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THE EVOLUTION OF AIMCO

BETH ROGERS

APARTMENT INVESTMENT AND MANAGEMENT COMPANY BECAME A PUBLICLY TRADED COMPANY ON THE NEW YORK STOCK EXCHANGE FOUR YEARS AGO. SINCE THEN, THE COMPANY HAS GROWN AT A GALLOP. AIMCO'S JOURNEY MIRRORS THE DEVELOPMENTS THAT HAVE MADE THE MULTIFAMILY INDUSTRY WHAT IT IS TODAY.

Four years ago, three individuals from different segments of the apartment industry came together to form Apartment Investment and Management Co. (AIMCO). What started as a venture with 9,637 units will mushroom to close to 400,000 units by the third quarter of this year when its acquisition of Insignia Financial Group is complete.

Each of the three key players got into the business differently. CEO Terry Considine started owning and operating apartments and commercial properties when he was a student at Harvard Law School. At a relatively youthful age he demonstrated considerable business acumen by syndicating apartments (assembling partnerships where he was the general partner and then selling limited partnership interests to others). In Boston, Considine participated in the formation of the Cabot, Cabot, and Forbes land REIT, one of the nation's first real estate investment trusts.

Steve Ira, executive vice president of AIMCO, was a former police officer who moonlighted as a security guard at his own Denver apartment community. He soon left law enforcement to start his own property management company and grew the business into what became the largest fee-operated apartment management company in Denver.

Ira and Considine met each other in 1987 when Considine acquired 75 percent ownership of Ira's company. The combined firms operated as Property Asset Management and Considine, who was at the time serving as a Colorado State Senator and finding himself stretched thin, asked Ira to take the company national. (Considine would eventually run unsuccessfully for the U.S. Senate in 1992 and leave politics.) Considine liked Ira's style of management, which was based on Ira's 'one-hour rule' - a principle that whoever managed a property had to be no more than one hour away from it by any mode of transportation because, notes Ira, 'I don't believe people can manage a property intensively being far away.'

Considine and Ira applied that management principle to their holdings through a strategy of purchasing other management companies that were closer to the assets they had to manage, and then building their base through acquiring other fee management. The two were able to acquire other companies through leveraged buyouts.

Between 1987 and 1994, Ira built Property Asset Management into the 12th largest fee management company in the United States, serving as its president. Then, in 1994, Considine and Ira decided to organize an apartment REIT. It was at this time that they hooked up with Peter Kompaniez, who headed a firm that was their largest client.

Kompaniez was a lawyer who ultimately became senior partner at a Los Angeles firm that was instrumental in forming four REITs. One of his clients wooed him away from law in 1986 to become a president in his firm, which owned a number of businesses nationwide, including apartment holdings of more than 6,000 units. In 1992, Kompaniez formed his own asset management firm, PDI Inc., to manage those units, and used Property Asset Management as its fee manager, Kompaniez brought those units to the table when AIMCO went public.

AIMCO became a public company traded on the NYSE through an initial public offering in July 1994. Since then, the company has grown at a gallop, progressing from relatively humble beginnings through its voracious appetite for acquisitions. In early 1997, AIMCO managed just under 43,000 apartments, but with the end-of-year acquisition of NHP and other companies, it had almost quintupled in size to 192,910 units. This past May, it merged with Ambassador Apartments, Inc., which brought 15,728 more units into the fold.

THE INSIGNIA DEAL

AIMCO's biggest coup thus far, however, has been the acquisition and merger agreement to acquire the multifamily operations and certain property holdings of the Greenville, South Carolina-based Insignia Financial Group, Inc., the largest property manager in the country, as well as Insignia's 75 percent interest in its REIT subsidiary, Insignia Properties Trust. The transaction is valued at approximately $190 million.

Leeann Morein, AIMCO's senior vice president of investor relations, notes that Insignia's similar size and business strategy made the company a natural match. Kompaniez explains why Insignia was a good target for acquisition: 'We look for a good return for our shareholders on transactions so we have found it advantageous, versus our competitors, to do deals that have some complexity to them and where the seller does not want cash necessarily but wants to make an investment in AIMCO or another REIT. That requires a decision by the seller that will favor AIMCO because you're then holding AIMCO paper versus someone else's.' Those were the ingredients of the Insignia acquisition.

Kompaniez continues: 'Insignia felt that they could maximize their return for their shareholders by in effect holding AIMCO common shares, and that's what they'll be getting.'

And pleasing shareholders seems to be what drives deal making. Dave Glickman, chairman and CEO of Ambassador, stated in a press release after its merger, 'We believe that merging with AIMCO enables Ambassador to fulfill its primary goal of maximizing shareholder value and increasing earnings per share. ... I am pleased and impressed with the similarities between AIMCO and Ambassador. Both companies have a strategic vision focused on three customer groups: shareholders, residents, and employees. Both companies have expanded significantly since their initial public offerings by raising equity capital in innovative ways. ... We are excited about this combination with a dynamic company.'

Andrew Farkas, CEO of Insignia, said almost the same when he declared, 'Clearly we are delivering - in dramatic fashion - on our commitment to enhance shareholder value. The value created from this transaction, including the efficiencies and ongoing opportunities we will realize with AIMCO, creates a dynamic and exciting growth story for both Insignia and AIMCO shareholders.'

Insignia shareholders will be issued $203 million in AIMCO Series E Preferred Stock which will automatically be converted into AIMCO common stock following payment of a special dividend of $50 million. Insignia shareholders will also receive $100 million in AIMCO Series F Preferred Stock which, following AIMCO shareholder approval, will convert to AIMCO common stock.

The Insignia deal calls for AIMCO to assume property management of approximately 191,000 multifamily units which consist of general and limited partnership investments in 122,000 units and third-party management of 69,000 units. With the conclusion of the deal, AIMCO will be a true industry behemoth as it owns/manages apartments in Puerto Rico and every state except Vermont, with close to 400,000 apartments under management and 16,000 employees (up from 8,000).

DEALING WITH GROWTH

Steve Ira admits that there are definite dangers in becoming too large. 'I think that large companies in terms of property operations particularly are at risk of becoming mediocre.' AIMCO plans to avoid this problem by structuring itself so that, in effect, it doesn't act large.

'What we do,' explains Ira, 'is we break down our portfolio into 10 thousand unit pieces and hire a local, regional person who is very entrepreneurial in nature, and give them a business unit that they run with great day-to-day autonomy within that smaller portfolio. We call them 'regional operating centers.'

AIMCO now has 15 ROCs and, with the Insignia acquisition, expects to have 35 to 40. Regional managers are 'coached' and 'resourced' by the senior vice presidents on a daily basis. This structure guarantees that even though the company is large, management is always at hand and always accountable.

At the moment, senior management is based in Los Angeles (Kompaniez), Denver (Considine), and Orlando (Ira). The trio meets twice a month in Denver. Tom Toomey, executive vice president of finance and administration based in Denver was hired after the IPO. After the Insignia acquisition, says Kompaniez, AIMCO plans on adding four or five more 'super ROCs.' The only things that are not regionalized in the company, notes Kompaniez, are capital allocation, liability management, and acquisitions.

Is there any limit to how big AIMCO can grow? 'First of all, we only grow where it is beneficial to our shareholders,' says Ira. 'In other words, because management has such a large stake in the company, and the three of us who founded it carry large amounts of stock personally, our goals and aspirations are very much aligned with those of our shareholders - that's where we make our money, and we won't acquire a property or a portfolio unless it is accretive to the original stockholders. So, different from some who feel that growth is good for growth's sake, we're only growing where there's an opportunity to grow, where it means that our original shareholders benefit from that growth. All that being said, the growth will only be limited by the amount of capital that can be formed, and to the extent that properties are available to acquire. We still believe that there are large numbers of properties to acquire that would be beneficial for our shareholders to own and we will continue to look for those specific opportunities.'

Morein notes that AIMCO uses a number of methods that allow it to grow from both an internal and external standpoint. When AIMCO acquired NHP, it signalled the company's decision she says, to take an 'even more active stance in acquiring general partnership interests, obviously acting in a fiduciary capacity for the limited partners while also giving them an exit strategy' - meaning that limited partners, in certain situations (where the property profile is similar to the AIMCO profile), can take a cash offer or can take operating partnership units ( a tax deferral strategy), or they can remain limited partners. As Kompaniez noted in a press release, 'AIMCO continues a successful strategy of increasing its ownership in real estate partnerships in which AIMCO is already the general partner through offers to purchase the limited partners' partnership interests. The limited partners have the opportunity to cash out their investment, or become limited partners in AIMCO Properties, L.P. and diversify their real estate holdings through AIMCO, or remain as partners with AIMCO as the general partner in their real estate partnerships.'

ACQUISITION STRATEGY

The company has no rule of thumb for its acquisitions, says Ira, 'but, generally speaking, they have to be priced at less than replacement cost. We believe that if a certain company, by example, has all luxury, class A, high-end properties and you would consider those Cadillacs, we'd like to own Chevy trucks. We believe that that's where the largest number of people who live in apartments in America live and therefore those are the types of products that we like to own. That's not to say that we don't have luxury buildings - we have some of the most luxurious high-end properties in the country - but they've been largely acquired because of specific locational advantages or because they were part of a portfolio purchase. Our strategy is aimed at middle market apartments and residents.'

AIMCO looks to acquire in areas where the neighborhoods are on an up trend, says Ira. The company has no lower limit in what it will acquire - it has a 20-unit community in Bowie, Texas, which was acquired as part of a portfolio. 'That's obviously not our target,' comments Ira, 'but we're not afraid of smaller properties and because we are regionally based, we have the management infrastructure in place to take care of those properties, whereas many companies do not.' Its single largest holding at the moment is the 2,113-unit Foxchase Apartments in Alexandria, Virginia.

After the Insignia acquisition, of the 400,000 units AIMCO will be managing, it will have an ownership interest in more than 300,000. The remainder are fee management accounts, most of which are controlled accounts (meaning that AIMCO has a controlled position in the management process). Although only a small fraction of AIMCO's business is in straight fee management, the attraction to property owners of AIMCO's services over its competitors is its tremendous purchasing power. 'For instance,' says Ira, 'we can buy insurance on a 400,000 unit base; we pass those savings along to our clients without any markup. ... We can often save our clients more money alone just in insurance than the cost of the management fee. Now when you expand that to purchases like appliances, hardware, pool chemicals, carpeting, paint, or any of the other things, we can purchase and operate for them cheaper than anyone else in the country.' AIMCO's fee management accounts, says Ira, are managed identically to the way it manages those properties in which it has an ownership interest: 'We have a very intensive management style that we extend to properties that we don't own - therefore clients are greatly advantaged by that system.'

Ira's assessment of the future viability of the apartment industry is that occupancy rates generally follow job formation. Because the economy has been robust, says Ira, it's been a good time for the industry. But, because the industry is cyclical, the company does worry about overbuilding which is why, says Ira, AIMCO has shied way from development: 'What we're doing is being very cautious, we're purchasing apartments that are in that middle sector because there are more people who work at Wal-Mart than there are vice presidents of high technology companies and those are the people who I think will continue over long periods of time to need middle-of-the-market housing opportunities. I also think there is a limitation to how many people can go out and buy homes. ... An argument is that certainly people will always want to buy a home if they have the ability to, but I think there's a large number of people, and a growing number of people, who prefer apartments because of the lifestyle and the amenities.'

Overbuilding, Ira feels, is the number-one problem in the apartment industry. (Although AIMCO is involved in very little development, it does actively rehabilitate and expand its existing properties, such as Morton Towers in Miami.) The second largest problem is regulation. 'I think regulation,' says Ira, 'remains to be to me always the biggest unknown. The myriad of governmental approvals that are required just to operate your business change so radically and often, often by local custom and design, that you worry about how those changes could affect the industry in a very negative way.' One item of legislation that Ira currently worries about is the telecommunications bill which has the potential to take away an owner's right to control access within an apartment community: 'We worry that special interests are lobbying to allow unrestricted access on private property for the installation of telephone, cable, or any other services without going through the owner. We think that those are huge issues because they violate a person's private property rights.'

MANAGEMENT STRATEGY

The hallmarks of a well-run property, says Ira, are intensity and providing superior service. Ira notes that it's easy to become complacent in the management process. 'Apartment management is something that is a process that needs to be repeated constantly and it has to be renewed with an intensity almost every day when the manager comes to work. Well-managed properties are properties where people don't become complacent, and where they do become very, very active and interested in what goes on every day in their community and they care passionately about the people that they're there to take care of.' As part of a commitment to service, notes Ira, Considine devised a 24-hour service guarantee which means that any resident with a complaint who is not taken care of within 24 hours gets free rent until the problem is resolved.

However, admits Ira, the average consumer, when apartment shopping, seldom bases his ultimate decision on a management company. Ira feels that renters learn to appreciate quality once they've lived in an AIMCO community, 'but I think that the average consumer selects an apartment not because of a brand name.' Nor does he think that branding will ever be possible. 'What you can do,' say Ira, 'is have locations that are superior, you can have communities that are convenient, and you can take care of the residents that you have and they in turn will help you be a better provider of housing.'

Kompaniez agrees that branding is almost impossible: 'What we can work on doing, and what we think we are already doing a good job in doing, is providing good amenities and quality housing as a quid pro quo for the dollars that the resident is spending - in fact we guarantee it.'

If there's a glaring hole in an amenity after AIMCO acquires a new community, AIMCO will add it. If a property lacked too many of the amenities that residents want today, claims Ira, AIMCO probably wouldn't buy the property because it wouldn't be performing well. Often, after an acquisition, AIMCO will add enhancements such as washer and drier hookups, carports, or other things residents indicate they would like to have. The one thing that AIMCO is doing with virtually all of its communities is gating them - AIMCO, says Ira, believes in providing an accessed environment that people feel comfortable living in.

Ira, who worked his way up and learned management on the fly (with admitted assistance from the National Apartment Association, the Colorado Apartment Association, and his peers), tries to impart to his employees that, 'number one, there's huge opportunity for an apartment professional to grow and prosper and to be happy in his job. I don't know of any other industry in America today where someone can literally start as a custodian or as a groundskeeper or a leasing agent and work his way into being an executive and I believe that those opportunities continue to exist in apartment property management.'

The second thing Ira tries to convey to employees is that 'the most important thing in their life is remembering who the customer is and working every single day at making their customer happy. If your customer is happy, you're going to be successful because it flows through to everything that makes an apartment successful, whether it's raising rents, lowering the turnover rate, or whether it's doing any of the things that make that job work - it's a very important component.'

CORPORATE STRATEGY

Why were Considine, Ira, and Kompaniez able to, considering their relatively humble beginnings, grow the business into a huge entity where many others have failed? 'Let me just say one thing about Terry,' responds Ira. 'He is the most thoughtful and intelligent and sophisticated purchaser of apartments that I've ever met in my career. He is an incredibly successful entrepreneur but he is also extremely capable of doing complicated transactions. I think that ability is one of the biggest reasons why AIMCO has grown as much as it has. ... Other people had tried to find a way to acquire Insignia, but Terry has been able to find methodology to find common ground to work with very wonderful people who own those companies and find ways to put them together. I think that's a very unique skill. ... Considine is the best in the country at deal formation and capital formation. AIMCO would not be successful without Considine or Kompaniez, no question.'

As is common with most successful businesses, all of the senior people at AIMCO work hard, with Kompaniez traditionally found in his office by 6 a.m. They all travel, according to Kompaniez's calculations, 60 percent of their time. Ira, a private pilot, flies himself to check on his territory of Florida, Georgia, Alabama, and Mississippi.

One thing that makes the company unique, says Ira, is its deference to its shareholders: 'The management of our company, because it's a public company, is always looking out for the shareholders. We take our personal compensation, or personal net worth gross, by aligning with the shareholders, so if we make money the shareholders make money. We've done that since day one and I think that's a unique way of looking at the world.'

At AIMCO, says Kompaniez, base salaries are kept fairly low compared to industry standards. AIMCO has a policy of compensating directors largely in AIMCO shares and requiring senior management to commit to substantial investment in AIMCO stock. In February of this year, AIMCO strengthened those ties between management and shareholders by establishing a new class of high performance equity in the AIMCO operating partnership for 12 members of management and four independent directors. The new security costs more than $2 million cash and has no value unless the AIMCO three-year total return to shareholders is 15 percent greater than industry averages. Considine noted, in a press release, 'The new high performance equity provides management a strong incentive to out-perform the REIT averages. It focuses management, including the board, on one bottom line: dividend income and share price appreciation. If AIMCO does not significantly out perform its peers, the $2+ million investment is lost.' In addition to these high performance units, AIMCO's senior management and independent board members own approximately $150 million worth of AIMCO stock.

In 1997 AIMCO earned $2.47 per share in AFFO (adjusted funds from operations), a 21 percent increase from 1996. The total return to shareholders was 38 percent, including cash dividends of $1.85 per share and share price appreciation of $8.50. The annualized total return has been 31 percent since the company's initial public offering. In comparison, other industry averages, such as the Morgan Stanley REIT index, only increased by 19 percent. In four years, AIMCO stock has had a low of $16.50 a share to a high of almost $40.

Although AIMCO is marked by a hunger to acquire, it also has sold some of its holdings, creating constant churning in its portfolio. 'In any real estate cycle there are some properties that you must sell,' observes Ira. 'Terry calls it a 'water the roses, pull the weeds program.' Every year we take a look at every property that we own, rank them, and the bottom-ranked properties - it doesn't mean that they're bad properties, it doesn't mean that they're not going to be successful - we will sell, take the capital from that sale, and re-deploy into properties that we feel better about.' Although AIMCO seems to be buying almost everything that's for sale, Kompaniez firmly notes AIMCO itself is not up for grabs.

Many takeovers are marked by a sense of trepidation by the acquired company. Communication, says Kompaniez, can eliminate that fear. The Insignia acquisition has been preceded by frequent visits to Greenville. 'I have actually found,' says Kompaniez, 'that with open communication and clear direction there are very few problems. NHP went quite smoothly, Ambassador was a virtual non-event in that regard, and I expect that the same will happen with Insignia.' For the most part, Kompaniez says, explaining the human logistics of an acquisition, existing personnel remain, especially those who are employed on-site, 'and they're happy to continue with a larger company because they correctly perceive that they have greater opportunities for advancement.' The decision as to which workers become AIMCO employees is determined department by department, and AIMCO is currently going through Insignia 'to see what makes sense.' Ira says, 'we've been fairly successful at keeping people involved. Every time you acquire a new operating entity you're certainly looking for economy of scale but by the same token, if it's someone who we think highly of, we're trying to keep the best people from those acquisitions and keep them involved in our company.'

Although AIMCO's primary focus is multifamily housing, occasionally, admits Kompaniez, some commercial properties get assumed as part of a larger portfolio. The company has a fairly significant chunk of housing that is occupied mostly or solely by seniors (concentrated in Arizona and Florida), and it is looking to grow that niche. Ira notes that the company is into assisted living 'sort of by default - a couple of the buildings that we operate we acquired when we acquired Kompaniez's company and we continue to add them in, a building at a time, when they're in portfolios that we've acquired.' Ira terms assisted living a 'huge opportunity that we are constantly exploring inside of AIMCO.' He claims that AIMCO hasn't taken a count, but thinks there are approximately 9,000 assisted living units that the company currently operates, and adds that he wouldn't be surprised to find out that AIMCO was the largest manager of assisted living units in the nation.

Despite AIMCO's phenomenal growth, it has not outstripped any of the three founders' dreams or expectations. As Kompaniez notes, 'When we went public, Terry, Steve, and I felt it could be quite possible that we would be as large as 500,000. We've been able to do that faster than I had expected because markets have been more favorable and our public currencies, both of common stock and operating partnership units, have been viewed more favorably, and so that's been a very good currency for people who are seeking tax deferral and who want to sell the operating partnership. I think the basic business plan of being a low-cost owner and operator of apartment units with a diversified base with low-risk leverage, in other words, long-term, fixed-rate, fully amortizing debt - that business plan has been borne out, so we're quite comfortable moving forward.' U

Rogers is a freelance writer based in Bethesda, Maryland.
COPYRIGHT 1998 National Apartment Association
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Author:Rogers, Beth
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Date:Jul 1, 1998
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