AIMCO: A Contrarian Real Estate Play

Despite the excess inventory that still characterizes the housing industry, there may be one pocket of opportunity left: AIMCO. But in order to appreciate this stock's potential value, investors will need to adhere to some of the most important tenants of value investing:

1. The ability to stand alone against a crowd of dissenters
2. Patience

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The Returns of an REIT
Apartment Investment and Management Co (NYSE:AIV), also known as AIMCO, is an owner and manager of apartment communities. AIMCO is one of the largest such owners and operators of apartment communities, with more than 160,000 apartment homes under its control. If you haven't heard of AIMCO, it's not a fly-by-night company - it's one of 14 real estate investment trusts (REIT) included in the S&P 500. AIMCO is included with the likes of well-known names like Vornando Realty Trust (NYSE:VNO) and Simon Property Group (NYSE:SPG). (For more, see What Are REITs?)

Currently, AIMCO's shares fetch approximately $8.50, valuing the company at $990 million. Its yield is currently near 5%, which on the surface looks unattractive compared to Vornando's 9% yield. Even close competitor Equity Residential (NYSE:EQR) yields nearly twice as much at 9.7%.

Yield and Gain
But AIMCO shares offer patient contrarian investors more than just an attractive yield: they also have substantial upside in the common shares. However, in order for investors to reap the benefits, the company will have to manage its huge, $7 billion debt load.

Fortunately, 83% of that debt is non-recourse debt - only the underlying property of that debt serves as its collateral and nothing more. But more importantly, AIMCO's debt has a weighted average maturity of nine years and an interest rate of 5.4%. In addition, all debt covenants are being met. The company continues to sell non-strategic assets to pay what little debt is due in the next couple of years,

The Benefits of Rentership
The big question with AIMCO is whether the core business can emerge from this recession stronger and more profitable. I think it has a good shot. For one thing, the company's properties are disbursed throughout all the major metropolitan cities in the U.S, so there is no geographic risk. The biggest market, Washington DC, represents 12% of the company's properties and should fare better than most locations due to many renters - many of whom are members of Congress - being employed by the government.

While apartment vacancy rates are currently slipping, the long-term picture for apartments could be quite good. Folks either rent or own and with lending standards expected to remain very rigid for years to come, the alternative is renting.

Bottom Line
Investing in AIMCO is a highly contrarian bet, but this particular company has some unique advantages and holds valuable assets all over the country. Opportunistic investors looking for a real estate play should consider drilling down on this business. (For related reading, see Basic Valuation Of A Real Estate Investment Trust and The REIT Way.)

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