We believe that Apartment Investment and Management Co. stock (NYSE: AIV) has an upside potential of 60% in 1-2 years once the occupancy rates and demand in residential property rent and lease markets improves to pre-Covid levels. AIV trades at $32 currently and it has lost 38% in value year-to-date. It traded at a pre-Covid high of $54 in February and is 41% below that level now. Also, AIV stock has gained 27% from the lows of $25 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. The stock is lagging the broader markets by a huge margin (S&P 500 is up about 60%), as investors are cautious about the impact of lower occupancy and decline in rental rates on its revenues.
The company owns and manages a geographically diversified portfolio of multifamily apartment properties in the United States. Due to the Covid-19 crisis, businesses have suffered losses, leading to higher unemployment and economic uncertainty. This has affected both occupancy and rental rates, as more and more people are looking for cheaper housing options. The same is evident from a 6% drop in AIV’s rental and other property revenues in Q3. However, easing of lockdown restrictions and gradual improvement in the negative GDP scenario is likely to benefit the spending capacity of its customer base, boosting AIV’s revenue prospects. In view of the small rise in AIV stock since late March, we believe that the stock has room for growth in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis ofApartment Investment and Management Co.’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 62% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
Apartment Investment and Management vs S&P 500 Performance Over 2007-08 Financial Crisis
AIV stock declined from levels of around $48 in October 2007 (the pre-crisis peak) to roughly $5 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 89% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.
However, AIV recovered strongly post the 2008 crisis to about $16 in early 2010 – rising by 205% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Apartment Investment and Management’s Fundamentals in Recent Years Look Strong
Apartment Investment and Management Co. revenues fell 7% from $981 million in 2015 to $914 million in 2019. However, the company’s adjusted net income increased from $272 million to $508 million over the same period – up 87%, mainly driven by the gain on sale of real estate and the Asset Management business. The company’s Q3 2020 revenues were 6% below the year-ago period, however, its EPS figure decreased from $0.01 to -$0.17 due to higher operating expenses in Q3.
Does Apartment Investment and Management Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Apartment Investment and Management’s total debt increased from $3.6 billion in 2016 to $4.4 billion at the end of Q3 2020, while its total cash increased from $142.9 million to around $228.4 million over the same period. The company generated around $265 million in cash from its operations in the first three quarters of 2020, however, if the cash situation further worsens, it might be difficult for the company to weather the crisis given its sizable debt burden.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $52 (60% upside) once economic conditions begin to show signs of improving. This marks a partial recovery to the $54 level Apartment Investment and Management’s stock was at before the coronavirus outbreak gained global momentum.
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