Apartment Investment and Management Co. (NYSE:AIV) completed a spinoff of most of its income-producing properties at the end of 2020. As of Dec. 15, 2020, AIV issued common stock shares in Apartment Income REIT (NYSE:AIRC) to its shareholders. AIV stock now trades as a separate REIT (real estate investment trust) with most of the properties that are not “stabilized.” These are in the AIRC portfolio.
As a result, the company (“AIMCO”) now has properties, after what its recent 10-K SEC filing calls “the Separation,” that are essentially apartment development projects. These are not stabilized, income-producing properties. As a result, here is what management said in its recent earnings release on March 12:
“Given our stated strategy, it is expected that at any point in time the value-creation process will be ongoing at numerous of our investments and will therefore be difficult to value.”
This implies that it will be difficult to value AIV stock going forward. For example, AIV has made clear it does not intend to pay a dividend. Now the stock has two strikes against it: Its value will be unclear and it won’t pay a dividend.
As a result, don’t expect AIV stock to spike. This is despite the stock moving from $4.82 to $6.26 per share at the time of publication.
By contrast, Apartment Income REIT (NYSE:AIRC) stock now pays a tax-advantaged dividend. It is expected to pay a $2.46 dividend, giving it a 5.53% dividend yield. The company says it expects that only 60% of that dividend will be taxable, as the rest of the dividend payments will be a return of capital.
Analyst Issues With AIMCO
The best analysis so far of the newly spun-off company is a Seeking Alpha article, “Sum of Its Parts: Analysis of Aimco’s Proposed Split.” The author questions why management even decided to split apart the two types of REITs. He implies that it might be to revamp the track record.
He also argues that the separation between the stabilized and development apartment holdings won’t “change existing opinions on AIMCO’s value proposition.” In the end, he believes that the holdings of the two companies are not all that different. Furthermore, he suggests that it is not really a “strategic transformation.”
For example, the article points out that a shareholder, Jonathan Litt, chief information officer of land and buildings, took a 1.4% stake in Apartment Investment and Management Company. He tried to get the shareholders to have a vote on the proposed split.
On Sept. 22, he wrote a letter to AIMCO arguing that the spinoff “will not close the Company’s substantial discount to net asset value (‘NAV’).” He also said that the separation was
“a thinly veiled attempt by management and the Board of Directors (the ‘Board’) to rid themselves of a decades-long poor track record rather than address the fundamental issues challenging the Company.”
He argued that the NAV of AIMCO pre-split was $58. Here is how the post-split math now adds up. Each AIC stock shareholder received exactly one share of AIRC stock. Therefore, all we have to do is add up the two stock prices and then compare that total with the estimated NAV.
As of the time of publication, AIRC stock was at $44.21 and AIV stock was at $6.26, so the total value of each of these is just $50.47. This is $7.53 below the $58 NAV at the end of September, or just about 13%.
What to Do With AIV Stock
The spinoff was a taxable event for taxable accounts that held the AIV shares before the spinoff. This is not a good situation for them since they now still have a discount to NAV on a combined basis, plus they owe taxes for the spinoff. That has likely led to selling pressure on both stocks.
By the way, the spinoff also kicked AIV stock out of the S&P 500 index and made room for Tesla (NASDAQ:TSLA) to take its place.
For the time being, investors don’t know the exact performance of both companies, at least until both managements issue their Q1 reports. And don’t forget what I pointed out earlier. Management has said that it will be difficult to value the new AIMCO. That does not bode well for AIV stock. Until some real catalyst appears that will raise the stock to its NAV, the stock is likely to linger well below the new NAV.
On the date of publication, Mark R. Hake held a long position in Tesla (TSLA) stock.