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Section 1: 10-Q (10-Q)

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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to
Commission File Number 1-13232 (Apartment Investment and Management Company)
Commission File Number 0-24497 (AIMCO Properties, L.P.)
 
Apartment Investment and Management Company
AIMCO Properties, L.P.
(Exact name of registrant as specified in its charter)
 
Maryland (Apartment Investment and Management Company)
 
84-1259577
 
Delaware (AIMCO Properties, L.P.)
 
84-1275621
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
4582 South Ulster Street, Suite 1100
 
 
 
Denver, Colorado
 
80237
 
(Address of principal executive offices)
 
(Zip Code)
 
(303) 757-8101
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Apartment Investment and Management Company: Yes x    No o
AIMCO Properties, L.P.: Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Apartment Investment and Management Company: Yes x    No o
AIMCO Properties, L.P.: Yes x    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Apartment Investment and Management Company:
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
o
 
 
 
 
 
AIMCO Properties, L.P.:
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act.
Apartment Investment and Management Company:
o
 
 
AIMCO Properties, L.P.:
o
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Apartment Investment and Management Company: Yes
o
No
x
AIMCO Properties, L.P.: Yes
o
No
x
 
_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
The number of shares of Apartment Investment and Management Company Class A Common Stock outstanding as of August 3, 2018: 157,351,428
The number of AIMCO Properties, L.P. Partnership Common Units outstanding as of August 3, 2018: 166,397,751
 


Table of Contents

EXPLANATORY NOTE
This filing combines the reports on Form 10-Q for the quarterly period ended June 30, 2018, of Apartment Investment and Management Company, or Aimco, and AIMCO Properties, L.P., or the Aimco Operating Partnership. Where it is important to distinguish between the two entities, we refer to them specifically. Otherwise, references to “we,” “us” or “our” mean, collectively, Aimco, the Aimco Operating Partnership and their consolidated entities.
Aimco, a Maryland corporation, is a self-administered and self-managed real estate investment trust, or REIT. Aimco, through wholly-owned subsidiaries, is the general and special limited partner of, and as of June 30, 2018, owned a 94.6% ownership interest in the common partnership units of, the Aimco Operating Partnership. The remaining 5.4% interest is owned by limited partners. As the sole general partner of the Aimco Operating Partnership, Aimco has exclusive control of the Aimco Operating Partnership’s day-to-day management.
The Aimco Operating Partnership holds all of Aimco’s assets and manages the daily operations of Aimco’s business. Pursuant to the Aimco Operating Partnership agreement, Aimco is required to contribute to the Aimco Operating Partnership any assets, which it may acquire including all proceeds from the offerings of its securities. In exchange for the contribution of these assets, Aimco receives additional interests in the Aimco Operating Partnership with similar terms (e.g., if Aimco contributes proceeds of a stock offering, Aimco receives partnership units with terms substantially similar to the stock issued by Aimco).
We believe combining the periodic reports of Aimco and the Aimco Operating Partnership into this single report provides the following benefits:
We present our business as a whole, in the same manner our management views and operates the business;
We eliminate duplicative disclosure and provide a more streamlined and readable presentation because a substantial portion of the disclosures apply to both Aimco and the Aimco Operating Partnership; and
We save time and cost through the preparation of a single combined report rather than two separate reports.
We operate Aimco and the Aimco Operating Partnership as one enterprise, the management of Aimco directs the management and operations of the Aimco Operating Partnership, and the members of the Board of Directors of Aimco are identical to those of the Aimco Operating Partnership.
We believe it is important to understand the few differences between Aimco and the Aimco Operating Partnership in the context of how Aimco and the Aimco Operating Partnership operate as a consolidated company. Aimco has no assets or liabilities other than its investment in the Aimco Operating Partnership. Also, Aimco is a corporation that issues publicly traded equity from time to time, whereas the Aimco Operating Partnership is a partnership that has no publicly traded equity. Except for the net proceeds from stock offerings by Aimco, which are contributed to the Aimco Operating Partnership in exchange for additional limited partnership interests (of a similar type and in an amount equal to the shares of stock sold in the offering), the Aimco Operating Partnership generates all remaining capital required by its business. These sources include the Aimco Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility, the issuance of debt and equity securities, including additional partnership units, and proceeds received from the sale of apartment communities.
Equity, partners’ capital and noncontrolling interests are the main areas of difference between the condensed consolidated financial statements of Aimco and those of the Aimco Operating Partnership. Interests in the Aimco Operating Partnership held by entities other than Aimco, which we refer to as OP Units, are classified within partners’ capital in the Aimco Operating Partnership’s financial statements and as noncontrolling interests in Aimco’s financial statements.
To help investors understand the differences between Aimco and the Aimco Operating Partnership, this report provides: separate condensed consolidated financial statements for Aimco and the Aimco Operating Partnership; a single set of condensed consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity, where appropriate.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for Aimco and the Aimco Operating Partnership in order to establish that the requisite certifications have been made and that Aimco and the Aimco Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

1

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
AIMCO PROPERTIES, L.P.

TABLE OF CONTENTS

FORM 10-Q

 
 
Page
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
ITEM 1A.
ITEM 2.
ITEM 6.
 


2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.
Financial Statements
 
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Buildings and improvements
$
6,407,863

 
$
6,174,149

Land
1,763,788

 
1,753,604

Total real estate
8,171,651

 
7,927,753

Accumulated depreciation
(2,452,947
)
 
(2,522,358
)
Net real estate
5,718,704

 
5,405,395

Cash and cash equivalents
46,703

 
60,498

Restricted cash
41,117

 
34,827

Other assets
365,564

 
272,739

Assets held for sale
94,314

 
17,959

Assets of partnerships served by Asset Management business held for sale at June 30, 2018:
 
 
 
Real estate, net
216,875

 
224,873

Cash and cash equivalents
20,696

 
16,288

Restricted cash
30,055

 
30,928

Other assets
10,328

 
15,533

Total assets
$
6,544,356

 
$
6,079,040

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Non-recourse property debt secured by Real Estate communities, net
$
3,791,238

 
$
3,545,109

Term loan, net
249,801

 
249,501

Revolving credit facility borrowings
220,170

 
67,160

Total indebtedness associated with Real Estate portfolio
4,261,209

 
3,861,770

Accrued liabilities and other
216,789

 
213,027

Liabilities related to assets held for sale
68,610

 

Liabilities of partnerships served by Asset Management business held for sale at June 30, 2018:
 
 
 
Non-recourse property debt, net
224,112

 
227,141

Accrued liabilities and other
17,519

 
19,812

Total liabilities
4,788,239

 
4,321,750

Preferred noncontrolling interests in Aimco Operating Partnership
101,332

 
101,537

Commitments and contingencies (Note 4)

 

Equity:
 
 
 
Perpetual Preferred Stock
125,000

 
125,000

Common Stock, $0.01 par value, 500,787,260 shares authorized, 157,351,428 and 157,189,447 shares issued/outstanding at June 30, 2018 and December 31, 2017, respectively
1,574

 
1,572

Additional paid-in capital
3,887,260

 
3,900,042

Accumulated other comprehensive income
3,208

 
3,603

Distributions in excess of earnings
(2,402,101
)
 
(2,367,073
)
Total Aimco equity
1,614,941

 
1,663,144

Noncontrolling interests in consolidated real estate partnerships
(2,984
)
 
(1,716
)
Common noncontrolling interests in Aimco Operating Partnership
42,828

 
(5,675
)
Total equity
1,654,785

 
1,655,753

Total liabilities and equity
$
6,544,356

 
$
6,079,040


See notes to condensed consolidated financial statements.

3

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
231,130

 
$
227,703

 
$
456,523

 
$
452,931

Rental and other property revenues of partnerships served by Asset Management business
19,000

 
18,533

 
37,808

 
37,095

Tax credit and transaction revenues
57

 
2,856

 
3,576

 
5,547

Total revenues
250,187

 
249,092

 
497,907

 
495,573

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses attributable to Real Estate
76,031

 
79,082

 
154,318

 
158,708

Property operating expenses of partnerships served by Asset Management business
9,062

 
8,391

 
18,257

 
17,587

Depreciation and amortization
97,485

 
89,155

 
190,033

 
176,323

General and administrative expenses
13,882

 
10,108

 
25,237

 
21,071

Other expenses, net
4,366

 
2,650

 
7,324

 
4,389

Total operating expenses
200,826

 
189,386

 
395,169

 
378,078

Operating income
49,361

 
59,706

 
102,738

 
117,495

Interest income
2,884

 
2,012

 
5,056

 
4,204

Interest expense
(49,906
)
 
(46,858
)
 
(97,701
)
 
(94,740
)
Other, net
200

 
200

 
424

 
665

Income before income taxes and gain on dispositions
2,539

 
15,060

 
10,517

 
27,624

Income tax benefit
4,395

 
5,023

 
41,783

 
10,008

Income before gain on dispositions
6,934

 
20,083

 
52,300

 
37,632

Gain on dispositions of real estate, inclusive of related income tax
222

 
1,508

 
50,546

 
1,114

Net income
7,156

 
21,591

 
102,846

 
38,746

Noncontrolling interests:
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests in consolidated real estate partnerships
(45
)
 
(813
)
 
(6,251
)
 
(1,764
)
Net income attributable to preferred noncontrolling interests in Aimco Operating Partnership
(1,934
)
 
(1,939
)
 
(3,871
)
 
(3,888
)
Net income attributable to common noncontrolling interests in Aimco Operating Partnership
(140
)
 
(787
)
 
(3,895
)
 
(1,344
)
Net income attributable to noncontrolling interests
(2,119
)
 
(3,539
)
 
(14,017
)
 
(6,996
)
Net income attributable to Aimco
5,037

 
18,052

 
88,829

 
31,750

Net income attributable to Aimco preferred stockholders
(2,149
)
 
(2,149
)
 
(4,297
)
 
(4,297
)
Net income attributable to participating securities
(71
)
 
(60
)
 
(190
)
 
(119
)
Net income attributable to Aimco common stockholders
$
2,817

 
$
15,843

 
$
84,342

 
$
27,334

 
 
 
 
 
 
 
 
Net income attributable to Aimco per common share – basic and diluted
$
0.02

 
$
0.10

 
$
0.54

 
$
0.17

Dividends declared per common share
$
0.38

 
$
0.36

 
$
0.76

 
$
0.72

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
156,703

 
156,305

 
156,656

 
156,282

Weighted average common shares outstanding – diluted
156,833

 
156,715

 
156,786

 
156,735


See notes to condensed consolidated financial statements.

4

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
7,156

 
$
21,591

 
$
102,846

 
$
38,746

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized (losses) gains on interest rate swaps
(4
)
 
(345
)
 
415

 
(355
)
Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
100

 
369

 
219

 
755

Unrealized (losses) gains on available for sale debt securities
(451
)
 
1,080

 
(1,051
)
 
(421
)
Other comprehensive (loss) gain
(355
)
 
1,104

 
(417
)
 
(21
)
Comprehensive income
6,801

 
22,695

 
102,429

 
38,725

Comprehensive income attributable to noncontrolling interests
(2,100
)
 
(3,630
)
 
(13,995
)
 
(7,090
)
Comprehensive income attributable to Aimco
$
4,701

 
$
19,065

 
$
88,434

 
$
31,635



See notes to condensed consolidated financial statements.

5

Table of Contents

APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended
 
June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
102,846

 
$
38,746

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
190,033

 
176,323

Gain on dispositions of real estate, inclusive of related income tax
(50,546
)
 
(1,114
)
Income tax benefit
(41,783
)
 
(10,008
)
Other adjustments
2,307

 
4,706

Net changes in operating assets and operating liabilities
(17,231
)
 
(31,147
)
Net cash provided by operating activities
185,626

 
177,506

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of real estate and deposits related to purchases of real estate
(205,318
)
 
(8,189
)
Capital expenditures
(164,116
)
 
(176,388
)
Proceeds from dispositions of real estate
76,317

 
10,915

Purchases of corporate assets
(2,649
)
 
(6,005
)
Other investing activities
2,079

 
733

Net cash used in investing activities
(293,687
)
 
(178,934
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from non-recourse property debt
360,613

 
68,535

Principal repayments on non-recourse property debt
(257,144
)
 
(91,420
)
Proceeds from term loan

 
250,000

Net borrowings on revolving credit facility
153,010

 
227,790

Payment of dividends to holders of Preferred Stock
(4,297
)
 
(4,297
)
Payment of dividends to holders of Common Stock
(119,288
)
 
(112,661
)
Payment of distributions to noncontrolling interests
(16,998
)
 
(11,176
)
Purchases and redemptions of noncontrolling interests
(11,395
)
 
(323,165
)
Other financing activities
(41
)
 
53

Net cash provided by financing activities
104,460

 
3,659

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(3,601
)
 
2,231

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD
142,541

 
131,150

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
138,940

 
$
133,381


See notes to condensed consolidated financial statements.

6

Table of Contents

 
AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Buildings and improvements
$
6,407,863

 
$
6,174,149

Land
1,763,788

 
1,753,604

Total real estate
8,171,651

 
7,927,753

Accumulated depreciation
(2,452,947
)
 
(2,522,358
)
Net real estate
5,718,704

 
5,405,395

Cash and cash equivalents
46,703

 
60,498

Restricted cash
41,117

 
34,827

Other assets
365,564

 
272,739

Assets held for sale
94,314

 
17,959

Assets of partnerships served by Asset Management business held for sale at June 30, 2018:
 
 
 
Real estate, net
216,875

 
224,873

Cash and cash equivalents
20,696

 
16,288

Restricted cash
30,055

 
30,928

Other assets
10,328

 
15,533

Total assets
$
6,544,356

 
$
6,079,040

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Non-recourse property debt secured by Real Estate communities, net
$
3,791,238

 
$
3,545,109

Term loan, net
249,801

 
249,501

Revolving credit facility borrowings
220,170

 
67,160

Total indebtedness associated with Real Estate portfolio
4,261,209

 
3,861,770

Accrued liabilities and other
216,789

 
213,027

Liabilities related to assets held for sale
68,610

 

Liabilities of partnerships served by Asset Management business held for sale at June 30, 2018:
 
 
 
Non-recourse property debt, net
224,112

 
227,141

Accrued liabilities and other
17,519

 
19,812

Total liabilities
4,788,239

 
4,321,750

Redeemable preferred units
101,332

 
101,537

Commitments and contingencies (Note 4)

 

Partners’ capital:
 
 
 
Preferred units
125,000

 
125,000

General Partner and Special Limited Partner
1,489,941

 
1,538,144

Limited Partners
42,828

 
(5,675
)
Partners’ capital attributable to the Aimco Operating Partnership
1,657,769

 
1,657,469

Noncontrolling interests in consolidated real estate partnerships
(2,984
)
 
(1,716
)
Total partners’ capital
1,654,785

 
1,655,753

Total liabilities and partners’ capital
$
6,544,356

 
$
6,079,040


See notes to condensed consolidated financial statements.

7

Table of Contents

AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
REVENUES
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
231,130

 
$
227,703

 
$
456,523

 
$
452,931

Rental and other property revenues of partnerships served by Asset Management business
19,000

 
18,533

 
37,808

 
37,095

Tax credit and transaction revenues
57

 
2,856

 
3,576

 
5,547

Total revenues
250,187

 
249,092

 
497,907

 
495,573

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses attributable to Real Estate
76,031

 
79,082

 
154,318

 
158,694

Property operating expenses of partnerships served by Asset Management business
9,062

 
8,391

 
18,257

 
17,601

Depreciation and amortization
97,485

 
89,155

 
190,033

 
176,323

General and administrative expenses
13,882

 
10,108

 
25,237

 
21,071

Other expenses, net
4,366

 
2,650

 
7,324

 
4,389

Total operating expenses
200,826

 
189,386

 
395,169

 
378,078

Operating income
49,361

 
59,706

 
102,738

 
117,495

Interest income
2,884

 
2,012

 
5,056

 
4,204

Interest expense
(49,906
)
 
(46,858
)
 
(97,701
)
 
(94,740
)
Other, net
200

 
200

 
424

 
665

Income before income taxes and gain on dispositions
2,539

 
15,060

 
10,517

 
27,624

Income tax benefit
4,395

 
5,023

 
41,783

 
10,008

Income before gain on dispositions
6,934

 
20,083

 
52,300

 
37,632

Gain on dispositions of real estate, inclusive of related income tax
222

 
1,508

 
50,546

 
1,114

Net income
7,156

 
21,591

 
102,846

 
38,746

Net income attributable to noncontrolling interests in consolidated real estate partnerships
(45
)
 
(813
)
 
(6,251
)
 
(1,764
)
Net income attributable to the Aimco Operating Partnership
7,111

 
20,778

 
96,595

 
36,982

Net income attributable to the Aimco Operating Partnership’s preferred unitholders
(4,083
)
 
(4,088
)
 
(8,168
)
 
(8,185
)
Net income attributable to participating securities
(79
)
 
(63
)
 
(204
)
 
(123
)
Net income attributable to the Aimco Operating Partnership’s common unitholders
$
2,949

 
$
16,627

 
$
88,223

 
$
28,674

 
 
 
 
 
 
 
 
Net income attributable to the Aimco Operating Partnership per common unit – basic
$
0.02

 
$
0.10

 
$
0.54

 
$
0.18

Net income attributable to the Aimco Operating Partnership per common unit – diluted
$
0.02

 
$
0.10

 
$
0.54

 
$
0.17

Distributions declared per common unit
$
0.38

 
$
0.36

 
$
0.76

 
$
0.72

 
 
 
 
 
 
 
 
Weighted average common units outstanding – basic
164,685

 
163,740

 
164,138

 
163,777

Weighted average common units outstanding – diluted
164,815

 
164,150

 
164,268

 
164,230

 

See notes to condensed consolidated financial statements.

8

Table of Contents

AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
7,156

 
$
21,591

 
$
102,846

 
$
38,746

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized (losses) gains on interest rate swaps
(4
)
 
(345
)
 
415

 
(355
)
Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
100

 
369

 
219

 
755

Unrealized (losses) gains on available for sale debt securities
(451
)
 
1,080

 
(1,051
)
 
(421
)
Other comprehensive (loss) gain
(355
)
 
1,104

 
(417
)
 
(21
)
Comprehensive income
6,801

 
22,695

 
102,429

 
38,725

Comprehensive income attributable to noncontrolling interests
(45
)
 
(856
)
 
(6,251
)
 
(1,865
)
Comprehensive income attributable to the Aimco Operating Partnership
$
6,756

 
$
21,839

 
$
96,178

 
$
36,860



See notes to condensed consolidated financial statements.

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AIMCO PROPERTIES, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Six Months Ended
 
June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
102,846

 
$
38,746

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
190,033

 
176,323

Gain on dispositions of real estate, inclusive of related income tax
(50,546
)
 
(1,114
)
Income tax benefit
(41,783
)
 
(10,008
)
Other adjustments
2,307

 
4,706

Net changes in operating assets and operating liabilities
(17,231
)
 
(31,147
)
Net cash provided by operating activities
185,626

 
177,506

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of real estate and deposits related to purchases of real estate
(205,318
)
 
(8,189
)
Capital expenditures
(164,116
)
 
(176,388
)
Proceeds from dispositions of real estate
76,317

 
10,915

Purchases of corporate assets
(2,649
)
 
(6,005
)
Other investing activities
2,079

 
733

Net cash used in investing activities
(293,687
)
 
(178,934
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from non-recourse property debt
360,613

 
68,535

Principal repayments on non-recourse property debt
(257,144
)
 
(91,420
)
Proceeds from term loan

 
250,000

Net borrowings on revolving credit facility
153,010

 
227,790

Payment of distributions to holders of Preferred Units
(8,168
)
 
(8,185
)
Payment of distributions to General Partner and Special Limited Partner
(119,288
)
 
(112,661
)
Payment of distributions to Limited Partners
(5,625
)
 
(5,408
)
Payment of distributions to noncontrolling interests
(7,502
)
 
(1,880
)
Purchases of noncontrolling interests in consolidated real estate partnerships
(3,581
)
 
(311,055
)
Other financing activities
(7,855
)
 
(12,057
)
Net cash provided by financing activities
104,460

 
3,659

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(3,601
)
 
2,231

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD
142,541

 
131,150

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
138,940

 
$
133,381


See notes to condensed consolidated financial statements.

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
AIMCO PROPERTIES, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)

Note 1 — Organization
Apartment Investment and Management Company, or Aimco, is a Maryland corporation incorporated on January 10, 1994. Aimco is a self-administered and self-managed real estate investment trust, or REIT. AIMCO Properties, L.P., or the Aimco Operating Partnership, is a Delaware limited partnership formed on May 16, 1994, to conduct our business, which is focused on the ownership, management, redevelopment and limited development of quality apartment communities located in several of the largest markets in the United States.
Aimco, through its wholly-owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP Trust, owns a majority of the ownership interests in the Aimco Operating Partnership. Aimco conducts all of its business and owns all of its assets through the Aimco Operating Partnership. Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are referred to as OP Units. OP Units include common partnership units, which we refer to as common OP Units, as well as partnership preferred units, which we refer to as preferred OP Units. As of June 30, 2018, after eliminations for units held by consolidated subsidiaries, the Aimco Operating Partnership had 166,403,852 common partnership units outstanding. As of June 30, 2018, Aimco owned 157,351,428 of the common partnership units (94.6% of the common partnership units) of the Aimco Operating Partnership and Aimco had outstanding an equal number of shares of its Class A Common Stock, which we refer to as Common Stock.
Except as the context otherwise requires, “we,” “our” and “us” refer to Aimco, the Aimco Operating Partnership and their consolidated subsidiaries, collectively.
As of June 30, 2018, we owned an equity interest in 138 apartment communities with 37,897 apartment homes in our Real Estate portfolio. Our Real Estate portfolio is diversified by both price point and geography and consists primarily of market rate apartment communities in which we own a substantial interest. We consolidated 134 of these apartment communities with 37,755 apartment homes and these communities comprise our reportable segment.
As of June 30, 2018, we also held nominal ownership positions in partnerships that own 46 low-income housing tax credit apartment communities with 6,898 apartment homes. We provide services to these partnerships and receive fees and other payments in return. Our relationship with these partnerships is different than real estate ownership and is better described as an asset management business, or Asset Management. In accordance with accounting principles generally accepted in the United States of America, or GAAP, we are required to consolidate partnerships owning an aggregate of 39 apartment communities with 6,211 apartment homes. We completed the sale of our Asset Management business on July 25, 2018.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The balance sheets of Aimco and the Aimco Operating Partnership at December 31, 2017, have been derived from their respective audited financial statements at that date, but do not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in Aimco’s and the Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2017. Except where indicated, the footnotes refer to both Aimco and the Aimco Operating Partnership.
Principles of Consolidation
Aimco’s accompanying condensed consolidated financial statements include the accounts of Aimco, the Aimco Operating Partnership, and their consolidated subsidiaries. The Aimco Operating Partnership’s condensed consolidated financial statements

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include the accounts of the Aimco Operating Partnership and its consolidated subsidiaries, including partnerships served by our Asset Management business (see Note 8). All significant intercompany balances and transactions have been eliminated in consolidation.
Interests in the Aimco Operating Partnership that are held by limited partners other than Aimco are reflected in Aimco’s accompanying condensed consolidated balance sheets as noncontrolling interests in the Aimco Operating Partnership. Interests in partnerships consolidated by the Aimco Operating Partnership that are held by third parties are reflected in our accompanying condensed consolidated balance sheets as noncontrolling interests in consolidated real estate partnerships.
Temporary Equity and Partners’ Capital
The following table presents a reconciliation of the Aimco Operating Partnership’s preferred OP Units from December 31, 2017 to June 30, 2018. The preferred OP Units may be redeemed at the holders’ option (as further discussed in Note 5), and are therefore presented within temporary equity in Aimco’s condensed consolidated balance sheets and within temporary capital in the Aimco Operating Partnership’s condensed consolidated balance sheets (in thousands).
Balance, December 31, 2017
$
101,537

Distributions to holders of preferred OP Units
(3,871
)
Redemption of preferred OP Units and other
(205
)
Net income attributable to preferred OP Units
3,871

Balance, June 30, 2018
$
101,332

Aimco Equity (including Noncontrolling Interests)
The following table presents a reconciliation of Aimco’s consolidated permanent equity accounts from December 31, 2017 to June 30, 2018 (in thousands):
 
Aimco
Equity
 
Noncontrolling
interests in
consolidated real estate
partnerships
 
Common
noncontrolling
interests in
Aimco Operating
Partnership
 
Total
Equity
Balance, December 31, 2017
$
1,663,144

 
$
(1,716
)
 
$
(5,675
)
 
$
1,655,753

Contributions

 
(20
)
 

 
(20
)
Issuance of common OP Units

 

 
50,151

 
50,151

Dividends on Preferred Stock
(4,297
)
 

 

 
(4,297
)
Dividends and distributions on Common Stock and common OP Units
(119,558
)
 
(7,499
)
 
(5,973
)
 
(133,030
)
Redemptions of common OP Units

 

 
(7,611
)
 
(7,611
)
Amortization of stock-based compensation cost
4,481

 

 
780

 
5,261

Effect of changes in ownership for consolidated entities
(17,385
)
 

 
7,283

 
(10,102
)
Change in accumulated other comprehensive loss
(395
)
 

 
(22
)
 
(417
)
Other
122

 

 

 
122

Net income
88,829

 
6,251

 
3,895

 
98,975

Balance, June 30, 2018
$
1,614,941

 
$
(2,984
)
 
$
42,828

 
$
1,654,785


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Partners’ Capital attributable to the Aimco Operating Partnership
The following table presents a reconciliation of the consolidated partners’ capital balances in permanent capital that are attributable to the Aimco Operating Partnership from December 31, 2017 to June 30, 2018 (in thousands):
 
Partners’ capital
 attributable to
the Aimco Operating Partnership
Balance, December 31, 2017
$
1,657,469

Issuance of common OP Units
50,151

Distributions to preferred units held by Aimco
(4,297
)
Distributions to common units held by Aimco
(119,558
)
Distributions to common units held by Limited Partners
(5,973
)
Redemption of common OP Units
(7,611
)
Amortization of Aimco stock-based compensation cost
5,261

Effect of changes in ownership for consolidated entities
(10,102
)
Change in accumulated other comprehensive loss
(417
)
Other
122

Net income
92,724

Balance, June 30, 2018
$
1,657,769

A separate reconciliation of noncontrolling interests in consolidated real estate partnerships and total partners’ capital for the Aimco Operating Partnership is not presented as these amounts are identical to the corresponding noncontrolling interests in consolidated real estate partnerships and total equity for Aimco, which are presented above.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP 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 2017 financial statements have been reclassified to conform to the current presentation.
Income Taxes
As discussed in Note 9 to the consolidated financial statements in Item 8 of our Form 10-K for the year ended December 31, 2017, we have not completed our accounting for the tax effects of the enactment of the Tax Cuts and Jobs Act in late December 2017. During the six months ended June 30, 2018, we recognized a measurement period adjustment to reduce by $11.3 million an estimated valuation allowance recognized as of December 31, 2017. During the six months ended June 30, 2018, we also recognized an offsetting valuation allowance resulting from an intercompany transfer of assets related to our Asset Management business. These adjustments had no net effect on our results of operations or effective tax rate.
Accounting Pronouncements Adopted in the Current Year
Effective January 1, 2018, we adopted a new standard issued by the Financial Accounting Standards Board, or FASB, that affects accounting for revenue. Under this new standard, revenue is generally recognized when an entity has transferred control of goods or services to a customer for an amount reflecting the consideration to which the entity expects to be entitled for such exchange. In evaluating the contracts we enter into in the ordinary course of business, substantially all of our revenue is generated by lease agreements, which will continue to be subject to existing GAAP until 2019, when we will adopt the new lease accounting standard.
The new revenue standard also introduced new guidance for accounting for other income, including how we measure gains or losses on the sale of real estate. We adopted the new standard using the modified retrospective transition method effective January 1, 2018, with no effect on our results of operations or financial position.
Effective January 1, 2018, we also adopted new standards issued by the FASB that affect the presentation and disclosure of the statements of cash flows. We are now required to present combined inflows and outflows of cash, cash equivalents, and

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restricted cash in the consolidated statement of cash flows. Previously our consolidated statements of cash flows presented transfers between restricted and unrestricted cash accounts as operating, financing, and investing cash activities depending upon the required or intended purpose for the restricted funds. The new guidance also requires debt prepayment and other extinguishment related payments to be classified as financing activities. We previously classified such payments as operating activities. We have revised our condensed consolidated statements of cash flows for the six months ended June 30, 2017 to conform to this presentation, and the effect of the revisions to net cash flows from operating and investing activities as previously reported for the six months ended June 30, 2017 are summarized in the following table (in thousands):
 
As Previously Reported
 
Adjustments
 
As Revised
Net cash flows from operating activities
$
176,013

 
$
1,493

 
$
177,506

Net cash flows from investing activities
(177,154
)
 
(1,780
)
 
(178,934
)
As of June 30, 2018, in addition to the balances presented as cash, cash equivalents and restricted cash on the condensed consolidated balance sheets, there is $0.4 million of cash, cash equivalents and restricted cash included in assets held for sale.
Note 3 — Significant Transactions, Dispositions of Apartment Communities and Assets Held for Sale
Acquisition of Apartment Communities
During the six months ended June 30, 2018, we purchased for $160.0 million Bent Tree Apartments, a 748-apartment home community in Fairfax County, Virginia. The purchase price, plus $1.0 million of capitalized transaction costs, was allocated as follows: $47.0 million to land; $113.0 million to buildings and improvements; and $1.0 million to other items.
During the six months ended June 30, 2018, we agreed to acquire six apartment communities in the Philadelphia area for a stated purchase price of $445.0 million. The portfolio includes 1,006 existing apartment homes, 110 apartment homes under construction, and 185,000 square feet of office and retail space. On May 1, 2018, we purchased four of the six apartment communities, including 665 apartment homes and 153,000 square feet of office and retail space. The gross purchase price consisted of $208.9 million of assumed property-level debt and the issuance of 1.2 million OP Units. In accordance with GAAP, the OP Units were valued at $41.08 per unit, the closing price of Aimco’s common share on May 1, 2018. Total consideration, plus $6.4 million of capitalized transaction costs, was allocated as follows: $14.1 million to land; $282.5 million to buildings and improvements; $6.3 million to intangible assets; and $3.1 million to intangible liabilities. The purchase of the fifth apartment community is conditioned upon the City of Camden’s approval of the transfer of the existing PILOT tax agreement, which has not yet been received. The purchase of the sixth apartment community is expected upon completion of the construction in the first half of 2019.
Dispositions of Apartment Communities and Assets Held for Sale
During the six months ended June 30, 2018, we sold three apartment communities with 513 apartment homes for a gain on disposition of $50.6 million, net of income tax, and gross proceeds of $71.9 million resulting in $64.6 million in net proceeds to us. Two of these communities are located in southern Virginia and one is located in suburban Maryland.
During the six months ended June 30, 2018, we sold our interests in the entities owning the La Jolla Cove property in settlement of legal actions filed in 2014 by a group of disappointed buyers who had hoped to acquire the property. We provided seller financing with a stated value of $48.6 million and received net cash proceeds of approximately $5.0 million in the sale.
In addition to the apartment communities we sold during the periods presented, from time to time we may be marketing for sale certain apartment communities that are inconsistent with our long-term investment strategy. At the end of each reporting period, we evaluate whether such communities meet the criteria to be classified as held for sale.
On July 25, 2018, we sold for $590.0 million our Asset Management business and our four affordable apartment communities located in Hunters Point. After payment of transaction costs and repayment of property-level debt encumbering the Hunters Point apartment communities, net proceeds were approximately $512.0 million. The related assets and liabilities were classified as held for sale as of June 30, 2018.
As of June 30, 2018, we also classified Chestnut Hill Village, an 821-apartment home community located in north Philadelphia, as held for sale. On July 27, 2018, we sold this community for gross proceeds of $170.4 million, resulting in $165.5 million of net proceeds to us.

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Note 4 — Commitments and Contingencies
Commitments
In connection with our redevelopment, development and capital improvement activities, we have entered into various construction-related contracts and we have made commitments to complete redevelopment of certain apartment communities, pursuant to financing or other arrangements. As of June 30, 2018, our commitments related to these capital activities totaled approximately $118.0 million, most of which we expect to incur during the next 12 months.
We enter into certain commitments for future purchases of goods and services in connection with the operations of our apartment communities. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to our historical expenditures.
Tax Credit Arrangements
For various consolidated partnerships served by our Asset Management business, we are required to manage the partnerships and related apartment communities in compliance with various laws, regulations and contractual provisions that apply to historic and low-income housing tax credit syndication arrangements. In some instances, noncompliance with applicable requirements could result in projected tax benefits not being realized by the limited partners in these partnerships and would require a refund or reduction of investor capital contributions, which are reported as deferred income in our condensed consolidated balance sheets, until such time as our obligation to deliver tax benefits is relieved. In connection with the July 25, 2018, sale of our Asset Management business, the performance obligation related to continuing compliance was assumed by the purchaser.
Income Taxes
In 2014, the Internal Revenue Service initiated an audit of the Aimco Operating Partnership’s 2011 and 2012 tax years. We do not believe the audit will have any material effect on our unrecognized tax benefits, financial condition or results of operations.
Legal Matters
In addition to the matters described below, we are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by our general liability insurance program, and none of which we expect to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Environmental
Various federal, state and local laws subject apartment community owners or operators to liability for management, and the costs of removal or remediation, of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or for personal injury, disease, disability or other infirmities related to the alleged presence of hazardous materials. In addition to potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future, or apartment communities we no longer own or operate.
We are engaged in discussions with the Environmental Protection Agency, or EPA, and the Indiana Department of Environmental Management, or IDEM, regarding contaminated groundwater in a residential area in the vicinity of an Indiana apartment community that has not been owned by us since 2008. The contamination allegedly derives from a dry cleaner that operated on our former property, prior to our ownership. We have undertaken a voluntary remediation of the dry cleaner contamination under IDEM’s oversight, and in previous years accrued our share of the then-estimated cleanup and abatement costs. In 2016, EPA listed our former community and a number of residential communities in the vicinity on the National Priorities List, or NPL (i.e. as a Superfund site). In May 2018, we prevailed on our federal judicial appeal vacating the Superfund listing. We continue to work with EPA and IDEM to identify options for clean-up of the site. Although the outcome of these processes are uncertain, we do not expect their resolution to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
We also have been contacted by regulators and the current owner of a property in Lake Tahoe, California, regarding environmental issues allegedly stemming from the historic operation of a dry cleaner. An entity owned by us was the former general partner of a now-dissolved partnership that previously owned a site that was used for dry cleaning. That entity and the current property owner have been remediating the dry cleaner site since 2009, under the oversight of the Lahontan Regional Water Quality Control Board, or Lahontan. In May 2017, Lahontan issued a final cleanup and abatement order that names four potentially-

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responsible parties, acknowledges that there may be additional responsible parties, and requires the named parties to perform additional groundwater investigation and corrective actions with respect to onsite and offsite contamination. We are appealing the final order while simultaneously complying with it. Although the outcome of this process is uncertain, we do not expect its resolution to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
We have determined that our legal obligations to remove or remediate certain potentially hazardous materials may be conditional asset retirement obligations, as defined in GAAP. Except in limited circumstances where the asset retirement activities are expected to be performed in connection with a planned construction project or apartment community casualty, we believe that the fair value of our asset retirement obligations cannot be reasonably estimated due to significant uncertainties in the timing and manner of settlement of those obligations. Asset retirement obligations that are reasonably estimable as of June 30, 2018, are immaterial to our consolidated financial condition, results of operations and cash flows.
Note 5 — Earnings per Share and Unit
Aimco and the Aimco Operating Partnership calculate basic earnings per common share and basic earnings per common unit based on the weighted average number of shares of Common Stock and common partnership units and participating securities outstanding, and calculate diluted earnings per share and diluted earnings per unit taking into consideration dilutive common stock and common partnership unit equivalents and dilutive convertible securities outstanding during the period.
Our common stock and common partnership unit equivalents include options to purchase shares of Common Stock, which, if exercised, would result in Aimco’s issuance of additional shares and the Aimco Operating Partnership’s issuance to Aimco of additional common partnership units equal to the number of shares purchased under the options. These equivalents also include unvested total stockholder return, or TSR, restricted stock awards that do not meet the definition of participating securities, which would result in an increase in the number of common shares and common partnership units outstanding equal to the number of shares that vest. The effect of 0.1 million and 0.4 million of these securities was dilutive for the three months ended June 30, 2018 and 2017, respectively. The effect of 0.1 million and 0.5 million of these securities was dilutive for the six months ended June 30, 2018 and 2017, respectively. Securities with dilutive effect are included in the denominator for calculating diluted earnings per share and unit during these periods. There were 0.2 million potential shares and 0.2 million potential units not dilutive and excluded from the denominator for calculating diluted earnings per share and per unit, respectively, for both the three and six months ended June 30, 2018 and 2017.
Our time-based restricted stock awards receive dividends similar to shares of Common Stock and common partnership units prior to vesting and our TSR long-term incentive partnership units receive a percentage of the distributions paid to common partnership units prior to vesting. These dividends and distributions are not forfeited if the awards fail to vest. Therefore, the unvested shares and units related to these awards are participating securities. The effect of participating securities is included in basic and diluted earnings per share and unit computations using the two-class method of allocating distributed and undistributed earnings when the two-class method is more dilutive than the treasury method. There were 0.3 million and 0.2 million unvested participating securities as of June 30, 2018 and 2017, respectively.
The Aimco Operating Partnership has various classes of preferred OP Units, which may be redeemed at the holders’ option. The Aimco Operating Partnership may redeem these units for cash, or at its option, shares of Common Stock. As of June 30, 2018, these preferred OP Units were potentially redeemable for approximately 2.4 million shares of Common Stock (based on the period end market price), or cash. The Aimco Operating Partnership has a redemption policy that requires cash settlement of redemption requests for the preferred OP Units, subject to limited exceptions. Accordingly, we have excluded these securities from earnings per share and unit computations and we expect to exclude them in future periods.
Note 6 — Fair Value Measurements
Recurring Fair Value Measurements
We measure at fair value on a recurring basis our investments in the securitization trust that holds certain of our property debt, which we classify as available for sale, or AFS, debt securities, and our interest rate swaps, both of which are classified within Level 2 of the GAAP fair value hierarchy.
Our investments in debt securities classified as AFS are presented within other assets in the accompanying condensed consolidated balance sheets. We hold several positions in the securitization trust that pay interest currently and we also hold the first loss position in the securitization trust, which accrues interest over the term of the investment. We are accreting the discount to the $100.9 million face value of the investments into interest income using the effective interest method over the remaining term of the investments, which, as of June 30, 2018, was approximately 2.9 years. Our amortized cost basis for these investments, which represents the original cost adjusted for interest accretion less interest payments received, was $80.6 million and $77.7

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million at June 30, 2018 and December 31, 2017, respectively. We estimated the fair value of these investments to be $84.6 million and $82.8 million at June 30, 2018 and December 31, 2017, respectively.
We estimate the fair value of these investments using an income and market approach with primarily observable inputs, including yields and other information regarding similar types of investments, and adjusted for certain unobservable inputs specific to these investments. The fair value of the positions that pay interest currently typically moves in an inverse relationship with movements in interest rates. The fair value of the first loss position is primarily correlated to collateral quality and demand for similar subordinate commercial mortgage-backed securities.
Certain consolidated partnerships served by our Asset Management business entered into interest rate swap agreements, which limited exposure to interest rate risk on the partnerships’ debt by effectively converting the interest from a variable rate to a fixed rate. We estimated the fair value of interest rate swaps using an income approach with primarily observable inputs, including information regarding the hedged variable cash flows and forward yield curves relating to the variable interest rates on which the hedged cash flows are based.
The following table sets forth a summary of the changes in fair value of these interest rate swaps (in thousands):
 
Six Months Ended June 30,
 
2018
 
2017
Beginning balance
$
(1,795
)
 
$
(3,175
)
Unrealized losses included in interest expense

 
(23
)
Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
219

 
755

Unrealized gains (losses) included in equity and partners’ capital
415

 
(355
)
Ending balance
$
(1,161
)
 
$
(2,798
)
As of June 30, 2018 and December 31, 2017, the interest rate swaps had aggregate notional amounts of $21.7 million and $22.0 million, respectively. We designated these interest rate swaps as cash flow hedges. As of June 30, 2018, the fair value of these swaps is presented within liabilities held for sale in our condensed consolidated balance sheets, and we recognized any changes in the fair value as an adjustment of accumulated other comprehensive loss within equity and partners’ capital to the extent of their effectiveness. Effective July 25, 2018, in connection with the sale of our Asset Management business, these obligations were derecognized.
Fair Value Disclosures
We believe that the carrying values of the consolidated amounts of cash and cash equivalents, receivables and payables approximate their fair values at June 30, 2018, and December 31, 2017, due to their relatively short-term nature and high probability of realization. The estimated fair value of the total indebtedness associated with our Real Estate portfolio was approximately $4.2 billion at June 30, 2018, as compared to a carrying amount of $4.3 billion at June 30, 2018. The carrying value of the total indebtedness associated with our Real Estate portfolio approximated its estimated fair value at December 31, 2017. We estimate the fair value of our consolidated debt using an income and market approach, including comparison of the contractual terms to observable and unobservable inputs such as market interest rate risk spreads, contractual interest rates, remaining periods to maturity, collateral quality and loan to value ratios on similarly encumbered apartment communities within our portfolio. We classify the fair value of debt within Level 3 of the GAAP valuation hierarchy based on the significance of certain of the unobservable inputs used to estimate its fair value.

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Note 7 — Business Segments
Our chief executive officer, who is our chief operating decision maker, uses proportionate property net operating income to assess the operating performance of our apartment communities. Proportionate property net operating income is defined as our share of rental and other property revenue less our share of property operating expenses, including real estate taxes, for consolidated apartment communities we own and manage. Beginning in 2018, we exclude from rental and other property revenues the amount of utilities cost reimbursed by residents and reflect such amount as a reduction of the related utility expense within property operating expenses in our evaluation of segment results. In our condensed consolidated statements of operations, utility reimbursements are included in rental and other property revenues, in accordance with GAAP. The tables below have been revised to conform to this presentation.
Apartment communities are classified as either part of our Real Estate portfolio or those owned through partnerships served by our Asset Management business. As of June 30, 2018, for segment performance evaluation, our Real Estate segment included 134 consolidated apartment communities with 37,755 apartment homes and excluded four apartment communities with 142 apartment homes that we neither manage nor consolidate.
As of June 30, 2018, through our Asset Management business we also held nominal ownership positions in consolidated partnerships that own 39 low-income housing tax credit apartment communities with 6,211 apartment homes. Neither the results of operations nor the assets of these partnerships and apartment communities are quantitatively material; therefore, we have one reportable segment, Real Estate.
The following tables present the revenues, net operating income and income before gain on dispositions of our Real Estate segment on a proportionate basis and excluding amounts related to apartment communities sold or held for sale as of June 30, 2018 for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Real Estate
 
Proportionate and Other
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Three months ended June 30, 2018:
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
214,478

 
$
8,192

 
$
8,460

 
$
231,130

Rental and other property revenues of partnerships served by Asset Management business

 

 
19,000

 
19,000

Tax credit and transaction revenues

 

 
57

 
57

Total revenues
214,478

 
8,192

 
27,517

 
250,187

Property operating expenses attributable to Real Estate
60,930

 
7,655

 
7,446

 
76,031

Property operating expenses of partnerships served by Asset Management business

 

 
9,062

 
9,062

Other operating expenses not allocated to reportable
segment (3)

 

 
115,733

 
115,733

Total operating expenses
60,930

 
7,655

 
132,241

 
200,826

Operating income
153,548

 
537

 
(104,724
)
 
49,361

Other items included in income before gain on
dispositions (4)

 

 
(42,427
)
 
(42,427
)
Income before gain on dispositions
$
153,548

 
$
537

 
$
(147,151
)
 
$
6,934


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Real Estate
 
Proportionate and Other
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Three months ended June 30, 2017:
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
193,908

 
$
13,547

 
$
20,248

 
$
227,703

Rental and other property revenues of partnerships served by Asset Management business

 

 
18,533

 
18,533

Tax credit and transaction revenues

 

 
2,856

 
2,856

Total revenues
193,908

 
13,547

 
41,637

 
249,092

Property operating expenses attributable to Real Estate
55,559

 
8,870

 
14,653

 
79,082

Property operating expenses of partnerships served by Asset Management business

 

 
8,391

 
8,391

Other operating expenses not allocated to reportable
segment (3)

 

 
101,913

 
101,913

Total operating expenses
55,559

 
8,870

 
124,957

 
189,386

Operating income
138,349

 
4,677

 
(83,320
)
 
59,706

Other items included in income before gain on
dispositions (4)

 

 
(39,623
)
 
(39,623
)
Income before gain on dispositions
$
138,349

 
$
4,677

 
$
(122,943
)
 
$
20,083

 
Real Estate
 
Proportionate and Other
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Six months ended June 30, 2018:
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
420,800

 
$
16,978

 
$
18,745

 
$
456,523

Rental and other property revenues of partnerships served by Asset Management business

 

 
37,808

 
37,808

Tax credit and transaction revenues

 

 
3,576

 
3,576

Total revenues
420,800

 
16,978

 
60,129

 
497,907

Property operating expenses attributable to Real Estate
120,273

 
15,914

 
18,131

 
154,318

Property operating expenses of partnerships served by Asset Management business

 

 
18,257

 
18,257

Other operating expenses not allocated to reportable
segment (3)

 

 
222,594

 
222,594

Total operating expenses
120,273

 
15,914

 
258,982

 
395,169

Operating income
300,527

 
1,064

 
(198,853
)
 
102,738

Other items included in income before gain on
dispositions (4)

 

 
(50,438
)
 
(50,438
)
Income before gain on dispositions
$
300,527

 
$
1,064

 
$
(249,291
)
 
$
52,300


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Real Estate
 
Proportionate and Other
Adjustments (1)
 
Corporate and
Amounts Not
Allocated to Reportable
Segment (2)
 
Consolidated
Six months ended June 30, 2017:
 
 
 
 
 
 
 
Rental and other property revenues attributable to Real Estate
$
385,414

 
$
27,388

 
$
40,129

 
$
452,931

Rental and other property revenues of partnerships served by Asset Management business

 

 
37,095

 
37,095

Tax credit and transaction revenues

 

 
5,547

 
5,547

Total revenues
385,414

 
27,388

 
82,771

 
495,573

Property operating expenses attributable to Real Estate
111,734

 
17,880

 
29,094

 
158,708

Property operating expenses of partnerships served by Asset Management business

 

 
17,587

 
17,587

Other operating expenses not allocated to reportable
segment (3)

 

 
201,783

 
201,783

Total operating expenses
111,734

 
17,880

 
248,464

 
378,078

Operating income
273,680

 
9,508

 
(165,693
)
 
117,495

Other items included in income before gain on
dispositions (4)

 

 
(79,863
)
 
(79,863
)
Income before gain on dispositions
$
273,680

 
$
9,508

 
$
(245,556
)
 
$
37,632

(1)
Represents adjustments for the noncontrolling interests in consolidated real estate partnerships’ share of the results of consolidated apartment communities in our Real Estate segment, which are included in the related consolidated amounts, but excluded from proportionate property net operating income for our segment evaluation. Also includes the reclassification of utility reimbursements from revenues to property operating expenses for the purpose of evaluating segment results. Utility reimbursements are included in rental and other property revenues in our condensed consolidated statements of operations prepared in accordance with GAAP.
(2)
Includes the operating results of apartment communities sold during the periods shown or held for sale at the end of the period, if any, and the operating results of apartment communities owned by consolidated partnerships served by our Asset Management business. Corporate and Amounts Not Allocated to Reportable Segment also includes property management expenses and casualty gains and losses, which are included in consolidated property operating expenses and are not part of our segment performance measure.
(3)
Other operating expenses not allocated to reportable segment consists of depreciation and amortization, general and administrative expenses and other operating expenses, which are not included in our measure of segment performance.
(4)
Other items included in income before gain on dispositions primarily consists of interest and income tax benefit.
The assets of our reportable segment and the consolidated assets not allocated to our segment are as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
Real Estate
$
5,853,287

 
$
5,391,816

Corporate and other assets (1)
691,069

 
687,224

Total consolidated assets
$
6,544,356

 
$
6,079,040

(1)
Includes the assets not allocated to our reportable segment, primarily the assets of consolidated partnerships served by our Asset Management business and apartment communities sold or held for sale as of June 30, 2018.
For the six months ended June 30, 2018 and 2017, capital additions related to our Real Estate segment totaled $158.4 million and $163.2 million, respectively.
Note 8 — Variable Interest Entities
Generally, a variable interest entity, or VIE, is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership is considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most

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significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
Aimco consolidates the Aimco Operating Partnership, which is a VIE for which Aimco is the primary beneficiary. Aimco, through the Aimco Operating Partnership, consolidates all VIEs for which the Aimco Operating Partnership is the primary beneficiary.
All of the VIEs we consolidate own interests in one or more apartment communities. VIEs that own apartment communities we classify as part of our Real Estate segment are typically structured to generate a return for their partners through the operation and ultimate sale of the communities. We are the primary beneficiary in the limited partnerships in which we are the sole decision maker and have a substantial economic interest.
Certain partnerships served by our Asset Management business own interests in low-income housing tax credit apartment communities that are structured to provide for the pass-through of tax credits and tax deductions to their partners and are VIEs. We held a nominal ownership position in these partnerships, generally one percent or less. As general partner in these partnerships, we were the sole decision maker and we received fees and other payments in return for the asset management and other services we provided and thus shared in the economics of the partnerships, and as such, we were the primary beneficiary of these partnerships. On July 25, 2018, we completed the sale of our Asset Management business. The table below summarizes information regarding VIEs consolidated by the Aimco Operating Partnership:
 
June 30, 2018
 
December 31, 2017
Real Estate portfolio:
 
 
 
VIEs with interests in apartment communities
13

 
14

Apartment communities owned by VIEs
13

 
14

Apartment homes in communities owned by VIEs
4,196

 
4,321

Consolidated partnerships served by Asset Management business:
 
 
 
VIEs with interests in apartment communities
41

 
49

Apartment communities owned by VIEs
31

 
37

Apartment homes in communities owned by VIEs
4,879

 
5,893


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Assets of the Aimco Operating Partnership’s consolidated VIEs must first be used to settle the liabilities of such consolidated VIEs. These consolidated VIEs’ creditors do not have recourse to the general credit of the Aimco Operating Partnership. Assets and liabilities of consolidated VIEs are summarized in the table below (in thousands):
 
June 30, 2018
 
December 31, 2017
Real Estate portfolio:
 
 
 
Assets
 
 
 
Net real estate
$
478,774

 
$
529,898

Cash and cash equivalents
13,776

 
16,111

Restricted cash
6,302

 
4,798

Assets held for sale
57,596

 

Liabilities
 
 
 
Non-recourse property debt secured by Real Estate communities, net
340,874

 
412,205

Accrued liabilities and other
12,204

 
10,623

Liabilities related to assets held for sale
68,443

 

Consolidated partnerships served by Asset Management business:
 
 
 
Assets held for sale at June 30, 2018
 
 
 
Real estate, net
171,281

 
215,580

Cash and cash equivalents
14,366

 
15,931

Restricted cash
22,691

 
30,107

Liabilities related to assets held for sale at June 30, 2018
 
 
 
Non-recourse property debt
183,188

 
220,356

Accrued liabilities and other
15,118

 
20,241



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ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Quarterly Report contains or may contain information that is forward-looking, within the meaning of the federal securities laws, including, without limitation, statements regarding: our ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, redevelopments and developments; our ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to our redevelopment and development investments; expectations regarding sales of our apartment communities and the use of proceeds thereof; and our ability to comply with debt covenants, including financial coverage ratios.
Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond our control, including, without limitation:
Real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing of acquisitions, dispositions, redevelopments and developments; and changes in operating costs, including energy costs;
Financing risks, including the availability and cost of capital markets’ financing; the risk that our cash flows from operations may be insufficient to meet required payments of principal and interest; and the risk that our earnings may not be sufficient to maintain compliance with debt covenants;
Insurance risks, including the cost of insurance, natural disasters and severe weather such as hurricanes; and
Legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of governmental regulations that affect us and interpretations of those regulations; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by us.
In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on our ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership.
Readers should carefully review our financial statements and the notes thereto, as well as the section entitled “Risk Factors” described in Item 1A of Apartment Investment and Management Company’s and AIMCO Properties, L.P.’s combined Annual Report on Form 10-K for the year ended December 31, 2017, and the other documents we file from time to time with the Securities and Exchange Commission.
As used herein and except as the context otherwise requires, “we,” “our” and “us” refer to Apartment Investment and Management Company (which we refer to as Aimco), AIMCO Properties, L.P. (which we refer to as the Aimco Operating Partnership) and their consolidated entities, collectively.
Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted in the United States, or GAAP. These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading and include: Funds From Operations, Pro forma Funds From Operations, Adjusted Funds From Operations, Free Cash Flow, Economic Income, and the measures used to compute our leverage ratios.
Executive Overview
We are focused on the ownership, management, redevelopment and limited development of quality apartment communities located in several of the largest markets in the United States.
Our principal financial objective is to provide predictable and attractive returns to our equity holders. We measure our current return using Adjusted Funds From Operations, or AFFO, and our long-term total return using Economic Income. We also use Pro forma Funds From Operations, or Pro forma FFO, as a measure of operational performance. Our business plan to achieve this principal financial objective is to:
operate our portfolio of desirable apartment homes with a high level of focus on customer selection and customer satisfaction and in an efficient manner that produces predictable and growing Free Cash Flow;

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improve our portfolio of apartment communities, which is diversified both by geography and price point by selling apartment communities with lower projected Free Cash Flow internal rates of return and investing the proceeds from such sales through capital enhancements, redevelopment, development, and acquisitions with greater land value, higher expected rent growth, and projected Free Cash Flow internal rates of return in excess of those expected from communities sold;
use low levels of financial leverage, primarily in the form of non-recourse, long-dated, fixed-rate property debt and perpetual preferred equity, a combination which reduces our refunding and re-pricing risk and which provides a hedge against increases in interest rates; and
focus intentionally on a collaborative and productive culture based on respect for others and personal responsibility.
Our business is organized around five areas of strategic focus: operational excellence; redevelopment; portfolio management; balance sheet; and team and culture.
The results from the execution of our business plan during the three months ended June 30, 2018, are further described below.
Net income attributable to common stockholders per common share decreased by $0.08 during the three months ended June 30, 2018 compared to 2017, due to higher depreciation from redevelopments placed into service and from apartment communities acquired during 2018 and to lower gains on sale of real estate.
Pro forma FFO per share was flat for the three months ended June 30, 2018, as compared to the same period in 2017. The following items contributed to Pro forma FFO:
$0.02 from Same Store property net operating income growth of 3.2%, driven by a 3.2% increase in revenue offset by a 3.3% increase in expenses; and
$0.03 from leasing activity related to renovated homes at Redevelopment communities, 2018 acquisitions and the second quarter 2017 reacquisition of a 47% interest in the Palazzo communities, offset in part by lower property net operating income from apartment communities sold in 2017 and 2018.
As compared to 2017, this increase of $0.05 to Pro forma FFO per share was offset primarily by increased interest expense on corporate borrowings, primarily related to acquisitions, increased personnel costs, primarily due to the timing of incentive compensation costs, and lower tax benefits.
AFFO per share increased 6% during the three months ended June 30, 2018, as compared to the same period in 2017, as a result of of lower Capital Replacement spending. Approximately one-third of the decrease in Capital Replacement spending was due to our paired trade activity, including the sale of 2,300 apartment homes in 2017 and an additional 513 apartment homes through June 30, 2018, and the remaining decrease is due to the timing of 2018 capital spending. As we concentrate our investment capital in higher quality, higher price point communities, Free Cash Flow margin is increasing as Capital Replacements decline as a percentage of net operating income.
Operational Excellence
We own and operate a portfolio of market rate apartment communities, diversified by both geography and price point, which we refer to as our Real Estate portfolio. At June 30, 2018, our Real Estate portfolio included 138 apartment communities with 37,897 apartment homes in which we held an average ownership of approximately 99%. This portfolio was divided about two thirds by value to our “Same Store” portfolio of stabilized apartment communities and about one third by value to “Other Real Estate,” which includes recently acquired communities and communities under redevelopment or development whose long-term financial contribution is not yet stabilized.
Our property operations team produced solid results for our Real Estate portfolio for the three months ended June 30, 2018. Highlights include:
Same Store net operating income growth of 3.2% for the three months ended June 30, 2018 compared to 2017;
Same Store rent increases on renewals and new leases averaged 4.8% and 1.9%, respectively, for a weighted average increase of 3.4%; and
Average daily occupancy of 96.3%, 40 basis points higher than the same period in 2017.

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Redevelopment
Our second line of business is the redevelopment of apartment communities, where we expect to create value of at least 25% to 35% of our incremental investment by repositioning communities within our portfolio. We measure the rate and quality of financial returns by net asset value creation, an important component of Economic Income, our primary measure of long-term financial performance. We also undertake ground-up development when warranted by risk-adjusted investment returns, either directly in connection with the redevelopment of an existing apartment community or, on a more limited basis, at a new location. When warranted, we rely on the expertise and credit of a third-party developer familiar with the local market to limit our exposure to construction risk.
We invest to earn risk-adjusted returns in excess of those expected from the apartment communities sold in paired trades to fund the redevelopment or development. Of these two activities, we favor redevelopment because it permits adjustment to the scope and timing of spending to align with changing market conditions and customer preferences.
During the three months ended June 30, 2018, we invested $42.2 million in redevelopment and development. In Center City, Philadelphia, we continued construction on the fourth and final tower of Park Towne Place; lease-up is underway. At June 30, 2018, 90% of the redeveloped apartment homes in the community were leased and 28 of the 136 homes still under renovation were pre-leased.
During the three months ended June 30, 2018, we invested $9.8 million in the development of our Parc Mosaic community in Boulder, Colorado. We expect completion of construction in late 2019 and initial occupancy in the summer of 2019.
Our total potential net investment in our current redevelopments and developments is $519.8 million with a projected weighted average net operating income yield on these investments of 6.1%, assuming untrended rents. Of this total, $313.6 million has been funded. Our funding needs for 2018 for our remaining redevelopment and development investment will be satisfied through a combination of leverage and community sales, including proceeds from the July 25, 2018 sale of our Asset Management business and our four affordable communities located in Hunters Point included in our Real Estate portfolio, discussed below.
During the three months ended June 30, 2018, we leased 181 apartment homes at our redevelopment communities. As of June 30, 2018, our exposure to lease-up at active redevelopment and development projects was approximately 419 apartment homes, of which 108 were in the fourth tower of Park Towne Place and 215 were being constructed at Parc Mosaic and 96 were located in three active redevelopments.
During the third quarter, we expect to exercise our option to acquire approximately two acres of land adjacent to our 21 Fitzsimons apartment community, located on the University of Colorado Anschutz Medical Campus, for the development of an apartment community. Over the next two years, we expect to invest approximately $87.0 million to construct 253 apartment homes and 4,600 square feet of retail space. We anticipate a stabilized net operating income yield in the low 6% range, driven by an 80% net operating income margin due to operational efficiencies from owning the adjacent property, and a Free Cash Flow internal rate of return greater than 10% resulting in value creation of at least 35%. Upon completion of the project, we will own and operate 853 apartment homes on the campus. Employment on the campus has grown by 9% annually from 2015 to 2017, and exceeds 25,000 jobs today. This number is expected to grow to 46,000 jobs over the next 12 years. We have multi-year options to acquire the balance of the land on the campus that is zoned for multifamily, enough for an additional 600 apartment homes.
Please see below under the Liquidity and Capital Resources – Redevelopment and Development heading for additional information regarding our redevelopment and development investment during the six months ended June 30, 2018.
Portfolio Management
Our portfolio of apartment communities is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality, and is also diversified across several of the largest markets in the United States. We measure the quality of apartment communities in our Real Estate portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance and analysis. Under this rating system, we classify as “A” quality apartment communities those earning rents greater than 125% of the local market average; as “B” quality apartment communities those earning rents between 90% and 125% of the local market average; as “C+” quality apartment communities those earning rents greater than $1,100 per month, but lower than 90% of the local market average; and as “C” quality apartment communities those earning rents less than $1,100 per month and lower than 90% of the local market average. We classify as “B/B+” quality a portfolio that on average earns rents between 100% and 125% of the local market average rents where the portfolio is located. Although some companies and analysts within the multifamily real estate industry use apartment community quality ratings of “A,” “B” and “C,” some of which are tied to the local market rent averages, the metrics used to classify apartment community quality as well as the period for which the local market rents are calculated may vary from company to company. Accordingly,

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our rating system for measuring apartment community quality is neither broadly nor consistently used in the multifamily real estate industry.
As part of our portfolio strategy, we seek to sell up to 10% of our portfolio annually and to reinvest the proceeds from such sales in accretive uses such as capital enhancements, redevelopments, occasional development, and selective acquisitions with projected Free Cash Flow internal rates of return higher than expected from the communities being sold. Through this disciplined approach to capital recycling, since 2011, we have sold $4.2 billion in lower-rated apartment communities and we have significantly increased the quality and expected growth rate of our portfolio.
 
Three Months Ended
 
June 30,
 
2018
 
2017
Average revenue per Aimco apartment home (1)
$
2,090

 
$
1,950

Portfolio average rents as a percentage of local market average rents
112
%
 
113
%
Percentage A (2Q 2018 average revenue per Aimco apartment home $2,770)
50
%
 
53
%
Percentage B (2Q 2018 average revenue per Aimco apartment home $1,839)
35
%
 
33
%
Percentage C+ (2Q 2018 average revenue per Aimco apartment home $1,669)
15
%
 
14
%
(1) Represents average monthly rental and other property revenues (excluding resident reimbursement of utility cost) divided by the number of occupied apartment homes as of the end of the current period.
Our average revenue per apartment home was $2,090 for three months ended June 30, 2018, a 7% increase compared to 2017. This increase is due to year-over-year growth in Same Store revenue as well as our acquisition activities, lease-up of redevelopment and acquisition properties, and the sale of communities with average monthly revenues per apartment home lower than those of the retained portfolio.
As we execute our portfolio strategy, we expect to increase average revenue per Aimco apartment home at a rate greater than market rent growth; increase Free Cash Flow margins; and maintain sufficient geographic and price point diversification to limit volatility and concentration risk.
Apartment Community Acquisitions
We evaluate potential acquisitions with an eye for unique and opportunistic investments and fund acquisitions pursuant to our strict paired trade discipline.
During the three months ended June 30, 2018, we agreed to acquire six communities in the Philadelphia area. On May 1, 2018, we purchased four communities including 665 apartment homes and 153,000 square feet of office and retail space for $307.9 million. The purchase of the fifth apartment community is conditioned upon the City of Camden’s approval of the transfer of the existing PILOT tax agreement, which has not yet been received. The purchase of the sixth apartment community is expected upon completion of construction in the first half of 2019. We anticipate our operation of the five operating communities will generate a year one net operating income yield of 5.3%, and for all six communities, average revenue per apartment home of $2,200 and a ten-year expected free cash flow internal rate of return of about 8%.
During the six months ended June 30, 2018, we purchased for $160 million Bent Tree Apartments, a 748-apartment home community in Fairfax County, Virginia. This community is expected to achieve a 5.6% year one net operating income capitalization rate. Since acquisition, results have exceeded underwriting, with new lease rates increasing by 8% overall and 5% before taking into consideration rate increases following capital investments. Occupancy has increased by approximately 300 basis points from the date of acquisition, to 97%.
Dispositions
On July 25, 2018, we sold for $590 million our Asset Management business and our four affordable apartment communities located in Hunters Point. After payment of transaction costs and repayment of property-level debt encumbering the Hunters Point apartment communities, net proceeds to us were approximately $512 million.
On July 27, 2018, we sold for $170 million Chestnut Hill Village, an 821-apartment home community located in north Philadelphia.
We used the proceeds from the two sales to fund 2018 acquisitions, completing the paired trades. The sale of Chestnut Hill Village rebalanced our capital allocation to Philadelphia from a lower-rated apartment community in north Philadelphia to

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communities in the more desirable Center City and University City submarkets. We used the proceeds from these sales to repay in full our our revolving credit facility and our term loan. We plan to use the remaining proceeds to reduce property-level borrowings and to fund an expected increase in 2018 redevelopment activity.
Balance Sheet
Our leverage includes our share of long-term, non-recourse property debt encumbering apartment communities in our Real Estate portfolio, outstanding borrowings under our revolving credit facility and term loan, and outstanding preferred equity. In our calculation of leverage, we exclude the non-recourse property debt obligations of consolidated partnerships served by our Asset Management business, as these were not our obligations and they had a limited effect on the amount of fees and other amounts we expected to receive in our role as asset manager for these partnerships. These obligations were derecognized in connection with the sale of our Asset Management business on July 25, 2018.
Our leverage strategy seeks to increase financial returns while using leverage with appropriate caution. We limit risk through balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; build financial flexibility by maintaining ample unused and available credit as well as holding properties with substantial value unencumbered by property debt; and use partners’ capital when it enhances financial returns or reduces investment risk.
We target the ratio of Proportionate Debt and Preferred Equity to Adjusted EBITDA to be below 7.0x and we target the ratio of Adjusted EBITDA to Adjusted Interest Expense and Preferred Dividends to be greater than 2.5x. Our leverage ratios for the three months ended June 30, 2018, are presented below:
Proportionate Debt to Pro forma EBITDA (1)
 6.5x
Proportionate Debt and Preferred Equity to Pro forma EBITDA (1)
 6.9x
Adjusted EBITDA to Adjusted Interest Expense
 3.4x
Adjusted EBITDA to Adjusted Interest Expense and Preferred Dividends
 3.1x
(1)
Our Proportionate Debt to Pro forma EBITDA and Proportionate Debt and Preferred Equity to Pro forma EBITDA ratios have been calculated on a pro forma basis to reflect the impact of the July 2018 dispositions of our Asset Management business, our four affordable apartment communities located in Hunters Point and Chestnut Hill Village, described above. Pro forma EBITDA has also been adjusted to reflect our acquisition of the four Philadelphia apartment communities as if the transaction had closed on April 1, 2018. These adjustments reduced the ratios of Proportionate Debt to Adjusted EBITDA and Proportionate Debt and Preferred Equity to Adjusted EBITDA by 0.7x.
We calculate Pro forma EBITDA, Adjusted EBITDA and Adjusted Interest Expense used in our leverage ratios based on the most recent three month amounts, annualized. As used in the ratios above, Preferred Equity represents Aimco’s preferred stock and the Aimco Operating Partnership’s preferred OP Units.
We expect our Proportionate Debt to Adjusted EBITDA and Proportionate Debt and Preferred Equity to Adjusted EBITDA ratios to decrease to 6.3x and 6.7x, respectively, before year-end.
Our liquidity consists of cash balances and available capacity on our revolving line of credit. As of June 30, 2018, we had on hand $455.3 million in cash and restricted cash plus available capacity on our revolving line of credit. After the completion of the July dispositions, we used the proceeds to repay the term loan and outstanding borrowings on our revolving line of credit. On a pro forma basis, we would have had the capacity to borrow $592.9 million under our revolving line of credit and additional cash of approximately $207 million.
We also manage our financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. At June 30, 2018, we held unencumbered apartment communities with an estimated fair value of approximately $2.0 billion.
Two credit rating agencies rate our creditworthiness using different methodologies and ratios for assessing our credit, and both have rated our credit and outlook as BBB- (stable), an investment grade rating. Although some of the ratios they use are similar to those we use to measure our leverage, there are differences in our methods of calculation and therefore our leverage ratios disclosed above may not be indicative of the ratios that may be calculated by these agencies.
For additional information regarding our leverage, please see the discussion under the Liquidity and Capital Resources heading.

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Team and Culture
Our team and culture are keys to our success. Our intentional focus on a collaborative and productive culture based on respect for others and personal responsibility is reinforced by a preference for promotion from within. We focus on succession planning and talent development to produce a strong, stable team that is the enduring foundation of our success. In 2018, we were recognized by the Denver Post as a Top Work Place for the sixth consecutive year, an accomplishment shared with only seven other companies in Colorado.
Key Financial Indicators
The key financial indicators we use in managing our business and in evaluating our operating performance are Economic Income, our measure of long-term total return, and Adjusted Funds From Operations, our measure of current return. In addition to these indicators, we evaluate our operating performance and financial condition using: Pro forma FFO; Free Cash Flow; same store property net operating income; proportionate property net operating income; average revenue per effective apartment home; leverage ratios; and net leverage.
Results of Operations
Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we redevelop, acquire and dispose of our apartment communities affect our operating results.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements included in Item 1.
Three and Six Months Ended June 30, 2018 compared to June 30, 2017
Net income attributable to Aimco decreased by $13.0 million and increased by $57.1 million, respectively, during the three and six months ended June 30, 2018 as compared to 2017. Net income attributable to the Aimco Operating Partnership decreased by $13.7 million and increased by $59.6 million, respectively, during the three and six months ended June 30, 2018 as compared to 2017. The following discussion describes the primary drivers of the changes in the net income attributable to Aimco and the Aimco Operating Partnership for the three and six months ended June 30, 2018 compared to 2017.
Property Operations
As described under the preceding Executive Overview heading, our Real Estate portfolio consists primarily of market rate apartment communities in which we hold a substantial equity ownership interest.
We use proportionate property net operating income to assess the operating performance of our Real Estate Portfolio. Proportionate property net operating income reflects our share of rental and other property revenues less direct property operating expenses, including real estate taxes, for consolidated apartment communities we manage. Accordingly, the results of operations of our Real Estate segment discussed below are presented on a proportionate basis and exclude the results of four apartment communities with 142 apartment homes that we neither manage nor consolidate.
Additionally, we evaluate the revenue and expense performance of our segment as adjusted for utility reimbursements. Nearly two-thirds of our utility costs are reimbursed by residents. These reimbursements are included in rental and other property revenues in our condensed consolidated statements of operations prepared in accordance with GAAP, but beginning in 2018, our segment results below reflect utility reimbursements as a reduction of the corresponding expense. We have revised the 2017 amounts to conform to this presentation.
We do not include offsite costs associated with property management or casualty-related amounts in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below.
Refer to Note 7 in the condensed consolidated financial statements in Item 1 for further discussion regarding our reportable segments including a reconciliation of these proportionate amounts to the corresponding amounts in our condensed consolidated statements of operations.
Real Estate Proportionate Property Net Operating Income
We classify apartment communities within our Real Estate segment as Same Store and Other Real Estate. Same Store communities are those that have reached a stabilized level of operations as of the beginning of a two-year comparable period and maintained it throughout the current and comparable prior periods, and are not expected to be sold within 12 months. Other Real

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Estate includes apartment communities that do not meet the Same Store definition, including, but not limited to: redevelopment and development apartment communities, which are those currently under construction that have not achieved a stabilized level of operations and those that have been completed in recent years that have not achieved and maintained stabilized operations for both the current and comparable prior year; acquisition apartment communities, which are those we have acquired since the beginning of a two-year comparable period; and communities that we expect to sell within 12 months but do not yet meet the criteria to be classified as held for sale.
As of June 30, 2018, our Real Estate segment consisted of 95 Same Store apartment communities with 26,367 apartment homes and 34 Other Real Estate communities with 9,963 apartment homes.
From December 31, 2017 to June 30, 2018, on a net basis, our Same Store portfolio increased by three apartment communities and decreased by 19 apartment homes. These changes consisted of:
the addition of one developed apartment community with 91 apartment homes and one redeveloped apartment community with 104 apartment homes that were classified as Same Store upon maintaining stabilized operations for the entirety of the periods presented;
the addition of one acquired apartment community with 115 apartment homes that was classified as Same Store because we have now owned it for the entirety of both periods presented;
the addition of one apartment community with 492 apartments homes that we no longer expect to sell within 12 months; and
the reduction of one apartment community with 821 apartment homes, which was classified as held for sale as of June 30, 2018.
As of June 30, 2018, our Other Real Estate communities included:
13 apartment communities with 6,284 apartment homes in redevelopment or development;
6 apartment communities with 1,876 apartment homes recently acquired; and
15 apartment communities with 1,803 apartment homes that do not meet the definition of Same Store because they are either subject to agreements that limit the amount by which we may increase rents or have not reached or maintained a stabilized level of occupancy as of the beginning of a two-year comparable period, often due to a casualty event.
Our Real Estate segment results for the three months ended June 30, 2018 and 2017, as presented below, are based on the apartment community populations as of June 30, 2018.
 
Three Months Ended June 30,
 
 
 
 
(in thousands)
2018
 
2017
 
$ Change
 
% Change
Rental and other property revenues before utility reimbursements:
 
 
 
 
 
 
 
Same Store communities
$
146,950

 
$
142,372

 
$
4,578

 
3.2
%
Other Real Estate Communities
67,528

 
51,536

 
15,992

 
31.0
%
Total
214,478

 
193,908

 
20,570

 
10.6
%
Property operating expenses, net of utility reimbursements:
 
 
 
 
 
 
 
Same Store communities
38,496

 
37,261

 
1,235

 
3.3
%
Other Real Estate Communities
22,434

 
18,298

 
4,136

 
22.6
%
Total
60,930

 
55,559

 
5,371

 
9.7
%
Proportionate property net operating income:
 
 
 
 
 
 
 
Same Store communities
108,454

 
105,111

 
3,343

 
3.2
%
Other Real Estate Communities
45,094

 
33,238

 
11,856

 
35.7
%
Total
$
153,548

 
$
138,349

 
$
15,199

 
11.0
%
For the three months ended June 30, 2018 compared to 2017, our Real Estate segment’s proportionate property net operating income increased $15.2 million, or 11.0%.
Same Store proportionate property net operating income increased by $3.3 million, or 3.2%. This increase was primarily attributable to a $4.6 million, or 3.2%, increase in rental and other property revenues due to higher average revenues of $53 per Aimco apartment home comprised of increases in rental rates and a 40 basis point increase in average daily occupancy. Renewal

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rents, which is the rent paid by an existing resident who renewed her lease compared to the rent she previously paid, were up 4.8% for the three months ended June 30, 2018, and new lease rents, which is the rent paid by a new resident compared to the rent paid by the previous resident of the same apartment home, were up 1.9%, resulting in a weighted average increase of 3.4%. The increase in Same Store rental and other property revenues was partially offset by a $1.2 million, or 3.3%, increase in property operating expenses primarily due to repairs and maintenance costs and increases in insurance and real estate taxes. During the three months ended June 30, 2018 compared to 2017, controllable operating expenses, which exclude utility costs, real estate taxes and insurance, increased by $0.5 million, or 2.6%.
The proportionate property net operating income of Other Real Estate communities increased by $11.9 million, or 35.7%, for the three months ended June 30, 2018 compared to 2017 due to: