Apartment Investment & Management Co: Form 10-Q for the period ended Sep 30, 2023

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 on Form 10-Q contains or may contain information that is forward-looking within the meaning of the federal securities laws, including, without limitation, statements regarding: our future plans and goals, including our pipeline investments and projects, our plans to eliminate certain near term debt maturities, our estimated value creation and potential, our timing, scheduling and budgeting, projections regarding lease growth, our plans to form joint ventures, our plans for new acquisitions or dispositions, our strategic partnerships and value added therefrom, and changes to our corporate governance.

These forward-looking statements are based on management’s judgment as of this date, which is subject to risks and uncertainties that could cause actual results to differ materially from our expectations, including, but not limited to: the risk that the 2023 plans and goals may not be completed, as expected, in a timely manner or at all, the inability to recognize the anticipated benefits of the pipeline investments and projects, changes in general economic conditions, including, increases in interest rates and other force-majeure events and such other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (“SEC”).

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 of 1986, as amended (the “Code”) and depends on our ability to meet the various requirements imposed by the 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 Item 1A. Risk Factors in Part II of this report. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Readers should also carefully review the section entitled “Risk Factors” described in Item 1A of Apartment Investment and Management Company’s and Aimco OP L.P.’s combined Annual Report on Form 10-K for the year ended December 31, 2022, and subsequent documents we file from time to time with the SEC.

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 OP L.P. (which we refer to as Aimco Operating Partnership) and their consolidated subsidiaries, collectively.

Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted in the United States ("GAAP"). These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading.

Executive Overview

Our mission is to make real estate investments, primarily focused on the multifamily sector within targeted U.S. markets, where outcomes are enhanced through our human capital and substantial value is created for investors, teammates, and the communities in which we operate.

Our value proposition includes our:

• Platform, consisting of a cohesive, talented, and tenured team with diverse real estate industry experience combined with a disciplined and proven investment process;
• Diversified portfolio, consisting of in-process value-add investments, a pipeline of 14 million square feet of potential future development, a national portfolio of stabilized multifamily real estate and limited indirect and passive investments; and
• Capital redeployment plan of prudent recycling of capital, reallocating our equity to higher returning investments.

Our primary goal is outsized risk adjusted returns and accelerating growth for our shareholders. We are focused on providing superior total-return performance to shareholders, primarily through capital appreciation driven by accretive investment and active portfolio management over multi-year periods. We plan to reinvest earnings to facilitate growth and, therefore, do not presently intend to pay a regular quarterly cash dividend.

Our financial objectives are to create value and produce superior, project-level, risk-adjusted returns on equity as measured by the investment period Internal Rate of Return (“IRR”) and the project-level Multiple on Invested Capital (“MOIC”). We measure broader performance based on Net Asset Value (“NAV”) growth over time.

Our capital allocation strategy is designed to leverage our investment platform and optimize risk-adjusted returns for our shareholders.

Aimco targets a balanced allocation, which includes investments in “Value Add” and “Opportunistic” multifamily real estate, primarily located in Southeast Florida, the Washington D.C. Metro Area and Colorado's Front Range, plus investment in a geographically diversified portfolio of "Core" and "Core-Plus" apartment communities.

In addition, we currently hold select alternative assets, consisting primarily of indirect, real estate related debt and equity investments. We have reduced our allocation to these investments and plan to continue to significantly reduce our allocation over time.

We have policies in place that support our stated strategy, guide our investment allocations, and manage risk, including to hold at all times a sizable portion of our net equity in stabilized cash-flowing assets and to require cash or committed credit necessary for completion of development and redevelopment projects prior to their commencement.

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. Over time, we expect our enterprise to produce superior returns on equity on a risk-adjusted basis and it is our plan to do so by:

• Benefiting from a national platform while leveraging local and regional expertise

We have corporate headquarters in Denver, Colorado and Washington D.C. Our investment platform is managed by experienced professionals based in three regions, where we will focus our new investment activity: Southeast Florida, the Washington D.C. Metro Area and Colorado's Front Range. By regionalizing this platform, we are able to leverage the in-depth local market knowledge of each regional leader, creating a comparative advantage when sourcing, evaluating, and executing investment opportunities.

• Managing and investing in value-add and opportunistic real estate

Our dedicated team will source and execute development and redevelopment projects, and various other direct investment strategies. Our development and redevelopment portfolio currently includes projects in construction and lease-up. In addition, our team has secured significant, high-quality, future development opportunities, including total potential of more than 14 million square feet, located in high-growth markets. Generally, we seek direct investment opportunities in locations where barriers to entry are high, target customers can be clearly defined and where we have a comparative advantage over others in the market. From time to time, we may choose to monetize certain pipeline assets prior to vertical construction in an effort to maximize value and risk adjusted returns. In any time period, the amount of Aimco capital that is allocated to development activities may vary based on market conditions and other factors.

• Owning a portfolio of stabilized core and core plus real estate

Our entire portfolio of operating properties includes 26 apartment communities (22 consolidated properties and four unconsolidated properties) with average rents in line with local market averages (generally defined as B class). We also own one commercial office building that is part of an assemblage with an adjacent apartment building. The target composition of our stabilized portfolio will continue to include primarily B multifamily assets, spread across a geographically diversified portfolio, with a bias toward long established residential neighborhoods that rank highly in regard to schools, employment fundamentals and state and regional governance. Core-Plus opportunities offer the opportunity for incremental capital investment while maintaining stabilized cashflow to accelerate income growth and improve asset values.

• Managing and continuing to reduce our allocation to alternative investments, over time

We currently hold select alternative investments, the majority of which originated with Aimco Predecessor and, over time, plan to significantly reduce capital allocated to these investments. Our current allocation to alternative investments includes: our indirect interest in the Mezzanine Investment to the Parkmerced partnership, which owns 3,165 apartment homes and future development rights in San Francisco, California, and our passive equity investments in IQHQ, Inc. ("IQHQ"), a privately-held life sciences real estate development company, and in property technology funds consisting of entities that develop technology related to the real estate industry. We have made significant progress on our plan to reduce capital allocated to alternative investments through the partial sale of the Mezzanine Investment, as discussed further below.

• Maintaining sufficient liquidity and utilizing safe financial leverage

We will guard our liquidity at all times by maintaining sufficient cash and committed credit.

From time to time, we will allocate capital to financial assets designed to mitigate risks. Existing examples include our use of interest rate caps to provide protection against increases in interest rates on in-place loans.

We expect to capitalize our activities through a combination of non-recourse property debt, construction loans, third-party equity, and the recycling of Aimco equity, including retained earnings. We plan to limit the use of recourse leverage, with a strong preference towards non-recourse property-level debt to limit risk to the Aimco enterprise. When warranted, we plan to seek equity capital from joint venture partners to improve our cost of capital, further leverage Aimco equity, reduce exposure to a single investment and, in certain cases, for strategic benefits.

The results from the execution of our business plan during the three and nine months ended September 30, 2023 are further described below.

Financial Results and Recent Highlights

• For the three and nine months ended September 30, 2023, net loss attributable to Aimco common stockholders per share, on a fully dilutive basis, was ($0.02) and ($0.10), respectively, compared to net income per share of $0.19 and $1.81, respectively, for the same periods in 2022 due primarily to lower real estate transaction proceeds and reduced tax benefit.
• For the three months ended September 30, 2023, revenue and net operating income from our Stabilized Operating Properties were up 6.4% and 7.6%, respectively, year over year, with average monthly revenue per apartment home of $2,358, up $158 year over year. For the nine months ended September 30, 2023, revenue and net operating income from our Stabilized Operating Properties were up 9.0% and 10.0%, respectively, year over year, with average monthly revenue per apartment home of $2,292, up $209 year over year.
• As of September 30, 2023, we had completed construction and delivered The Hamilton, a 276-apartment home property in Miami, Florida, and The Benson Hotel and Faculty Club, a 106-key boutique hotel on the Anschutz Medical Campus in Aurora, Colorado. We expect to deliver 234 additional units at Upton Place in Washington, D.C. and the initial homes at Oak Shore in Corte Madera, California, by the end of 2023.
• Aimco is under contract to sell our 80% stake in the Parkmerced mezzanine loan for $134.0 million plus accrued interest. In June, at the time of closing on the sale of a 20% non-controlling position, the purchaser pre-paid $4.0 million of interest to Aimco and is expected to pay another $7.4 million prior to year end.

Value Add, Opportunistic & Alternative Investments

Development and Redevelopment

We generally seek development and redevelopment opportunities where barriers to entry are high, target customers can be clearly defined, and where we have a comparative advantage over others in the market. We will focus our new investment activity in Southeast Florida, the Washington D.C. Metro Area and Colorado's Front Range. Our Value Add and Opportunistic investments may also target portfolio acquisitions, operational turnarounds, and re-entitlements.

We currently have five active development and redevelopment projects, located in four U.S. markets, in varying phases of construction and lease-up. These projects remain on track, as measured by construction budget and lease-up metrics. Additionally, we have a pipeline of future value-add opportunities totaling approximately 14 million gross square feet of development in our target markets of Southeast Florida, the Washington D.C. Metro, and Colorado's Front Range. During the three and nine months ended September 30, 2023, we invested $74.4 million and $220.4 million, respectively, in development and redevelopment activities.

Updates include:

• Construction and repositioning of The Hamilton, a 276-unit bayfront apartment community in Miami, Florida, is now complete. Demand for rental housing in Southeast Florida remains robust, especially for unique waterfront properties, and the property was 97% leased as of September 30, 2023.
• Construction is progressing on plan at the first phase of Strathmore Square in Bethesda, Maryland, which will contain 220 highly tailored apartment homes with initial delivery on track for the second half of 2024. This suburban infill project is located adjacent to the Grosvenor-Strathmore Metro station and the Strathmore Performing Arts Campus, and is 1.5 miles from The National Institutes of Health main campus. Funding for the $164.0 million project is fully secured with Aimco having already funded 100% of its equity commitment.
• Construction continues on schedule and on budget at Upton Place in Northwest Washington, D.C. The initial delivery of 81 of Upton Place’s 689 apartment homes occurred in the fourth quarter of 2023. As of September 30, 2023, 80% of the project's 105,000 square feet of retail space has been leased.
• Construction is ongoing at Oak Shore, in Corte Madera, California, where 16 luxury single family rental homes and eight accessory dwelling units are being developed. Construction has been completed on the initial homes and they are expected to be ready for occupancy in November 2023.
• In the three months ended September 30, 2023, we invested $4.8 million into programming, design, documentation, and entitlement efforts related to select pipeline projects located in Southeast Florida, the Washington D.C. Metro, and Colorado’s Front Range.

Alternative Investments

Our current alternative investments are primarily those investments originated by Aimco Predecessor and include a Mezzanine Investment to the Parkmerced partnership secured by a stabilized multifamily property with an option to participate in future multifamily development, as well as three passive equity investments. Over time, we plan to significantly reduce capital allocated to these investments.

Updates for our alternative investments include:

• Aimco is under contract to sell our 80% stake in the Parkmerced mezzanine loan for $134.0 million plus accrued interest. In June, at the time of closing on the sale of a 20% non-controlling position, the purchaser pre-paid $4.0 million of interest to Aimco and is expected to pay another $7.4 million prior to year end.

Investment and Disposition Activity

We are focused on growing the business and delivering strong investment returns, through the ownership of apartment properties as well as development and redevelopment activities, funded primarily through third-party capital. In the three months ended September 30, 2023, no new investment or disposition activity occurred.

Operating Property Results

We own a diversified portfolio of stabilized apartment communities located in eight major U.S. markets with average rents in line with local market averages. We also own a commercial office building that is part of an assemblage with an adjacent apartment building.

Highlights for the three months ended September 30, 2023 include:

• Revenue for our Operating segment for the three months ended September 30, 2023, was $37.7 million, up 6.4% year over year, resulting from a $158 increase in average monthly revenue per apartment home to $2,358, partially offset with a 75-basis point decrease in Average Daily Occupancy to 95.2%.
• Expenses for our Operating segment for the three months ended September 30, 2023, were $10.7 million, up 3.5% year-over-year due primarily to higher insurance costs, during the quarter we received favorable real estate tax valuations in Chicago largely offsetting the impact of the prior unfavorable real estate tax valuation in Miami, which has been successfully appealed.
• Net operating income for our Operating segment for the three months ended September 30, 2023 was $27.0 million, up 7.6% year-over-year.

Balance Sheet and Financing Activity

We are highly focused on maintaining a strong balance sheet, including having at all times ample liquidity. As of September 30, 2023, we had access to $320.2 million in liquidity, including $95.7 million of cash on hand, a $54.3 million short term investment in a treasury bill, $20.2 million of restricted cash, and the capacity to borrow up to $150.0 million on our revolving credit facility. Refer to the Liquidity and Capital Resources section for additional information regarding our leverage.

Financial Results of Operations

We have three segments: (i) Development and Redevelopment, (ii) Operating, and (iii) Other.

Our Development and Redevelopment segment includes properties that are under construction or have not achieved stabilization, as well as land assemblages that are being held for future development. Our Operating segment includes 21 residential apartment communities that have achieved stabilized levels of operations as of January 1, 2022 and maintained it throughout the current year and comparable period. We aggregate all our apartment communities that have reached stabilization into our Operating segment. Our Other segment consists of properties currently owned that are not included in our Development and Redevelopment or Operating segments.

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.

Results of Operations for the three and nine months ended September 30, 2023 and 2022

Net income attributable to Aimco common stockholders decreased by $31.7 million and $291.5 million, respectively, for the three and nine months ended September 30, 2023, compared to the same period in 2022, as described more fully below.

Property Results

As of September 30, 2023, our Development and Redevelopment segment included 12 properties, three of which were properties that were under construction and two of which were recently completed, while the remaining were land held for development. Our Operating segment included 21 communities with 5,600 apartment homes, and our Other segment included 1001 Brickell Bay Drive, our only office building, and St. George Villas. During the first quarter of 2023, we reclassified one residential apartment community from the Other segment to the Operating segment because it reached stabilization. Prior period segment information has been recast based upon our current segment population, and is consistent with how our CODM evaluates the business. The recast conforms with our reportable segment classification as of September 30, 2023.

We use proportionate property net operating income to assess the operating performance of our segments. Proportionate property net operating income is defined as our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, including utility reimbursements, for the consolidated communities; but

• excluding the results of four apartment communities with an aggregate 142 apartment homes that we neither manage nor consolidate, our investment in IQHQ and the Mezzanine Investment; and
• excluding property management costs and casualty gains or losses, reported in consolidated amounts, in our assessment of segment performance.

Please refer to Note 8 to the condensed consolidated financial statements in Item 1 for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses.

Proportionate Property Net Operating Income

The results of our segments for the three months ended September 30, 2023 and 2022, as presented below, are based on segment classifications as of September 30, 2023:

(in thousands)

32

For the three months ended September 30, 2023, compared to the same period in 2022:

• Development and Redevelopment proportionate property net operating income increased by $2.3 million due primarily to the lease up of apartment homes at The Hamilton.
• Operating proportionate property net operating income increased by $1.9 million, or 7.6%. The increase was attributable primarily to a $2.3 million, or 6.4% increase in rental and other property revenues due to higher average revenues of $158 per apartment home, offset with a 75-basis point decrease in Average Daily Occupancy to 95.2%.
• Other proportionate property net operating income decreased by $0.4 million, or 14.8%, primarily at our commercial office building in Miami, Florida from lower occupancy following lease expirations earlier in 2023.

The results of our segments for the nine months ended September 30, 2023 and 2022, as presented below, are based on segment classifications as of September 30, 2023:

(in thousands)

For the nine months ended September 30, 2023, compared to the same period in 2022:

• Development and Redevelopment proportionate property net operating income increased by $3.9 million due primarily to the lease up of apartment homes at The Hamilton.
• Operating proportionate property net operating income increased by $7.1 million, or 10.0%. The increase was attributable primarily to a $9.2 million, or 9.0% increase in rental and other property revenues due to higher average revenues of $209 per apartment home, offset with a 90-basis point decrease in occupancy.
• Other proportionate property net operating income decreased by $1.4 million, or 17.7%, primarily at our commercial office building in Miami, Florida from lower occupancy following lease expirations earlier in 2023.

Non-Segment Real Estate Operations

Operating income amounts not attributed to our segments include property management costs, casualty losses, and, if applicable, the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.

Depreciation and Amortization

For the three and nine months ended September 30, 2023, compared to the same periods in 2022, Depreciation and amortization decreased by $67.6 million, or 79.2%, and $92.3 million, or 64.4%, respectively, due primarily to the disposition of three properties and the termination of leases of four properties and related relinquishment of the associated leasehold improvements during the year ended December 31, 2022.

General and Administrative Expenses

For the three and nine months ended September 30, 2023, compared to the same periods in 2022, General and administrative expenses decreased by $2.6 million, or 24.2%, and $4.8 million, or 16.3%, respectively, due primarily to a decrease in expenses for consulting services per the Separation Agreement with AIR, which concluded at December 31, 2022.

Interest Income

For the three and nine months ended September 30, 2023, compared to the same periods in 2022, interest income increased by $1.6 million, or 100.0%, and $5.0 million, or 100.0%, respectively, due primarily to increased interest earned on greater amounts of invested cash at higher rates in the current year versus the prior year.

Interest Expense

For the three and nine months ended September 30, 2023, compared to the same periods in 2022, interest expense decreased by $1.5 million, or 15.1%, and $38.2 million, or 58.0%, respectively, due primarily to the prepayment of the notes payable due to AIR and other property debt, partially offset by an increase related to the placement of certain property debt during the year ended December 31, 2022.

Mezzanine Investment Income (Loss), Net

For the three and nine months ended September 30, 2023, compared to the same periods in 2022, Mezzanine Investment income decreased by $9.2 million, or 100%, and $26.0 million or 100.0%, respectively, due primarily to our cessation of income recognition after the non-cash impairment recorded during the year ended December 31, 2022.

Realized and Unrealized Gains (Losses) on Interest Rate Options

We are required to adjust our interest rate options to fair value on a quarterly basis. As a result of the mark-to-market adjustments, we recorded unrealized losses of $0.5 million and unrealized gains of $0.1 million, respectively, for the three and nine months ended September 30, 2023, compared to unrealized gains of $7.5 million and $38.3 million, respectively, for the three and nine months ended September 30, 2022. In addition, we recorded realized gains of $1.5 million and $3.2 million, respectively, for the three and nine months ended September 30, 2023, compared to realized gains of $1.7 million and $9.7 million, respectively, for the three and nine months ended September 30, 2022.

Realized and Unrealized Gains (Losses) on Equity Investments

We measure our investments in stock based on market prices at period end and our investments in property technology funds at NAV as a practical expedient. As a result of changes in the values of these investments, we recorded unrealized losses of $1.1 million and unrealized gains of $0.2 million, respectively, for the three and nine months ended September 30, 2023, compared to unrealized losses of $2.2 million and $6.0 million, respectively, for the three and nine months ended September 30, 2022.

During the three and nine months ended September 30, 2022, we recognized realized and unrealized gains on our investment in IQHQ totaling $0.0 million and $26.2 million, respectively, resulting from a partial redemption of our investment during June 2022.

Gain on Dispositions of Real Estate

During the three months ended September 30, 2023, we had no gain on dispositions compared to a gain of $75.5 million for the three months ended September 30, 2022 related to the sale of two apartment communities.

During the nine months ended September 30, 2023, we recognized a gain on disposition of $1.9 million for the contribution of real estate to an unconsolidated joint venture compared to gains of $170.0 million for the nine months ended September 30, 2022 related to the sale of three apartment communities.

Lease Modification Income

During the three and nine months ended September 30, 2022, we recognized $1.6 million and $207.0 million, respectively, of lease modification income related to the agreement entered into with AIR for the termination of the leases of four properties.

Other Income (Expense), Net

Other income (expense), net, includes costs associated with our risk management activities, partnership administration expenses, fee income, and certain non-recurring items. For the three months ended September 30, 2023, compared to the same period in 2022, other expenses, net increased by $0.3 million, or 19.9%. For the nine months ended September 30, 2023, compared to the same period in 2022, other expenses, net increased by $2.3 million, or 53.1%, primarily due to the incremental expense associated with pre-existing long-term incentive partnership units recorded upon the resignation of one of our board members during the first quarter of 2023.

Income Tax Benefit (Expense)

Certain aspects of our operations, including our development and redevelopment activities, are conducted through taxable REIT subsidiaries, or TRS entities. Additionally, our TRS entities hold investments in one of our apartment communities and 1001 Brickell Bay Drive.

Our income tax benefit calculated in accordance with GAAP includes income taxes associated with the income or loss of our TRS entities. Income taxes, as well as changes in valuation allowance and incremental deferred tax items in conjunction with intercompany asset transfers and internal restructurings (if applicable), are included in Income tax benefit (expense) in our Condensed Consolidated Statements of Operations.

Consolidated GAAP income or loss subject to tax consists of pretax income or loss of our taxable entities and gains retained by the REIT. For the three and nine months ended September 30, 2023, we had consolidated net losses subject to tax of $5.0 million and $12.4 million, respectively, compared to consolidated net losses of $75.6 million and net income of $91.0 million subject to tax, respectively, for the same periods in 2022.

For the three months ended September 30, 2023, we recognized an income tax benefit of $6.2 million, compared to an income tax benefit of $17.6 million for the same period in 2022. The change is due primarily to GAAP income tax benefit associated with the depreciation taken related to the termination of four leases of four properties in the third quarter of 2022, as well as a change in estimate associated with finalizing the 2022 tax return in the third quarter of 2023.

For the nine months ended September 30, 2023, we recognized an income tax benefit of $10.8 million, compared to income tax expense of $24.3 million for the same period in 2022. The change is primarily due to GAAP income tax benefit associated with the lease modification income recognized in the second quarter of 2022, as well as a change in the first quarter of 2023 to the effective state tax rate expected to apply to the reversal of deferred taxes and a change in estimate associated with finalizing the 2022 tax return in the third quarter of 2023.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements relate to capitalized costs, impairment of long-lived assets, acquisitions, and the Mezzanine Investment.

Our critical accounting policies are described in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Aimco’s and Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in our critical accounting policies from those reported in our Form 10-K and we believe that the related judgments and assessments have been consistently applied and produce financial information that fairly depicts the financial condition, results of operations, and cash flows for all periods presented.

Non-GAAP Measures

We use EBITDAre and Adjusted EBITDAre in managing our business and in evaluating our financial condition and operating performance. These key financial indicators are non-GAAP measures and are defined and described below. We provide reconciliations of the non-GAAP financial measures to the most comparable financial measure computed in accordance with GAAP.

Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization for Real Estate ("EBITDAre")

EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and allow for comparison of our credit strength to different companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income (loss) as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. Nareit defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation, and amortization expense, further adjusted for:

• gains and losses on the dispositions of depreciated property;
• impairment write-downs of depreciated property;
• impairment write-downs of investments in unconsolidated partnerships caused by a decrease in the value of the depreciated property in such partnerships; and
• adjustments to reflect our share of EBITDAre of investments in unconsolidated entities.

EBITDAre is defined by Nareit and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted to exclude the effect of net (income) loss attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests, and realized and unrealized (gains) losses on interest rate options, which we believe allow investors to compare a measure of our earnings before the effects of our capital structure and indebtedness with that of other companies in the real estate industry. Additionally, we exclude the (income) loss recognized on our Mezzanine Investment.

The reconciliation of net income (loss) to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2023 and 2022, is as follows (in thousands):

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Liquidity and Capital Resources

Liquidity

Liquidity is the ability to meet present and future financial obligations. Our primary sources of liquidity are cash flows from operations and borrowing capacity under our loan agreements.

As of September 30, 2023, our available liquidity was $320.2 million, which consisted of:

• $95.7 million in cash and cash equivalents;
• $20.2 million of restricted cash, including amounts related to tenant security deposits and escrows held by lenders for capital additions, property taxes, and insurance;
• $54.3 million short-term investment in a treasury bill; and
• $150.0 million of available capacity to borrow under our revolving secured credit facility.

As of September 30, 2023, we had sufficient capacity on our construction loans to cover our commitments of approximately $120.2 million. The initial allocations to our joint ventures have remaining unfunded commitments of $3.1 million. We also have unfunded commitments in the amount of $2.1 million related to four investments in entities that develop technology related to the real estate industry. Our principal uses for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital expenditures, and future investments. Additionally, our third-party property managers may enter into commitments on our behalf to purchase goods and services in connection with the operation of our apartment communities and our office building. Those commitments generally have terms of one year or less and reflect expenditure levels comparable to historical levels.

We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for the next twelve months.

In the event that our cash and cash equivalents, revolving secured credit facility, and cash provided by operating activities are not sufficient to cover our liquidity needs, we have the means to generate additional liquidity, such as from additional property financing activity and proceeds from apartment community sales. We expect to meet our long-term liquidity requirements, including debt maturities, development and redevelopment spending, and future investment activity, primarily through property financing activity, cash generated from operations, and the recycling of our equity. Our revolving secured credit facility matures in December 2024, prior to consideration of its one-year extension option.

Leverage and Capital Resources

The availability and cost of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Any adverse changes in the lending environment could negatively affect our liquidity. We have taken steps to mitigate a portion of our short-term refunding risk. However, if property or development financing options become unavailable, we may consider alternative sources of liquidity, such as reductions in capital spending or apartment community dispositions.

As of September 30, 2023, approximately 88% of our outstanding non-recourse property debt had a fixed interest rate and approximately 12% had a variable interest rate. In addition, the weighted-average contractual rate on our non-recourse debt was 5.0% and 4.7% inclusive of interest rate caps, and the average remaining term to maturity was 6.8 years. At September 30, 2023, all of our outstanding non-recourse property debt was either fixed or hedged. Our use of interest rate caps may vary from quarter to quarter depending on lender requirements, recycling of interest rate caps between projects, and our view on forecasted interest rates.

While our primary source of leverage is property-level debt and construction loans, we also have a secured $150.0 million credit facility with a syndicate of financial institutions. As of September 30, 2023, we had no outstanding borrowings under our revolving secured credit facility. Under our revolving secured credit facility, we have agreed to maintain a fixed charge coverage ratio of 1.25X minimum tangible net worth of $625.0 million, and maximum leverage of 60.0% as defined in the credit agreement. We are currently in compliance and expect to remain in compliance with these covenants during the next twelve months.

Changes in Cash, Cash Equivalents, and Restricted Cash

The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing and financing activities, which are presented in our Condensed Consolidated Statements of Cash Flows in Item 1 of this report.

Operating Activities

For the nine months ended September 30, 2023, net cash provided by operating activities was $42.6 million. Our operating cash flow is primarily affected by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment communities and general and administrative costs. Cash provided by operating activities for the nine months ended September 30, 2023, decreased by $185.7 million compared to the same period ended in 2022, due primarily to lower net cash received from lease incentive, lower net operating income associated with apartment communities sold in the latter part of 2022, and timing of balance sheet position changes, partially offset by decreased interest payments.

Investing Activities

For the nine months ended September 30, 2023, net cash used in investing activities of $264.1 million consisted primarily of capital expenditures of $212.2 million and the purchase of a short-term treasury bill for $53.8 million. Net cash used in investing activities for the nine months ended September 30, 2023, increased by $181.2 million compared to the same period ended in 2022, due primarily to increased capital expenditures and the purchase of a short-term treasury bill offset by decreased funding for net real estate and investment transactions. We have generally funded capital additions with available cash and cash provided by operating activities and construction loans.

Financing Activities

For the nine months ended September 30, 2023, net cash provided by financing activities of $107.7 million consisted primarily of proceeds from construction loans, the sale of a participation in the Mezzanine Investment, and the monetization of interest rate options, partially offset by repayments on non-recourse property debt and common stock repurchases. Net cash provided by financing activities for the nine months ended September 30, 2023, increased by $272.1 million compared to the same period ended in 2022, due primarily to prior year repayment and borrowing activity, offset by current year activity, including increased proceeds from construction loans, the sale of a participation in the Mezzanine Investment and the monetization of interest rate options.

Future Capital Needs

We expect to fund any future acquisitions, development and redevelopment, and other capital spending principally with operating cash flows, short-term borrowings, and debt and equity financing. Our near-term business plan does not contemplate the issuance of equity. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for the next twelve months.

Our chief market risks are refunding risk, that is the availability of property debt or other cash sources to refund maturing property debt, and repricing risk, that is the possibility of increases in base interest rates and credit risk spreads. We primarily use long-dated, fixed-rate, non-recourse property debt on stabilized properties in order to avoid the refunding and repricing risks of short-term borrowings.

We use working capital primarily to fund short-term uses. We use derivative financial instruments as a risk management tool and do not use them for trading or other speculative purposes.

As of September 30, 2023, on a consolidated basis, we had approximately $104.2 million of variable-rate property-level debt outstanding and $218.1 million of variable rate construction loans. The impact of rising interest rates is mitigated by our use of interest rate caps, which as of September 30, 2023, provided protection for our variable interest rate debt. Our use of interest rate caps may vary from quarter to quarter depending on lender requirements, recycling of interest rate caps between projects, and our view on forecasted interest rates. We estimate that an increase or decrease in our variable rate indices of 100 basis points with constant credit risk spreads, would have no impact on interest expense on an annual basis.

As of September 30, 2023, we held interest rate caps with $627.4 million notional value. These instruments were acquired for $5.8 million and at September 30, 2023, were valued at $9.1 million.

As of September 30, 2023, we had $115.9 million in cash and cash equivalents and restricted cash, a portion of which earns interest at variable rates.

Aimco

Disclosure Controls and Procedures

Aimco’s management, with the participation of Aimco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Aimco’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, Aimco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Aimco’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2023, we implemented the first phase of a new enterprise resource planning ("ERP") system, which replaced a legacy system where a significant portion of our transactions were originated, processed, or recorded. We updated our internal control over financial reporting, as necessary, to accommodate related changes in our financial management processes resulting from this implementation. While we believe that this new system will enhance our internal control over financial reporting, there are inherent risks in implementing a new ERP system. Accordingly, we will continue to evaluate the design and operating effectiveness of these controls.

Except for this system implementation, there has been no other changes in Aimco’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, Aimco’s internal control over financial reporting.

Aimco Operating Partnership

Disclosure Controls and Procedures

Aimco Operating Partnership’s management, with the participation of the Chief Executive Officer and Chief Financial Officer of both Aimco and Aimco OP GP, LLC, Aimco Operating Partnership’s general partner, has evaluated the effectiveness of Aimco Operating Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer of Aimco OP GP, LLC have concluded that, as of the end of such period, Aimco Operating Partnership’s disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2023, we implemented the first phase of a new ERP system, which replaced a legacy system where a significant portion of our transactions were originated, processed, or recorded. We updated our internal control over financial reporting, as necessary, to accommodate related changes in our financial management processes resulting from this implementation. While we believe that this new system will enhance our internal control over financial reporting, there are inherent risks in implementing a new ERP system. Accordingly, we will continue to evaluate the design and operating effectiveness of these controls.

Except for this system implementation, there has been no other changes in Aimco Operating Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, Aimco Operating Partnership’s internal control over financial reporting.

As of the date of this report, there have been no material changes from the risk factors in Aimco’s and Aimco Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022, other than the new risk factor identified below. We may disclose changes to such factors or disclose additional factors from time to time in our filings with the SEC.

Our implementation of a new enterprise resource planning ("ERP") system may adversely affect our business, results of operations, and financial condition or the effectiveness of our internal control over financial reporting.

We are engaged in a phased implementation of a new ERP system, which is expected to continue into 2024. During the quarter ended September 30, 2023, we implemented the first phase, which replaced a legacy system where a significant portion of our transactions were originated, processed, or recorded. The ERP system is designed to accurately maintain our financial records, enhance operational functionality and provide timely information to our management team related to the operation of our business. The implementation of a new ERP system has required, and will continue to require, the investment of significant financial and human capital resources. While we have invested, and continue to invest, significant resources in planning, project management, consulting, and training, it is possible that significant implementation, operational, and functionality issues may arise during the course of implementing and utilizing the ERP system, and it is further possible that we may experience significant delays, increased costs, and other difficulties that are not presently contemplated. Any significant disruptions, delays, deficiencies, or errors in the design, implementation, and utilization of the ERP system could adversely affect our operations, prevent us from accurately and timely reporting our financial results, and negatively impact our business, results of operations and financial condition. Additionally, if we do not effectively implement and utilize the ERP system as planned or the system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to adequately assess its effectiveness could be delayed.