one of the properties comprising 250 units for $55.5 million);
•provide a stand-by facility of $70 million in debt financing associated with the two properties under development (as of December 31, 2002, no funds have been drawn on this stand-by facility); and
•invest up to $50 million for a 20% limited liability company interest in Casden Properties, LLC, a newly formed company controlled by third parties. As of December 31, 2002, the Company had invested $11.7 million. Casden Properties, LLC acts as general contractor for the entity that is developing the two properties AIMCO has committed to purchase. In addition, Casden Properties, LLC intends to pursue new development opportunities in Southern California and other markets. AIMCO will have an option, but not an obligation to purchase, at completion, all multifamily rental projects developed by Casden Properties, LLC.
AIMCO paid approximately $1.1 billion, which included an earnout of $15 million as a result of property performance for the period ended December 31, 2001. AIMCO issued 3.508 million shares of AIMCO Class A Common Stock and the Partnership issued 882,784 common OP Units (valued at $164.9 million and $41.5 million, respectively, based on $47 per share/unit), paid approximately $198 million in cash and acquired title subject to existing mortgage indebtedness of approximately $685 million, and assumed short-term indebtedness of approximately $48 million. AIMCO also incurred approximately $15 million in transaction costs comprised largely of professional fees, which included legal, accounting, tax and acquisition due diligence. This transaction was accounted for as a purchase, and as a result, the results of operations were included in the consolidated statements of income from the date of acquisition. AIMCO contributed substantially all of the assets and liabilities acquired in the Casden Merger to the Partnership. The aggregate purchase price of $1.1 billion (including AIMCO's transaction costs of $15.0 million) was recorded as follows (in thousands):
The allocation of the purchase price of Casden is based upon preliminary estimates and is subject to final resolution of certain contingent liabilities and other evaluations of fair value. Therefore, the allocations reflected above may differ from the amounts ultimately determined.
In connection with the Casden Merger, the Company borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan (the "Casden Loan") to pay the cash required to complete the Casden Merger. During 2002, the Company repaid approximately 60% of the Casden Loan principally with portions of the proceeds from AIMCO's public offering of AIMCO Class A Common Stock, AIMCO's offering of Class R Cumulative Preferred Stock, property sales and other net cash flow from operations. The outstanding balance on the Casden Loan was $115 million at December 31, 2002.
New England Properties Acquisition
On August 29, 2002, the Company completed the acquisition of certain New England area properties (the "New England Properties Acquisition") pursuant to a definitive agreement dated as of July 10, 2002, by and among the Partnership, Thomas J. Flatley and others. In this acquisition, the Company acquired 11 conventional garden and mid-rise apartment properties located primarily in the greater Boston, Massachusetts area. These properties include 4,323 units located on approximately 553 acres in the aggregate. The total cost of the acquisition included a purchase price of $500 million for the properties, $2.5 million in transaction costs and $34.2 million of initial capital expenditures (of which $28 million will be spent to complete a kitchen and bath program and $6.2 million will be spent to address other identified property needs). The acquisition was funded through a combination of non-recourse property debt of $308.7 million in long-term, fixed rate, fully amortizing notes with an average interest rate of 5.69%; and $200 million from the Company's credit facility. The Company expects to repay the facility with net cash flow from operations and proceeds from property sales. The Company accounted for this transaction as a purchase, and as a result, the results of operations were included in the consolidated statements of income from the date of acquisition. The current allocation of the purchase price of the New England Properties Acquisition is based upon preliminary estimates and is subject to final resolution of certain contingent liabilities and other evaluations of fair value.
In connection with the New England Properties Acquisition, the Company entered into an exchange agreement with a third party intermediary on 10 of the 11 properties. This agreement was for a maximum term of 180 days and allowed the Company to pursue favorable tax treatment on other properties sold by the Company within this period. During this 180-day period, that ended on February 25, 2003, the third party intermediary was the legal owner, although the Company retained all
of the economic benefits and risks associated with these properties and had indemnified the third party intermediary. As of the expiration of the 180-day period, the Company has taken legal ownership of all of these properties.
Oxford Tax Exempt Fund
On March 26, 2001, the Company completed a merger pursuant to an agreement entered into on November 29, 2000 between AIMCO and Oxford Tax Exempt Fund II Limited Partnership ("OTEF"), for a total purchase price of $270 million, comprised of $100 million in AIMCO's Class P Convertible Cumulative Preferred Stock (the "Class P Preferred Stock"), $106 million in AIMCO Class A Common Stock issued at $48.46 per share (2.185 million shares of AIMCO Class A Common Stock), $17 million in cash, and $47 million in assumed liabilities. OTEF merged with a subsidiary of the Partnership. In connection with the Company's acquisition of interests in properties (the "Oxford properties") from affiliates of Oxford Realty Financial Group, Inc., on September 20, 2000, the Company had acquired interests in OTEF's managing general partner and OTEF's associate general partner. OTEF was a publicly traded master limited partnership that invested primarily in tax-exempt bonds issued to finance properties owned by affiliates of OTEF, including the Oxford properties. In the merger, each beneficial interest was converted into the right to receive 0.299 shares of AIMCO Class A Common Stock and 0.547 shares of AIMCO's Class P Preferred Stock. In addition, the beneficial interest holders received a special distribution of $50 million, or $6.21 per beneficial interest. This transaction was accounted for as a purchase, and as a result, the results of operations were included in the consolidated statement of income from the date of acquisition. Subsequent to the merger, the Company sold certain of the tax-exempt bond receivables, with a carrying value of $246.8 million, to an unrelated third party at a discount to their face amount and retained a residual interest in those bonds. The fair value of the Company's retained residual interests was based on the future cash flows from the bonds. In 2001, the Company received net proceeds of approximately $253.3 million and recognized gains of $26.1 million on the sale of these tax-exempt bonds, which included $19.6 million of retained residual interests (see Note 26). Approximately $23 million of tax-exempt bonds were not sold in 2001, of such amount; (i) $14 million were eliminated in consolidation and (ii) $9.0 million remained held by the Company and were classified with other assets. During 2002, in connection with the sale of certain assets, as well as additional proceeds received from the refinancing of the tax-exempt bonds of the underlying properties, the Company's retained residual interests were collected.
Oxford Properties
On September 20, 2000, the Company acquired all of the stock and other interests of the Oxford entities that were held by six executive officers and directors of the Oxford entities. The Oxford properties, which are owned by 166 separate partnerships, are 167 apartment communities including 36,949 units, located in 18 states. This transaction was accounted for as a purchase, and as a result, the results of operations were included in the consolidated statements of income from the date of acquisition. The purchase price of $1,189 million was comprised of $266 million in cash, $861 million of assumed liabilities and transaction costs and $62 million in common OP Units valued at $45 per unit. During 2001, the allocation of the purchase price was finalized, which resulted in changes to amounts included in the prior year financial statements.
Limited Partnership Acquisitions
During 2002 and 2001, the Company acquired limited partnership interests in 323 partnerships and 261 partnerships, respectively, in which affiliates of the Company served as a general partner. During 2002, the Company paid approximately $31.0 million, of which $27.7 million was in cash and the remainder in OP Units in connection with such tender offers, a portion of which related to increasing the ownership interest in consolidated real estate partnerships. During 2001, the Company paid approximately $178.0 million, of which $135.6 million was in cash and the remainder in OP Units in connection with such tender offers.
NOTE 5 - Investments in Unconsolidated Real Estate Partnerships
The Company owned general and limited partner interests in approximately 445 unconsolidated real estate partnerships at December 31, 2002, approximately 487 unconsolidated real estate partnerships at December 31, 2001 and approximately 625 unconsolidated real estate partnerships at December 31, 2000, respectively. The interests were acquired through acquisitions, direct purchases and separate offers to other limited partners. The Company's total ownership interests in these unconsolidated real estate partnerships range from 1% to 55%. However, based on the provisions of the partnership agreements, which grant varying degrees of control, the Company is not deemed to have control of these partnerships sufficient to require or permit consolidation for accounting purposes.
The following table provides selected combined financial information for the Company's unconsolidated real estate partnerships as of and for the years ended December 31, 2002, 2001 and 2000 (in thousands):
The decrease in the amounts in the above table from year to year was primarily due to dispositions and the Company's purchase of controlling interests in, and resultant consolidation of, various partnerships previously accounted for under the equity method.
As a result of the Company's acquisitions of interests in unconsolidated real estate partnerships, the investment in these partnerships at December 31, 2002 of $367.9 million is approximately $450 million in excess of the Company's share of the underlying historical net liabilities of the partnerships. The excess of the cost of the investments acquired over the equity in the underlying net liabilities is ascribed to the fair values of land and buildings owned by the unconsolidated real estate partnerships. The Company amortizes the excess basis related to the buildings over their estimated useful lives.
NOTE 6 - Investments in Unconsolidated Subsidiaries
In prior years, in order to satisfy certain requirements of the Internal Revenue Code applicable to AIMCO's status as a REIT, certain assets of the Company were held through unconsolidated subsidiaries in which the Partnership held non-voting preferred stock representing a 99% economic interest and certain officers and directors of AIMCO held all of the voting common stock, representing a 1% economic interest. As a result of the controlling ownership interest in the unconsolidated subsidiaries being held by others, the Company accounted for its interest in the unconsolidated subsidiaries using the equity method through December 31, 2000.
The REIT Modernization Act, which became effective January 1, 2001, among other things, permits REITS to own taxable REIT subsidiaries. Therefore, effective January 1, 2001, the Company acquired the 1% controlling ownership interest in the unconsolidated subsidiaries. As a result, the Company began consolidating these subsidiaries as of January 1, 2001.
The following table provides selected combined historical financial information for the Company's unconsolidated subsidiaries as of and for the year ended December 31, 2000 (in thousands):
NOTE 7 - Notes Receivable Primarily From Unconsolidated Real Estate Partnerships
The following table summarizes the Company's notes receivable primarily from unconsolidated real estate partnerships at December 31, 2002 and 2001 (in thousands):
As of December 31, 2002 and 2001, the Company held, primarily through its consolidated corporate subsidiaries, $85.6 million and $135.8 million, respectively, of par value notes receivable from unconsolidated real estate partnerships, including accrued interest. During 2002, the Company determined that an allowance for loan losses of $4.1 million was required on certain of its par value notes that had a carrying value of $10.5 million at December 31, 2002. No allowance for loan losses was recorded in 2001 on par value notes. Upon determining that less than the full amount of the notes was collectible, the Company ceased recording interest income on the impaired par value loans. The average recorded investment in the impaired par value loans for the year ended December 31, 2002 was $7.5 million. The Company believes the remaining $74.0 million in par value notes receivable is collectible and, therefore, interest income on these par value notes is recognized as it is earned. Interest income from par value notes for the years ended December 31, 2002, 2001 and 2000, totaled $26.6 million, $26.0 million, and $25.6 million, respectively.
As of December 31, 2002 and 2001, the Company held discounted notes, including accrued interest, with a carrying value of $89.0 million and $107.8 million, respectively. The total face value plus accrued interest of these notes was $167.2 million and $270.7 million in 2002 and 2001, respectively. During 2002, the Company recorded an allowance for loan losses of $1.3 million on discounted notes that had a carrying value of $9.3 million. No allowance for loan losses was recorded in 2001 on discounted notes. The average recorded investment in the impaired discounted loans for the year ended December 31, 2002 was $11.8 million.
The discounted notes are accounted for under the cost recovery method, which results in the discounted notes being carried at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. Based upon closed or pending transactions (which include sales, refinancing, foreclosures and rights offering activities), the Company has determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, the Company is recognizing accretion income, on a prospective basis over the estimated remaining life of the loans, equal to the difference between the carrying value of the discounted notes and the estimated collectible value. For the years ended December 31, 2002, 2001 and 2000, the Company recognized accretion income of approximately $36.8 million ($0.38 per basic unit and $0.37 per diluted unit), $9.9 million ($0.12 per basic and diluted unit), and $26.4 million ($0.35 per basic and diluted unit), respectively. These amounts are net of allocated expenses in 2002, 2001 and 2000 of $1.0 million, $4.4 million and $4.3 million, respectively. The notes receivable generally are realizable through collection of cash or obtaining ownership of the property or of an additional equity interest in the partnership owning the property.
The activity in the allowance for loan losses in total for both par value and discounted notes for the year ended December 31, 2002, is as follows (in thousands):
The Company will continue to monitor the collectibility or impairment of each note on a periodic basis, and changes in the required allowances may occur in the future due to changes in the market environment.
As of December 31, 2002 and 2001, the Company had $60.7 million and $53.7 million, respectively, in notes receivable that were secured by interests in real estate or interests in real estate partnerships. The Company earns interest on these notes receivable at various interest rates ranging between 7.0% and 12.5%.
NOTE 8 - Secured Tax-Exempt Bond Financing
The following table summarizes the Company's secured tax-exempt bond financing at December 31, 2002 and 2001, all of which is non-recourse to the Company (in thousands):
As of December 31, 2002, the scheduled principal amortization and maturity payments for the Company's secured tax-exempt bonds are as follows (in thousands):
At December 31, 2002, the Company's secured tax-exempt bond financing was secured by 90 properties with a combined net book value of $1,886.0 million.
NOTE 9 - Secured Notes Payable
The following table summarizes the Company's secured notes payable at December 31, 2002 and 2001, all of which are non-recourse to the Company (in thousands):
As of December 31, 2002, the scheduled principal amortization and maturity payments for the Company's secured notes payable are as follows (in thousands):
At December 31, 2002, the Company's secured notes payable was secured by 618 properties with a combined net book value of $6,976.8 million.
NOTE 10 - Term Loan
The Casden Loan was used to pay the cash required to complete the Casden Merger. Transaction costs (including advisory fees) incurred on the term loan were $12.2 million, which included $8.8 million of advisory fees (which are included as a cost of the Casden Merger in Note 4) and $3.4 million of deferred loan costs. During 2002, the Company repaid approximately 60% of the Casden Loan principally with portions of the proceeds from AIMCO's public offering of Class A Common Stock, AIMCO's offering of Class R Cumulative Preferred Stock, property sales and other net cash flow from operations. The weighted average interest rate on the Casden Loan at December 31, 2002 was 3.96%, and the balance outstanding was $115 million.
The financial covenants contained in the Casden Loan require the Company to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, and an interest coverage ratio of 2.25 to 1.0. In addition, the Casden Loan limits the Company from distributing more than 80% of its Funds From Operations (or such amounts as may be necessary for AIMCO to maintain its status as a REIT). On August 5, 2002, the Company and its lenders amended the Casden Loan, to reduce the fixed charge coverage ratio requirement from 1.70:1 to 1.60:1, effective for the quarter ended June 30, 2002 through the quarter ending June 30, 2003; 1.65:1 for the quarter ending September 30, 2003 through the quarter ending December 31, 2003; and 1.70:1 thereafter. The Casden Loan imposes minimum net worth requirements and provides other financial covenants related to certain of AIMCO's assets and obligations. The Casden Loan is secured by a first priority pledge of
the equity owned by AIMCO and certain subsidiaries of AIMCO in other subsidiaries of AIMCO and a second priority pledge of certain non-real estate assets of the Company. As of December 31, 2002, the Company was in compliance with all financial covenant requirements.
Subsequent to December 31, 2002, additional modifications were made to the loan covenants. See Note 28 for further information.
NOTE 11 - Credit Facility
On March 11, 2002, the Company amended and restated its revolving credit facility as necessitated by the execution of the Casden Loan, in order to conform certain provisions of the loans. The commitment remained $400 million, and there are ten lender participants in the facility's syndicate. The obligations under the amended and restated credit facility are secured by a first priority pledge of certain of the Company's non-real estate assets and a second priority pledge of the equity owned by AIMCO and certain subsidiaries of AIMCO in other subsidiaries of AIMCO. Borrowings under the amended and restated credit facility are available for general corporate purposes. The amended and restated credit facility matures in July 2004 and can be extended once at the Company's option, for a term of one year. The annual interest rate under the credit facility is based either on LIBOR or a base rate which is the higher of Bank of America, N.A.'s reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. From March 11, 2002 through the later of June 30, 2004 or the date on which the Casden Loan is paid in full, the margin ranges between 2.05% and 2.55%, in the case of LIBOR-based loans, and between 0.55% and 1.05%, in the case of base rate loans, based upon a fixed charge coverage ratio. The weighted average interest rate at December 31, 2002 was 3.97%, and the balance outstanding was $291.0 million. The amount available under the amended and restated credit facility at December 31, 2002 and 2001 was $109.0 million (less $4.2 million for outstanding letters for credit) and $186.5 million (less $5.1 million for outstanding letters for credit), respectively.
The financial covenants contained in the amended and restated revolving credit facility require the Company to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, and an interest coverage ratio of 2.25 to 1.0. In addition, the amended and restated revolving credit facility limits the Company from distributing more than 80% of its Funds From Operations (or such amounts as may be necessary for AIMCO to maintain its status as a REIT). On August 5, 2002, the Company and its lenders amended the amended and restated revolving credit facility, to reduce the fixed charge coverage ratio requirement from 1.70:1 to 1.60:1, effective for the quarter ended June 30, 2002 through the quarter ending June 30, 2003; 1.65:1 for the quarter ending September 30, 2003 through the quarter ending December 31, 2003; and 1.70:1 thereafter. The credit facility imposes minimum net worth requirements and provides other financial covenants related to certain of AIMCO's assets and obligations. As of December 31, 2002, the Company was in compliance with all financial covenant requirements.
Subsequent to December 31, 2002, additional modifications were made to the loan covenants. See Note 28 for further information.
NOTE 12 - Commitments and Contingencies
Legal
In addition to the matters described below, the Company is a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.
Limited Partnerships
In connection with the Company's acquisitions of interests in real estate partnerships, it is sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such real estate partnerships or violations of the relevant partnership agreements.
The Company may incur costs in connection with the defense or settlement of such litigation. The Company believes it complies with its fiduciary obligations and relevant partnership agreements. Although the outcome of any litigation is uncertain, the Company does not expect any such legal actions to have a material adverse affect on the Company's consolidated financial condition or results of operations taken as a whole.
Environmental
Various Federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to properly remedy, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of properties, the Company could potentially be liable for environmental liabilities or costs associated with its properties or properties it acquires or manages in the future.
There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. AIMCO has been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. Prior to March 31, 2002, the Company generally was insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, the Company's insurance coverage for property damage loss claims arising from the presence of mold has become more limited and generally includes only limited coverage for catastrophic property damage due to mold. In addition, since December 31, 2002, the Company's insurance coverage for personal injury claims related to mold exposure has also become more limited.
The Company has implemented protocols and procedures to prevent or eliminate mold from its properties and believes that its measures will eliminate, or at least minimize, the effects that mold could have on its residents. To date, the Company has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change, however, the Company can make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.
Other Legal Matters
In December 2001, AIMCO and certain of its affiliated partnerships that own properties voluntarily entered into an agreement with the United States Environmental Protection Agency ("EPA") and the United States Department of Housing and Urban Development ("HUD") pursuant to which AIMCO agreed to pay a fine of $130,000, conduct lead-based paint inspections and other testing, if necessary, on properties initially built prior to 1978, and re-issue lead-based paint disclosures to residents of such properties that have not been certified as lead-base paint free. In return, neither AIMCO nor its properties will be subject to any additional fines for inadequate disclosures prior to the execution of the agreement. The cost of the settlement, inspections and remediations incurred to date have been reserved for by the Company in connection with its portfolio acquisitions and mergers. Any remaining costs are not expected to be material.
In January 2002, AIMCO and four of its affiliated partnerships were named as defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco ("CCSF") in the Superior Court, County of San Francisco. The City Attorney asserts that the defendants have violated certain state and local residential housing codes, and engaged in unlawful business practices and unfair competition, in connection with four properties owned and operated by the affiliated partnerships. The City Attorney asserts civil penalties from $500 to $1,000 per day for each affected unit, as well as other statutory and equitable relief. In January 2003, the Company filed a cross-complaint against CCSF, its Department of Building Inspections and certain of its employees, alleging constitutional violations arising out of its arbitrary and discriminatory application of its codes, and other tortious conduct. In February 2003, CCSF and the other defendants named in the Company's cross-complaint removed the case to the United States District Court for the Northern District of California. As a result of the removal to Federal court, the trial date previously scheduled for July 7, 2003 in state court is doubtful, even if there is a remand of the case to the state court. The Company has engaged in preliminary discussions with the City Attorney to resolve the lawsuit, including a mediation session. In the event it is unable to resolve the lawsuit, the Company believes it has meritorious defenses to assert and it will vigorously defend itself against CCSF's claims, and
vigorously prosecute its own claims. Although the outcome of any litigation is uncertain, the Company does not believe that the ultimate outcome will have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.
National Program Services, Inc. and Vito Gruppuso (collectively "NPS") are insurance agents who in 2000 sold to the Company property insurance issued by National Union Fire Insurance Company of Pittsburgh, PA ("National Union"). The financial failure of NPS resulted in defaults in June 2002 under two agreements by which NPS indemnified the Company from losses relating to the matters described below. As a result of such defaults, the Company faces the risk of impairment of a $16.7 million insurance-related receivable as well certain contingent liabilities as more fully described below. The Company's receivable arose from the improper and premature cancellation by National Union of its property insurance coverage in April 2001. The Company had paid to National Union amounts in excess of $10 million in prepaid premiums for property insurance coverage that was to continue through at least April 2002. In addition, the Company has a $6.7 million receivable from NPS to reimburse it for payments on a premium finance agreement, proceeds of which were to pay premiums to National Union. The Company holds two $5 million surety bonds issued by Lumbermens Mutual Casualty Company ("Lumbermens") to secure the NPS indemnities. In addition, AIMCO has pending litigation in the United States District Court for the District of Colorado against National Union, First Capital Group, a New York based insurance wholesaler, NPS and other agents of National Union, for a refund of at least $10 million of the prepaid premium plus other damages resulting from the cancellation of the coverage. The cancellation of the property insurance coverage in 2001 has no effect on the Company's present property insurance coverage or on coverage that existed through April 2001.
With respect to the contingent liabilities arising from the NPS defaults, in November 2002, Cananwill, Inc., a premium funding company, commenced litigation in Superior Court, Morris County, New Jersey, against AIMCO and others, alleging a balance due of $5.7 million, plus interest and attorney's fees, on a premium finance agreement that funded premium payments made to National Union. AIMCO denies liability to Cananwill, believes it has meritorious defenses to assert, and it will vigorously defend itself. In the event of litigation and an adverse determination, the Company will seek reimbursement of any loss from the bonds securing the NPS indemnification agreements as well as from all third parties responsible for the misapplication of its payments.
In November 2002, AIMCO commenced an action against Lumbermens in the District Court, City and County of Denver, Colorado to recover on the two $5 million surety bonds securing the NPS indemnification agreements, which action was removed to the United States District Court for the District of Colorado. In December 2002, Lumbermens commenced a separate action in the United States District Court for the Southern District of New York seeking declarations of the invalidity of the surety bonds and damages. AIMCO and Lumbermens have engaged in preliminary settlement negotiations to resolve the litigation between them. Finally, in November 2002 AIMCO was served with a third party complaint served on it by XL Reinsurance American, Inc. ("XL") and Greenwich Insurance Company ("Greenwich"). XL, Greenwich, Lumbermens and others were named as defendants in this action filed in the United States District Court for the Southern District of New York by WestRM - West Risk Markets, Ltd. to collect on surety bonds issued by XL, Greenwich and Lumbermens allegedly to secure payment obligations due on a premium funding made by WestRM. XL and Greenwich assert that if they have any liability to WestRM, which they deny, then AIMCO is liable to XL and Greenwich pursuant to an alleged indemnification agreement. The Company believes it has meritorious defenses to assert and will vigorously defend itself against these claims, and vigorously prosecute its own claims.
Although the outcome of any claim or matter in litigation is uncertain, the Company does not believe that it will incur any material loss in connection with the insurance-related receivable or that the ultimate outcome of these separate but related matters will have a material adverse effect on the Company's consolidated financial condition or results of operations taken as a whole.
In 1998 and 1999, prior to the Casden Merger and the related NAPICO acquisition, investors holding limited partnership units in various limited partnerships of which NAPICO is the corporate general partner, commenced an action against NAPICO and certain other defendants. The claims related to activities that pre-dated the Casden Merger and included, but were not limited to, claims for breaches of fiduciary duty to the limited partners of certain NAPICO managed partnerships and violations of securities laws by making materially false and misleading statements in the consent solicitation statements sent to the limited partners of such partnerships. The actions were certified as a class action, and in October and November 2002 were tried in the United States District Court for the Central District of California. In November 2002, the jury returned special verdicts against NAPICO and certain other defendants in the amount of approximately $25.2 million for violations of securities laws and against NAPICO for approximately $67.3 million for breaches of fiduciary duty. In addition, the jury
awarded the plaintiffs punitive damages against NAPICO of approximately $92.5 million. On March 12, 2003, the Court heard oral argument on defendants' post-trial motions seeking to set aside or reduce the jury award and plaintiffs' motion for relief on their equitable claims and has taken those matters under submission. While the matter is not yet final and no judgment has been entered, the matter is the responsibility of the former shareholders of Casden pursuant to documents related to the Casden Merger, which was completed in March 2002. The Company does not believe that the ultimate outcome will have a material adverse effect on the Company's consolidated financial position or results of operations taken as a whole.
Operating Leases
The Company is obligated under office space and equipment non-cancelable operating leases. In addition, the Company subleases certain of its office space to tenants under non-cancelable subleases. Approximate minimum annual rentals under operating leases and approximate minimum payments to be received under annual subleases for the five years ending after December 31, 2002 are as follows (in thousands):
Substantially all of the office space and equipment subject to the operating leases described above are for the use of its corporate offices and regional operating centers. Rent expense recognized totaled $5.0 million, $4.5 million, and $5.6 million in 2002, 2001 and 2000, respectively, including amounts recognized in 2000 by the unconsolidated subsidiaries. Sublease receipts for 2002, 2001 and 2000 were not material.
NOTE 13 - Mandatorily Redeemable Convertible Preferred Securities
In connection with the Insignia merger in 1998, the Company assumed the obligations under Trust Based Convertible Preferred Securities with an aggregate liquidation amount of $149.5 million. The securities mature on September 30, 2016 and require distributions at the rate of 6.5% per annum, with quarterly distributions payable in arrears. The securities are convertible by the holders at any time through September 30, 2016 and may be redeemed by the Company on or after November 1, 1999. Each $50 of liquidation value of the securities can be converted into AIMCO Class A Common Stock at a conversion price of $49.61, which equates to 1.007 shares of AIMCO Class A Common Stock. Since 1998 when these securities were assumed, $134.4 million of the $149.5 million has been converted, resulting in $15.1 million remaining as of December 31, 2002. In 2002 and 2001, the holders of the securities converted approximately $5.5 million and $11.7 million, respectively, into approximately 107,000 and 238,000 shares of AIMCO Class A Common Stock.
NOTE 14 - Related Party Notes Receivable
In exchange for the sale of certain real estate assets to AIMCO, the Partnership received notes receivable totaling $10.1 million. The notes bear interest at the rate of 5.7% per annum. Of the $10.1 million total, $7.6 million is due upon demand, and the remainder is due in scheduled semi-annual payments with all unpaid principal and interest due on December 31, 2010.
In order to fund the acquisition of the Villas of Park La Brea on November 27, 2002, the Partnership loaned $28.1 million to AIMCO in exchange for a note receivable. The note bears interest at the rate of 8.0% per annum, with interest payments due on December 31 of each year with all unpaid principal and interest due on December 31, 2012.
NOTE 15 - Registration Statements
On November 7, 2001, AIMCO and the Partnership filed a shelf registration statement with the Securities and Exchange Commission ("SEC") with respect to an aggregate of $822 million of debt and equity securities of AIMCO and $500 million of debt securities of the Partnership, all of which was carried forward from AIMCO's 1998 shelf registration statement. The registration statement was declared effective by the SEC on November 9, 2001. As of December 31, 2002, AIMCO had approximately $400 million of debt and equity securities available and the Partnership had $500 million of debt securities available from this registration statement.
NOTE 16 - Partners' Capital
Preferred OP Units
All classes of preferred OP Units are on equal parity and are senior to the common OP Units. None of the classes of preferred OP Units have any voting rights, except the right to approve certain changes to the Partnership Agreement that would adversely affect holders of such class of units. Distributions on all preferred OP Units are subject to being declared by the General Partner.
At December 31, 2002 and 2001, the following classes of preferred OP Units (stated at their redemption values) owned by AIMCO were outstanding (in thousands, except unit data):
Holders of the Class B Partnership Preferred Units ("the Class B Preferred Units") were entitled to receive cash distributions in an amount per unit equal to the greater of (i) $7.125 per year (equivalent to 7.125% of the liquidation preference) or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class B Cumulative Convertible Preferred Stock ("Class B Preferred Stock") was convertible. Class B Preferred Units were convertible, upon conversion of the Class B Preferred Stock, beginning August 1998, into 3.284 common OP Units, subject to certain anti-dilution adjustments. In 2000, 330,529 Class B Preferred Units were converted into 1,085,480 common OP Units. On July 29, 2002, AIMCO announced that on August 28, 2002, it would redeem all outstanding shares of its Class B Preferred Stock, par value $0.01 per share for cash equal to the liquidation preference of $100 per share, plus accrued and unpaid dividends through the redemption date of $1.73545 per share. On August 20, 2002, the holder of all 419,471 shares of Class B Preferred Stock converted such shares into 1,377,573 shares of AIMCO Class A Common Stock. Concurrently, the Partnership converted all Class B Preferred Units into 1,377,573 common OP Units.
Holders of Class K Partnership Preferred Units (the "Class K Preferred Units"), which were issued on February 18, 1999, were entitled to receive cash distributions in an amount per unit equal to the greater of (i) $2.00 per year (equivalent to 8% of the liquidation preference) or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class K Convertible Cumulative Preferred Stock ("Class K Preferred Stock") was convertible. Beginning with the third anniversary of the date of original issuance, holders of Class K Preferred Units were entitled to receive an amount per unit equal to the greater of (i) $2.50 per year (equivalent to 10% of the liquidation preference), or (ii) the cash distributions payable on the number of AIMCO Class A Common Stock into which a share of Class K Preferred Stock was convertible. Class K Preferred Units were convertible, upon conversion of the Class K Preferred Stock, into 0.59524 common OP Units, subject to certain anti-dilution adjustments. On March 19, 2002, AIMCO announced that on April 18, 2002 it would redeem for AIMCO Class A Common Stock all outstanding shares of its Class K Preferred Stock, par value $0.01 per share at a redemption price of $27.2125 per share of Class K Preferred Stock. The redemption price was payable in shares of AIMCO Class A Common Stock at a price of $45.7835 per share, or the issuance of 0.5944 shares of AIMCO Class A Common Stock for each share of Class K Preferred Stock redeemed. Concurrently, the Partnership announced that it would redeem each of the Class K Preferred Units for 0.5944 common OP Units. Subsequent to the Partnership's announcement all 5,000,000 Class K Preferred Units were converted into approximately 2,972,000 common OP Units.
Holders of Class L Partnership Preferred Units (the "Class L Preferred Units"), which were issued on May 28, 1999, were entitled to receive cash distributions in an amount per unit equal to the greater of (i) $2.025 per year (equivalent to 8.1% of the liquidation preference) or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class L Convertible Cumulative Preferred Stock ("Class L Preferred Stock") is convertible. Beginning with the third anniversary of the date of original issuance, the holders of Class L Preferred Units are entitled to receive an amount per unit equal to the greater of (i) $2.50 per year (equivalent to 10% of the liquidation preference) or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class L Preferred Stock is convertible. Class L Preferred Units are convertible, upon conversion of the Class L Preferred Stock, into 0.5379 common OP Units, subject to certain anti-dilution adjustments. On May 6, 2002, the holder of 2,500,000 shares of AIMCO Class L Preferred Stock, par value $0.01 per share with a face value of $62.5 million, converted such shares into 1,344,664 shares of AIMCO Class A Common Stock. Concurrently, the Partnership converted 2,500,000 Class L Preferred Units into 1,344,664 common OP Units. Following this conversion, as of December 31, 2002, 2,500,000 Class L Preferred Units remained outstanding.
Holders of Class M Partnership Preferred Units (the "Class M Preferred Units"), which were issued on January 13, 2000, were entitled to receive, for the period beginning January 13, 2000 through and including January 13, 2003, cash distributions in an amount per unit equal to the greater of (i) $2.125 per year (equivalent to 8.5% of the liquidation preference) or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class M Convertible Cumulative Preferred Stock ("Class M Preferred Stock") is convertible. Beginning with the third anniversary of the date of original issuance, the holders of Class M Preferred Units are entitled to receive an amount per unit equal to the greater of (i) $2.3125 per year (equivalent to 9.25% of the liquidation preference), or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class M Preferred Stock is convertible. Class M Preferred Units are convertible, upon conversion of the Class M Preferred Stock, into 0.5682 common OP Units, subject to certain anti-dilution adjustments.
Holders of Class N Partnership Preferred Units (the "Class N Preferred Units"), which were issued on September 12, 2000 are entitled to receive cash distributions in an amount per unit equal to the greater of (i) $2.25 per year (equivalent to 9% per annum of the liquidation preference), subject to increase in the event of a change in control of AIMCO or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class N Convertible Cumulative Preferred Stock ("Class N Preferred Stock") is convertible. Class N Preferred Units are convertible, upon conversion of the Class N Preferred Stock, into 0.4762 common OP Units, subject to certain anti-dilution adjustments.
Holders of Class O Partnership Preferred Units (the "Class O Preferred Units"), which were issued on September 15, 2000 are entitled to receive cash distributions in an amount per unit equal to the greater of (i) $4.725 per year (equivalent to 9% per annum of the liquidation preference), subject to increase in the event of a change in control of AIMCO or (ii) the cash distributions payable on the number of shares of AIMCO Class A Common Stock into which a share of Class O Convertible Cumulative Preferred Stock ("Class O Preferred Stock") is convertible. Class O Preferred Units are convertible, upon conversion of the Class O Preferred Stock, into one common OP Unit, subject to certain anti-dilution adjustments.
Holders of Class P Partnership Preferred Units (the "Class P Preferred Units"), which were issued on March 26, 2001, are entitled to receive cash distributions in an amount per share equal to the greater of (i) $2.25 per year (equivalent to 9% of the liquidation preference) or (ii) the cash distributions payable on the number of AIMCO Class A Common Stock into which a share of Class P Convertible Cumulative Preferred Stock ("Class P Preferred Stock") is convertible. Class P Preferred Units are convertible, upon conversion of the Class P Preferred Stock, into 0.4464 common OP Units, subject to certain anti-dilution adjustments. Distributions are paid on the Class P Preferred Units quarterly, and began on April 15, 2001.
In addition to the above listed preferred OP Units, the following outstanding preferred OP Units are subject to redemption at AIMCO's option on or after the dates specified: Class C Partnership Preferred Units, December 23, 2002; Class D Partnership Preferred Units, February 19, 2003; Class G Partnership Preferred Units, July 15, 2008; Class H Partnership Preferred Units, August 14, 2003; and Class Q Partnership Preferred Units, March 19, 2006.
On March 11, 2002, the Partnership paid the proceeds from the Casden Loan to AIMCO in exchange for a note receivable of $198.3 million (the "Note"). Upon completion of the Casden Merger in March of 2002, AIMCO contributed the substantial majority of the assets and liabilities of Casden to the Partnership in exchange for approximately 7,934,920 Class Ten Partnership Preferred Units (the "Class Ten Preferred Units"). The Note bears interest at 8% per annum. The Class Ten Preferred Units paid distributions of $2.00 per unit. When AIMCO issued stock for cash, the net proceeds were used to repay the Note. Concurrently, a portion of the Class Ten Preferred Units were converted into the same class of units issued by AIMCO. In June 2002, AIMCO fully repaid the note and all remaining Class Ten Preferred Units were converted.
On November 27, 2002, in connection with the purchase of The Villas at Park La Brea, the Partnership loaned funds to AIMCO in exchange for a note receivable of $28.1 million. Upon completion of the purchase, AIMCO contributed the assets and liabilities of The Villas at Park La Brea to the Partnership in exchange for 1,124,041 Class Eleven Partnership Preferred Units (the "Class Eleven Preferred Units"). The Class Eleven Preferred Units pay distributions of $2.00 per unit on December 31 of each year, with the first distribution being prorated from the date of issuance.
As of December 31, 2002 and 2001, the following classes of preferred OP Units (stated at their redemption values) owned by third parties were outstanding (in thousands, except unit data):
For all preferred OP Units that are redeemable to AIMCO Class A Common Stock, the Partnership, upon redemption, will issue a common OP Unit to AIMCO for each share of AIMCO Class A Common Stock issued. In addition, subject to certain conditions, the Class Four, Class Five, Class Six and Class Eight Partnership Preferred Units are convertible into common OP Units, two years from issuance, after December 21, 2000, three years from issuance, and after November 16, 2001, respectively.
The distributions paid on each class of preferred OP Units for the years ended December 31, 2002, 2001, and 2000 are as follows (in thousands, except per unit data):
(1)Amounts per unit are based on the stated distribution rate for each class of preferred OP Units.
(2)For the period from the date of issuance to December 31, 2000.
(3)No distributions for these preferred OP Units were required during 2000 based on the date of issuance.
(4)For the period from the date of issuance to December 31, 2001.
(5)For the period from January 1, 2002 to the date of conversion to common OP Units.
(6)Total amount paid includes distributions paid on all 5.0 million of Class L Preferred Units until May 6, 2002, when 2.5 million Class L Preferred Units were converted into common OP Units. Additionally, the amount per unit includes a scheduled increase in the distribution from $2.03 per unit to $2.50 per unit starting after May 28, 2002.
(7)For the period from January 1, 2002 to the date of conversion to common OP Units.
(8)Total amount paid includes distributions paid on all 7.9 million Class Ten Preferred Units from date of issuance until June 5, 2002, when all Class Ten Preferred Units were converted into common OP Units.
Common OP Units
Common OP Units are redeemable by common OP Unitholders (other than the General Partner and Special Limited Partner) at their option, subject to certain restriction, on the basis of one common OP Unit for either one share of AIMCO Class A Common Stock or cash equal to the fair value of a share of AIMCO Class A Common Stock at the time of redemption. The Company has the option to deliver shares of AIMCO Class A Common Stock in exchange for all or any portion of the cash requested. When a Limited Partner redeems a common OP Unit for AIMCO Class A Common Stock, Limited Partners' Capital is reduced and Special Limited Partners' capital is increased. Common OP Units held by AIMCO are not redeemable.
In 2002, the Company completed tender offers for limited partnership interests resulting in the issuance of approximately 331,451 common OP Units and issued 882,784 common OP Units in connection with the Casden Merger. In addition, the Partnership issued 3.508 million common OP Units to AIMCO in exchange for substantially all of the assets and liabilities AIMCO acquired in the Casden Merger and 8.0 million common OP Units to AIMCO in exchange for the total proceeds AIMCO received on its issuance of 8.0 million shares of AIMCO Class A Common Stock.
During 2002 and 2001, AIMCO issued approximately 188,000 shares and 241,000 shares, respectively, of its Class A Common Stock to certain of its executive officers (or entities controlled by them) at market prices. In exchange for the shares purchased, the executive officers (or entities controlled by them) executed notes payable to AIMCO totaling $7.8 million and $10.7 million, respectively. These notes, which are 25% recourse to the holder, have a 10-year maturity and bear interest at rates between 6.25% and 7.25% annually. The notes were contributed by AIMCO to the Partnership in exchange for approximately 188,000 and 241,000 common OP Units, respectively. Total payments on such notes from officers in 2002 and 2001 were $5.3 million and $8.5 million, respectively. In addition, in 2002 and 2001, the Partnership issued approximately 80,000 and 172,000 common OP Units to AIMCO and AIMCO issued approximately 80,000 and 172,000 shares of AIMCO Class A Common Stock, respectively, to certain of its employees. The restricted stock was issued at the fair market value of AIMCO's Class A Common Stock on the date of issuance. The restricted stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of and is subject to a risk of forfeiture within the applicable vesting period (3 to 5 years).
During 2002, AIMCO did not repurchase any shares of AIMCO Class A Common Stock (and the Partnership did not purchase any common OP Units from AIMCO). During 2001, AIMCO repurchased and retired approximately 772,000 shares of AIMCO Class A Common Stock (and the Partnership purchased approximately 772,000 common OP Units from AIMCO) at an average price of $43.15 per share.
High Performance Units
In January 1998, the Partnership sold an aggregate of 15,000 Class I High Performance Partnership Units (Class I Units) to a joint venture comprised of fourteen members of AIMCO's senior management and to three of AIMCO's independent directors for $2.1 million in cash. The value of these Class I Units was determined on December 31, 2000 and the 15,000 Class I Units converted to 2,379,084 Class I Units in January 2001. The holders of these units will receive distributions and allocations of income and loss from the Partnership in the same amounts and at the same times as would holders of the same number of OP Units. In June 2001, AIMCO shareholders approved the sale by the Partnership of an aggregate of 15,000 of its Class II, III and IV High Performance Partnership Units. In June 2002, AIMCO shareholders approved the sale by the Partnership of an aggregate of 5,000 of its Class V High Performance Partnership Units (see Note 20).
Investment in AIMCO
In 1998, AIMCO issued 1.0 million shares of Class J Preferred Stock for proceeds of $100.0 million. The proceeds were contributed by AIMCO to the Partnership in exchange for 1.0 million Class J Preferred Units. Concurrently, the Partnership issued 250,000 Class J Preferred Units valued at $25.0 million to AIMCO, in exchange for 250,000 shares of Class J Preferred Stock. In June 2000, the Partnership converted 250,000 shares of AIMCO Class J Cumulative Convertible Preferred Stock, with a liquidation value of $25 million, into 625,000 shares of AIMCO Class A Common Stock. In connection with this conversion, 41,991 shares of AIMCO Class A Common Stock, valued at $1.5 million, were exchanged by the Partnership for common OP Units held by a limited partner. In 2001, 198,269 shares of AIMCO Class A Common Stock, valued at $7.1 million, were exchanged by the Partnership for common OP Units held by a limited partner. The
investment in AIMCO's Class A Common Stock is presented in the accompanying financial statements as a reduction to partners' capital.
NOTE 17 - Stock Option Plans and Stock Warrants
AIMCO, from time to time, will issue stock options and stock warrants. Upon exercise of the stock options or stock warrants, AIMCO must contribute the proceeds received to the Partnership in exchange for common OP Units in the same number as shares of AIMCO Class A Common Stock issued in connection with the exercised stock options or stock warrants. Therefore, the following disclosures are made pertaining to AIMCO's stock options and stock warrants.
AIMCO's Board of Directors has adopted the 1994 Stock Option Plan of Apartment Investment and Management Company (the "1994 Plan"), the Apartment Investment and Management Company 1996 Stock Award and Incentive Plan (the "1996 Plan"), the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan (the "1997 Plan") and the Apartment Investment and Management Company Non-Qualified Employee Stock Option Plan (the "Non-Qualified Plan") to attract and retain officers, key employees and independent directors. The 1994 Plan provides for the granting of a maximum of 150,000 options to purchase common shares. The 1996 Plan provides for the granting of a maximum of 500,000 options to purchase common shares. The 1997 Plan provides for the granting of a maximum of 20,000,000 options to purchase common shares. The Non-Qualified Plan provides for the granting of a maximum of 500,000 options to purchase common shares and allows for the granting of non-qualified stock options. The 1994 Plan, the 1996 Plan and the 1997 Plan allow for the grant of incentive and non-qualified stock options, and together with the Non-Qualified Plan, are administered by the Compensation Committee of the Board of Directors of AIMCO. The 1994 Plan also provides for a formula grant of the non-qualified stock options to the independent directors to be administered by the Board of Directors of AIMCO to the extent necessary. The exercise price of the options granted may not be less than the fair market value of the common stock at the date of grant. The term of the incentive and non-qualified options is ten years from the date of grant. The options vest over a period of one to five years from the date of grant. Terms may be modified at the discretion of the Compensation Committee of the Board of Directors of AIMCO.
AIMCO has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires the use of option valuation models that were not developed for use in valuing employee stock options and warrants. Under APB 25, because the exercise price of AIMCO's employee stock options and warrants equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if AIMCO had accounted for its employee stock options and warrants granted subsequent to December 31, 1994 under the fair value method. The fair value for these options and warrants was estimated at the date of grant using a Black-Scholes valuation model with the following assumptions:
The Black-Scholes valuation model was developed for use in estimating the fair value of traded options and for warrants which have no vesting restrictions and are fully transferable. In addition, the valuation model requires the input of highly subjective assumptions including the expected stock price volatility. AIMCO's stock options and warrants have characteristics significantly different from those of traded options and warrants; therefore, changes in the subjective input assumptions can materially affect the fair value estimate.
For purposes of pro forma disclosures, the estimated fair values of the options are amortized over the options' vesting period. AIMCO's pro forma information for the years ended December 31, 2002, 2001 and 2000 is as follows (in thousands, except per share data):
The effects of applying SFAS 123 in calculating pro forma income attributable to common stockholders and pro forma basic earnings per share may not necessarily be indicative of the effects of applying SFAS 123 to future years' earnings.
The following table summarizes the option and warrant activity for the years ended December 31, 2002, 2001 and 2000:
As of December 31, 2002, outstanding and exercisable options and warrants have the following ranges of exercise prices and remaining weighted-average contractual lives:
On December 14, 1998, AIMCO sold, in a private placement, 1.4 million Class B Partnership Preferred Units (the "Class B Preferred Units") of a subsidiary of the Partnership for $30.85 million. As a part of the transaction, AIMCO also sold a warrant to purchase 875,000 shares of AIMCO Class A Common Stock for $4.15 million. On January 14, 2002, AIMCO
redeemed the Class B Preferred Units, paid accrued dividends and settled the warrant for a total of 447,991 shares of AIMCO Class A Common Stock and 444,247 common OP Units.
On December 2, 1997, AIMCO issued warrants (the "Oxford Warrants") exercisable to purchase up to an aggregate of 500,000 shares of AIMCO Class A Common Stock at $41 per share. The Oxford Warrants were issued to affiliates of Oxford Realty Financial Group, Inc., a Maryland corporation ("Oxford"), in connection with the amendment of certain agreements pursuant to which the Company manages properties formerly controlled by Oxford or its affiliates. The Oxford Warrants were amended in connection with the acquisition of the Oxford entities in September 2000, are currently exercisable and expire on December 31, 2006.
Effective January 1, 2003, AIMCO adopted the accounting provisions of SFAS 123 and will transition using the prospective method. Under this method, AIMCO will now apply the fair value recognition provisions of SFAS 123 to all employee awards granted, modified, or settled on or after January 1, 2003, which will result in compensation expense being recorded based on the fair value of the stock option.
AIMCO also grants restricted stock awards as part of its equity compensation plan. For the years ended December 31, 2002, 2001 and 2000, AIMCO granted restricted stock awards with weighted average fair values per share of $43.65, $47.82 and $40.14, respectively. These awards are amortized to compensation expense over the applicable vesting period (3 to 5 years).
NOTE 18 - Earnings per Unit
The following table illustrates the calculation of basic and diluted earnings per unit for the years ended December 31, 2002, 2001 and 2000 (in thousands, except per unit data):
The Class B Preferred Units, the Class K Preferred Units, the Class L Preferred Units, the Class M Preferred Units, the Class N Preferred Units, the Class O Preferred Units and the Class P Preferred Units are convertible (see Note 16). The Class C Preferred Units, the Class D Preferred Units, the Class G Preferred Units, the Class H Preferred Units, the Class Q Preferred Units and the Class R Preferred Units are not convertible. All of the convertible preferred OP Units are anti-dilutive on an "as converted" basis, therefore, all of the distributions are deducted to arrive at the numerator and no additional units are included in the denominator. Vested and unvested stock options, together with units issued for non-recourse notes receivable, and restricted stock awards totaling approximately 3.6 million for the year ended December 31, 2002 have been excluded from diluted earnings per unit as their effect would be anti-dilutive. For the years ended December 31, 2001 and 2000, no material amounts of vested and unvested stock options, non-recourse shares or restricted stock awards were excluded as their effect was dilutive.
NOTE 19 - Recent Accounting Developments
In July 2001, the FASB issued Statement of Financial Accounting Standard No. 141, Business Combinations ("SFAS 141") and Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires the Company to reflect intangible assets apart from goodwill and supercedes previous guidance related to business combinations. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the Company's consolidated financial position or results of operations taken as a whole. SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires the Company to perform impairment tests at least annually on all goodwill and other indefinite lived intangible assets. The Company adopted the requirements of SFAS 142 beginning January 1, 2002, and has completed the transitional goodwill impairment test required by SFAS 142 and did not identify any impairments.
The adoption of the non-amortization provision of SFAS 142 affected net income and earnings per unit for the years ended December 31, 2002, and would have affected net income and earnings per unit for the years ended December 31, 2001 and 2000, as shown below (in thousands, except per unit amounts):
In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 rescinds Statement of Financial Accounting Standard No. 4 ("SFAS 4"), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Historically, the Company has included these costs in interest expense. Statement of Financial Accounting Standard No. 64 amended SFAS 4, and is no longer necessary because SFAS 4 has been rescinded. Statement of Financial Accounting Standard No. 44 and the amended sections of Statement of Financial Accounting Standard No. 13 are not applicable to the Company and therefore have no effect on the Company's financial statements. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early application encouraged. The adoption of SFAS 145 did not have a material effect on the Company's consolidated financial condition or results of operations taken as whole because the Company has previously included these costs in interest expense.
In July 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that expenses associated with restructuring charges be accrued as liabilities in the period in which the liability is incurred. We are required to adopt SFAS 146 on January 1, 2003. The Company does not anticipate that the adoption of SFAS 146 will have a material impact on the Company's consolidated financial condition or results of operations taken as a whole.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the
guarantee. The accounting provisions and new disclosure requirements of FIN 45 are required to be adopted for all guarantees issued or modified on or after January 1, 2003. The Company does not anticipate that the adoption of FIN 45 will have a material impact on the Company's consolidated financial condition or results of operations taken as a whole.
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," to provide transition alternatives for adopting the accounting provisions of SFAS 123 and also amends the disclosure requirements of SFAS 123. Additionally, SFAS 148 requires disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. AIMCO adopted the disclosure provisions of SFAS 148 in Note 17 of these consolidated financial statements. The transition provisions of SFAS 148 will be adopted on January 1, 2003 when AIMCO adopts the accounting provisions of SFAS 123. See Note 17 for information on the impact the adoption of SFAS 148 will have on AIMCO's consolidated financial condition and results of operations.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN 46"). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted FIN 46 effective January 31, 2003. The Company does not anticipate that the adoption of FIN 46 will have a material impact on the Company's consolidated financial condition or results of operations taken as a whole.
NOTE 20 - Dilutive Securities
In January 1998, AIMCO shareholders approved the sale by the Partnership of an aggregate of 15,000 Class I Units to a joint venture comprised of fourteen members of AIMCO's senior management and to three of AIMCO's independent directors for $2.1 million in cash. The value of these units was determined on December 31, 2000 and the 15,000 units were adjusted to 2,379,084 units in January 2001. The holders of these units receive distributions and allocations of income and loss from the Partnership in the same amounts and at the same times as would holders of the same number of common OP Units.
In June 2001, AIMCO stockholders approved the sale by the Partnership of an aggregate of 15,000 of its Class II, III, and IV High Performance Partnership Units (the "Class II Units," "Class III Units" and "Class IV Units," respectively) to three limited liability companies owned by a limited number of AIMCO employees for an aggregate offering price of $4.9 million.
The valuation period for the Class III Units ended on December 31, 2002, with no value added, and therefore the allocable investment made by the holders of $1.793 million was lost. The valuation period for the Class II Units had previously ended on December 31, 2001, with no value added, and therefore the allocable investment made by the holders of $1.275 million was lost. The valuation period for the Class IV Units ends December 31, 2003.
On April 26, 2002, AIMCO stockholders approved the sale by the Partnership of up to 5,000 of its Class V High Performance Partnership Units (the "Class V Units," together with the Class II Units, Class III Units and Class IV Units, the "High Performance Units"), to a limited liability company owned by a limited number of AIMCO employees for an aggregate offering price of up to $1.1 million. An aggregate of 4,398 Class V Units were sold, for an aggregate offering price of $938,000. The Class V Units have identical characteristics to the Class IV Units sold in 2001, except for the dilutive impact limit, which was reduced from 1.5% to 1.0%, and a different three-year measurement period. The valuation period of the Class V Units began on January 1, 2002 and will end on December 31, 2004.
At December 31, 2002, the Company did not meet the required measurement benchmarks for Class IV Units or Class V Units, and therefore, the Company has not recorded any value to the High Performance Units in the consolidated financial statements as of December 31, 2002, and such High Performance Units have had no dilutive effect. The table below illustrates the calculation of the value of High Performance Units at December 31, 2002 (in thousands):
(1)Calculated based on a $48.36 starting price for Class III Units and Class IV Units and a $45.19 starting price for Class V Units, dividend reinvestment on the dividend payment date using the closing price for that date, and an ending price based on an average of the volume weighted average trading price for the 20 trading days immediately preceding the end of the period.
(2)Outperformance Return multiplied by Average Market Capitalization.
(3)Outperformance Stockholder Value Added multiplied by 5%. The Company has additional dilutive securities, which include options, warrants, convertible preferred securities and convertible debt securities. The following table presents the total number of OP Units that would be outstanding if all dilutive securities were converted or exercised (not all of which are included in the fully diluted unit count) as of December 31, 2002:
NOTE 21 - Transactions with Affiliates
The Company earns revenue from unconsolidated real estate partnerships in which the Company is the general partner and has a 21% average ownership interest and earns fees from consolidated real estate partnerships. These revenues include property management services, partnership and asset management services, transactional services such as refinancing, construction supervisory and disposition services. Also, the Company is reimbursed for its costs in connection with the management of the unconsolidated real estate partnerships. Fees earned for these services for the years ended December 31, 2002, 2001 and 2000 were $87.2 million, $128.8 million and $137.3 million, respectively, and include fees earned by the previously unconsolidated subsidiaries in 2000. The total accounts receivable due from affiliates was $47.1 million, net of allowance for doubtful accounts of $4.1 million, at December 31, 2002, and $35.3 million, net of allowance for doubtful accounts of $5.6 million at December 31, 2001.
Additionally, the Company earns interest income on notes from unconsolidated and consolidated real estate partnerships, in which the Company is the general partner and holds either par value or discounted notes. Interest income earned on par value notes totaled $26.6 million, $26.0 million, and $25.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. Accretion income earned on discounted notes totaled $36.8 million, $9.9 million, and $26.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. See Note 7 for additional information on notes receivable primarily from unconsolidated real estate partnerships.
The accounts receivable and notes receivable from affiliates due from consolidated real estate partnerships are fully eliminated in the consolidated balance sheets. The income from services and interest income earned on notes from consolidated real estate partnerships is eliminated in the consolidated statements of income to the extent of the Company's ownership. Any intercompany profits on income earned from unconsolidated real estate partnerships is eliminated in the consolidated statements of income to the extent of the Company's ownership.
NOTE 22 - Employee Benefit Plans
The Company offers medical, dental, life and short-term and long-term disability benefits to employees of the Company through insurance coverage of Company-sponsored plans. The medical and dental plans are self-funded and are administered by independent third parties. In addition, the Company also participates in a 401(k) defined-contribution employee savings plan. Employees who have completed six months of service are eligible to participate. The Company matches 50% to 100% of the participant's contributions to the plan up to a maximum of 6% of the participant's prior year compensation. The Company match percentage is based on employee tenure. The expense incurred by the Company totaled approximately $2.6 million, $2.8 million and $3.7 million in 2002, 2001 and 2000, respectively.
NOTE 23 - Unaudited Summarized Consolidated Quarterly Information and Significant Adjustments
Summarized unaudited consolidated quarterly information for 2002 and 2001 is provided below (amounts in thousands, except per unit amounts).
(1)Certain reclassifications have been made to 2002 and 2001 quarterly amounts to conform to the full year 2002 presentation, including certain eliminations of self-charged income, as well as the treatment of discontinued operations. During the quarter ended December 31, 2002, the Company recorded in gain (loss) on dispositions of real estate a loss of $38.0 million. This $38.0 million loss resulted primarily from a change in estimate due to better insight into information related to the finalization of the recording of purchase price accounting to appropriate entities acquired in past acquisitions and the related historical estimation process in determining the carrying value of assets sold. The recognition of this amount in the current period is considered to be a change in estimate associated with the historical estimated gain or loss on the sale of these properties. In the prior quarters, the Company recognized a gain of approximately $10.0 million related to this same change in estimate, resulting in a total change in estimate for the year ended December 31, 2002 of $28.0 million. The
recognition of this change in estimate resulted in a decrease in basic earnings per unit of $0.29 and diluted earnings per unit of $0.28 for the year ended December 31, 2002.
During the quarter ended December 31, 2001, the Company recorded the following adjustments affecting previous quarters. These adjustments, in total, did not have an overall material impact on net income for any one quarter.
NOTE 24 - Industry Segments
The Company has two reportable segments: real estate (owning and operating apartments); and investment management business (providing, to third parties and affiliates, services relating to the apartment business). The Company owns and operates apartment communities throughout the United States and Puerto Rico that generate rental and other property related income through the leasing of apartment units to a diverse base of residents. The Company separately evaluates the performance of each of its apartment communities. However, because each of its apartment communities has similar economic characteristics, the apartment communities have been aggregated into a single apartment communities, or real estate, segment. The Company considers disclosure of different components of the multifamily housing business to be useful. All real estate revenues are from external customers and no revenues are generated from transactions with other segments. A significant portion of the revenues earned in the investment management business are from transactions with affiliates in the real estate segment. In 2002, the Company formed Aimco Capital to integrate affordable property operations within its real estate segment, and asset management and transaction activities within its investment management business.
No single resident or related group of residents contributed 10% or more of total revenues during the years ended December 31, 2002, 2001 or 2000. The Company also manages apartment properties and provides other services for third parties and affiliates through its investment management business segment. As disclosed, a significant portion of the revenues of the investment management business is from affiliates.
A performance measure the Company uses for each segment is its contribution to free cash flow ("Free Cash Flow" or "FCF"). The Company defines Free Cash Flow as net operating income less the capital spending required to maintain and improve the related assets. Free Cash Flow measures profitability prior to the cost of capital. Other performance measures the Company uses include funds from operations, adjusted funds from operations and earnings before structural depreciation. The Company deducts Capital Replacement spending to arrive at Free Cash Flow and adjusted funds from operations. In addition, beginning in the second quarter of 2002, the Company began deducting Capital Enhancement spending. This additional deduction is reflected on a prospective basis. Certain reclassifications have been made to 2001 and 2000 amounts to conform to the 2002 presentation. These reclassifications primarily represent presentation changes related to discontinued operations resulting from the adoption of SFAS 144 in 2002.
The following tables present the contribution (separated between consolidated and unconsolidated activity) to the Company's Free Cash Flow for the years ended December 31, 2002, 2001 and 2000, from these segments, and a reconciliation of Free Cash Flow to funds from operations, funds from operations less actual spending for Capital Replacements and Capital Enhancements, and net income (in thousands, except equivalent units (ownership effected) and monthly rents):
FREE CASH FLOW FROM BUSINESS COMPONENTS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except unit data)
[Additional columns below]
FREE CASH FLOW FROM BUSINESS COMPONENTS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except unit data)
FREE CASH FLOW FROM BUSINESS COMPONENTS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per unit data)
[Additional columns below]
FREE CASH FLOW FROM BUSINESS COMPONENTS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per unit data)
(1)Reconciliation of total consolidated real estate contribution to Free Cash Flow to consolidated rental and other property revenues (in thousands):
(2)Reconciliation of total investment management business contribution to Free Cash Flow to consolidated management fees and other income primarily from affiliates (in thousands):
(3)Reconciliation of unconsolidated net income (loss) attributable to common unitholders to equity in earnings (losses) of unconsolidated real estate partnerships and equity in losses of unconsolidated subsidiaries (in thousands):
(4)The Company uses Free Cash Flow, Earnings Before Structural Depreciation, Funds From Operations, and Adjusted Funds From Operations as performance measurement standards. These should not be considered alternatives to net income or net cash flow from operating activities, as determined in accordance with generally accepted accounting principles ("GAAP"), or as an indication of its performance or as a measure of liquidity.
•"Free Cash Flow" or "FCF" is defined by the Company as net operating income less the Capital Replacement spending required to maintain, and the Capital Enhancement spending made to improve, the related assets. FCF measures profitability prior to the cost of capital.
•"Earnings Before Structural Depreciation" or "EBSD" is defined by the Company as net income (loss), determined in accordance with GAAP, plus "structural depreciation," (i.e., depreciation of buildings and land improvements whose useful lives exceed 20 years).
•"Funds From Operations" or "FFO" is defined by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") as net income (loss), computed in accordance with GAAP, excluding gains and losses from extraordinary items, disposals of depreciable property, net of related income taxes, plus real estate related depreciation and amortization (excluding amortization of financing costs), including depreciation for unconsolidated partnerships, joint ventures and discontinued operations. The Company calculates FFO based on the NAREIT definition, plus amortization of intangibles, plus distributions to minority partners in excess of income and less distributions on preferred units. The Company calculates FFO (diluted) by adding back the interest expense and preferred distributions relating to convertible securities whose conversion is dilutive to FFO. The Company's basis for computing FFO may not be comparable with that of other real estate investment trusts.
•"Adjusted Funds From Operations" or "AFFO" is defined by the Company as FFO less Capital Replacement spending and, for 2002 and subsequent periods, Capital Enhancement spending. Capital Replacement spending was equal to $478 per unit for the year ended December 31, 2002, $367 per unit for the year ended December 31, 2001, and $300 per unit for the year ended December 31, 2000. Capital Enhancement spending was equal to $46 per unit
for the year ended December 31, 2002. In the year ended December 31, 2002, $8.0 million in Capital Enhancement spending was deducted to arrive at AFFO. In 2001 and 2000 Capital Enhancement spending was not deducted to arrive at AFFO.
Reconciliation of FCF, EBSD, FFO and AFFO to Net Income (in thousands):
(1)Assets associated with the investment management business are immaterial, and are therefore included in total assets for reportable segments.
NOTE 25 - Income Taxes
As discussed in Note 6, prior to January 1, 2001, the taxable REIT subsidiaries were not consolidated and therefore the associated income tax expense and related liabilities were included in the equity in earnings (losses) of unconsolidated subsidiaries and investment in unconsolidated subsidiaries, respectively.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities of the taxable REIT subsidiaries for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
Significant components of the provision (benefit) for income taxes are as follows and classified with management and other expenses in the Company's statement of income for 2002 and 2001 (in thousands):
Consolidated income (loss) subject to tax is $5,093,000 for 2002, $(4,851,000) for 2001, and $4,694,000 for 2000. The reconciliation of income tax attributable to continuing operations computed at the U.S. statutory rate to income tax expense (benefit) is shown below (dollars in thousands):
Income taxes paid totaled $1,620,000, $819,000, and $117,000 in the years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002, the Company had net operating loss carryforwards (NOLs) of approximately $42.3 million for income tax purposes that expire in years 2012 to 2021. Subject to some limitations, the NOL carryover may be used to offset all or a portion of taxable income generated by the taxable REIT subsidiaries.
NOTE 26 - Transfers of Financial Assets
In 2001, the Company sold certain tax-exempt bond receivables acquired in connection with its acquisition of OTEF (see Note 4) to an unrelated third party at a discount to their face amount and retained a residual interest in the sold bonds. The fair value of the Company's retained residual interests were based on the future cash flows from the bonds. Gain or loss on sale of the tax-exempt bonds depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained residual interests based on their relative fair value at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained residual interests, so the Company generally estimates fair value of the retained residual interests based on the present value of future expected cash flows of the bonds, which are derived from the underlying properties' operations. The fair value of both the retained residual interests and the bonds, based on the underlying properties that secure the bonds, were estimated using management's best estimates of the key assumptions - capitalization rates and discount rates commensurate with the risks involved. The total fair value of the retained residual interests did not exceed the face amount of the bonds, less the sales price of the bonds, including any cash gains recognized upon the sale of the bonds.
Key economic assumptions used in measuring the fair value of retained residual interests at the date of the sale were as follows:
In 2001, the Company received net proceeds of approximately $253.3 million and recognized gains of $26.1 million on the sale and retained residual interests of these tax-exempt bonds. All gains and losses have been realized and were determined on the specific identification method and are reflected in interest and other income.
In 2002, the Company received net proceeds of approximately $27.3 million and recognized gains of $7.7 million in connection with the sale of certain assets, as well as additional proceeds received from the refinancing of the tax-exempt bonds of the underlying properties, and as a result the Company's retained residual interests aggregating approximately $27.0 million were collected.
NOTE 27 - Discontinued Operations and Assets Held for Sale
In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 establishes criteria beyond that previously specified in Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), to determine when a long-lived asset is classified as held for sale, and it provides a single accounting model for the disposal of long-lived assets. SFAS 144 was effective beginning January 1, 2002. Due to the adoption of SFAS 144, the Company now reports as discontinued operations real estate assets held for sale (as defined by SFAS 144) and real estate assets sold in the current period. All results of these discontinued operations, less applicable income taxes, are included in a separate component of income on the consolidated statements of income under the heading "discontinued operations." This change has resulted in certain reclassifications of 2001 and 2000 financial statement amounts.
The components of income from operations related to discontinued operations for the years ended December 31, 2002, 2001 and 2000 are shown below. These include the results of operations through the date of each respective sale for sold properties and a full period of operations for those assets held for sale for the year ended December 31, 2002 and a full period of operations for the years ended December 31, 2001 and 2000 (dollars in thousands):
Included in the gain on dispositions of real estate was approximately $3.0 million of impairments, or initial write-downs of the assets that were recorded at the time properties were classified as assets held for sale during 2002. The remainder of the gain on dispositions of real estate included approximately $4.4 million, net of minority interest, related to the subsequent net gain recorded upon sale of the properties.
The Company is currently marketing for sale certain real estate properties that are inconsistent with its long-term investment strategies (as determined by management from time to time). The Company expects that all properties classified as held for sale will sell within one year from the date classified as held for sale. As of December 31, 2002, the Company classified as assets held for sale eight properties with an aggregate of 2,214 units and a net book value of $64.5 million. Other properties, both consolidated and unconsolidated, are being marketed for sale but are not accounted for as assets held for sale as they do not meet the criteria under SFAS 144. In addition, as required by SFAS 144, the $130.0 million of assets held for sale at December 31, 2001, represent 19 properties with 4,411 units that were classified as assets held for sale during 2002.
NOTE 28 - Subsequent Events
Distribution Declared
On January 30, 2003, the General Partner declared a quarterly cash distribution of $0.82 per unit for the quarter ended December 31, 2002, paid on February 18, 2003, to unitholders of record on February 11, 2003. The distribution is equivalent to an annualized distribution rate of $3.28 per unit, which remained the same as the previous annual distribution rate.
Amendment of Credit Facility and Term Loan
On February 14, 2003, the Company and its lenders amended the revolving credit facility to provide for a $100 million increase, at the Company's option, in the available commitment to $500 million (such commitment in excess of $400 million is not available until it has been syndicated), reduced the minimum fixed charge coverage ratio from 1.60:1 to 1.50:1 through the maturity date and extend the maturity date one year to July 31, 2005. Upon the effective date of the amendment, the margin on LIBOR-based loans and base rate loans was amended to a range between 2.05% to 2.65% and .55% to 1.15%, respectively, based on the fixed charge coverage ratio. In addition, the Company and its lenders amended the Casden Loan with the same reduction in the fixed charge coverage ratio as stated above for the credit facility, through maturity, and to eliminate mandatory prepayments for the remainder of the term using proceeds from equity, sales or refinancing proceeds (except as such proceeds arise from transactions of the properties acquired in the Casden Merger).
Assets Held for Sale
Subsequent to December 31, 2002, an additional five properties with 1,226 units became classified as assets held for sale. At December 31, 2002, these assets had a net book value of $29.0 million with related liabilities of $20.6 million.
AIMCO PROPERTIES, L.P
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(In Thousands Except Unit Data)
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(1)Date the Company acquired the property of first consolidated the partnership which owns the property
(2)Amounts include reclassifications which have been made to conform the 2002 presentation for the tendering costs to acquire the minority interest share of the consolidated partnerships
(3)Costs capitalized subsequent to acquisition includes costs capitalized since acquisition or first consolidation of the partnership / property by the Company
AIMCO PROPERTIES, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 2002, 2001 and 2000
(In Thousands)