Against a rather slow Monday opener on Wall Street, residential complex-focused real estate investment trust (REIT) Apartment Investment and Management (AIV) livened the mood, gaining over 2%. In sharp contrast, the benchmark S&P 500 index almost imperceptibly poked its head above parity. As well, AIV stock courted significant interest in the options arena. So far, everything seems to be cooking just right.
However, some of the details undergirding Apartment Investment and Management – which goes by the shorter name Aimco – present some pause for prospective investors. In addition, rising economic pressures (especially for the upper end of income earners) raise concerns about the viability of the broader housing market. Therefore, market participants may want to approach AIV stock cautiously.
AIV Stock Appears to Fire on All Cylinders
At first glance, the idea of casting any doubt on AIV stock seems foolishly contrarian. After all, residential rentals align with a harsh, cynical reality: you got to live somewhere. Therefore, even if you find yourself priced out of the housing market, you’re going to need to rent a roof over your head. Given the draconian situation in single-family real estate, Aimco may be a beneficiary of the troubles.
Moreover, the Barchart Technical Opinion indicator rates AIV stock a 48% buy. It specifically notes a strengthening short-term outlook on maintaining the current direction. And that direction is up. Since the start of the year, AIV returned stakeholders slightly over 15% of equity value. In the trailing one-year period, it’s up more than 42%, an impressive performance.
Even though Aimco posted a loss of 6 cents a share for its first-quarter earnings report (disclosed on May 4), the market continues to hold AIV stock in high regard. In the trailing five sessions, for example, shares moved up more than 3%. In the past 30 days, they’re up almost 6%.
If that wasn’t enough confirmation of optimism for Aimco, AIV stock also represented the top highlight for unusual stock options volume. Following the close of the May 8 session, total volume for AIV stock hit 108,911 contracts against an open interest reading of 34,456. Further, the delta between the Monday session volume and the trailing one-month average volume came out to 1,771%.
Drilling down into the details, call volume landed at 108,897 contracts while put volume came out to only 14 contracts. This pairing yielded a put/call volume ratio of 0.00013, on paper dramatically favoring the bulls. While seemingly a no-brainer buy, investors may want to consider the other side of the story.
Layoffs and FCF Concerns Don’t Help Aimco
While the market may have brushed aside the Q1 loss – which amounted to $8.8 million – it doesn’t mean that investors shouldn’t investigate the matter. Perhaps after closer inspection, you may still like AIV stock. Unfortunately, rising fundamental headwinds on the horizon don’t offer a holistically encouraging view no matter what your position.
Diving into the granularity of the Q1 report, interested market participants will note that free cash flow (FCF) for the three months ended March 31, 2023 came out to a loss of $59.2 million. Referencing Aimco’s regulatory filing, FCF is calculated by combining net cash from operating activities ($5.599 million) with capital expenditures ($64.814 million).
However, in the year-ago quarter, FCF came out to a loss of $43.1 million (combining net cash of $6.511 million with capital expenditures of $49.656 million). Generally speaking, rising red ink in FCF doesn’t always spell alarm. Primarily, decreased FCF (or expanded negative FCF) means that a company is making heavy capital investments, hopefully sparking increased earnings in the future.
But the question is, is it realistic for stakeholders to expect a continued positive return on the aforementioned capital expenditures? In other words, will the consumer economy be able to bear the current pricing paradigm of the residential rental market, let alone an increased cost structure?
Invariably, probably most bulls will say yes because of the historically and contextually low unemployment rate. However, this is where the mass layoffs trend may impose a significant obstacle against AIV stock. Company after company – usually in the technology sphere but increasingly in other industries – have announced headcount reductions.
Now, as GoBankingRates pointed out early this year, rising job cuts for the nation’s most generously compensated workers may take a toll on the housing market, with fewer people willing to take huge financial risks in a tricky economic environment.
At the same time, the layoffs in other segments of the workforce may hit the rental market. If so, the rising red ink in FCF may present a huge concern for Aimco.
Just a Heads Up
To be 100% clear, I’m not suggesting that you should dump AIV stock or heaven forbid short it. The rental market could continue to move higher. It’s anyone’s market to call. Nevertheless, it would be risky not to acknowledge Aimco’s rising capital expenditures. If circumstances fail to align with the bulls’ forecast, the REIT could find itself in a more vulnerable position than it anticipated earlier.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
