APARTMENT INVESTMENT & MANAGEMENT CO

Transcription

1 APARTMENT INVESTMENT & MANAGEMENT CO FORM 10-K (Annual Report) Filed 03/07/03 for the Period Ending 12/31/02 Address 4582 SOUTH ULSTER STREET SUITE 1100 DENVER, CO, Telephone CIK Symbol AIV SIC Code Real Estate Investment Trusts Industry Residential REITs Sector Financials Fiscal Year 12/31 Copyright 2019, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use.

2 Use these links to rapidly review the document TABLE OF CONTENTS APARTMENT INVESTMENT AND MANAGEMENT COMPANY INDEX TO FINANCIAL STATEMENTS SECURITIES AND EXCHANGE COMMISSION Washington, D.C Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 OR For the transition period from to Commission File Number Apartment Investment and Management Company (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 4582 South Ulster Street Parkway, Suite 1100 Denver, Colorado (Address of principal executive offices) (I.R.S. Employer Identification No.) (Zip Code) Registrant's Telephone Number, Including Area Code: (303) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Class A Common Stock Class C Cumulative Preferred Stock Class D Cumulative Preferred Stock Class G Cumulative Preferred Stock Class H Cumulative Preferred Stock Class P Convertible Cumulative Preferred Stock Class Q Cumulative Preferred Stock Class R Cumulative Preferred Stock Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: none

3 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, was approximately $4.4 billion as of June 30, As of February 18, 2003, there were 93,804,497 shares of Class A Common Stock outstanding. Documents Incorporated by Reference Portions of the registrant's definitive proxy statement to be issued in conjunction with the registrant's annual meeting of stockholders to be held April 25, 2003 are incorporated by reference into Part III of this Annual Report. APARTMENT INVESTMENT AND MANAGEMENT COMPANY TABLE OF CONTENTS ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 2002 Item Page PART I 1. Business 2 2. Properties Legal Proceedings Submission of Matters to a Vote of Security Holders 18 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations 21 7a. Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 PART III 10. Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Controls and Procedures Exhibits, Financial Statement Schedule and Reports on Form 8-K 44 1 FORWARD-LOOKING STATEMENTS

4 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements in certain circumstances. In addition to historical information, this Annual Report on Form 10-K ("Annual Report") contains forward-looking statements that discuss future expectations, contain projections of results of operations or financial condition or state other "forward-looking" information. When used in this Annual Report, the words "may," "will," "expect," "intend," "plan," "believe," "anticipate," "estimate," "continue" or other similar words or expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. Actual results may differ materially from those described and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the level of interest rates; terms and interpretations of governmental regulations that affect us; the competitive environment in which we operate; financing risks, including the risk that our cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values, the general economic climate in local markets and competition for tenants in such markets; acquisition and development risks, including failure of such acquisitions to perform in accordance with projections; litigation, including the costs of settlements, adverse judgments and litigation costs; and possible environmental liabilities, including costs that may be incurred in remediation of contamination of properties presently or previously owned by us. 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 and depends on our ability to meet the various requirements imposed by the Internal Revenue 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 the section entitled "Risk Factors" described in this Annual Report. ITEM 1. Business PART I Apartment Investment and Management Company, or AIMCO, is a Maryland corporation incorporated on January 10, We are a selfadministered and self-managed real estate investment trust, or REIT, engaged in the acquisition, ownership, management and redevelopment of apartment properties. As of December 31, 2002, we owned or managed a portfolio of 1,788 apartment properties (individually a "property" and collectively the "properties") containing 318,152 apartment units located in 47 states, the District of Columbia and Puerto Rico. Based on apartment unit data compiled by the National Multi Housing Council, as of December 31, 2002, we were the largest owner and operator of apartment properties in the United States. We serve approximately one million residents per year. As of December 31, 2002, we: owned a controlling equity interest in 187,506 apartment units in 728 properties (which we refer to as "consolidated"); owned a non-controlling equity interest in 73,924 apartment units in 511 properties (which we refer to as "unconsolidated"), of which 64,937 apartment units were managed by us; and provided services or managed, for third party owners, 56,722 apartment units in 549 properties, primarily pursuant to long-term agreements (includes 45,187 apartment units in 448 properties that are asset managed only, and not also property managed). AIMCO is the sole general partner of, and through our wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP, Inc., owns a majority interest in, AIMCO Properties, L.P., which we refer to as the AIMCO Operating Partnership. As of December 31, 2002, AIMCO held an approximate 89% ownership interest in the AIMCO Operating Partnership. AIMCO conducts substantially all of its business and owns substantially all of its assets through the AIMCO Operating Partnership. Interests in the AIMCO Operating Partnership that are held by limited partners other than AIMCO are referred to as "OP Units." Holders of common OP Units may redeem such units for cash or, at AIMCO's option, AIMCO Class A Common Stock, which we refer to as Common Stock. Except as 2 the context otherwise requires, "we," "our," "us" and the "Company" refer to AIMCO, the AIMCO Operating Partnership and AIMCO's consolidated corporate subsidiaries and consolidated real estate partnerships, collectively. At December 31, 2002, 93,769,996 shares of our Common Stock were outstanding. At December 31, 2002, the AIMCO Operating Partnership had 12,061,259 common OP Units and equivalents outstanding. At December 31, 2002, a combined total of 105,831,255 shares of Common Stock and OP Units were outstanding (excluding preferred OP Units). Effective March 3, 2003, our principal executive offices were moved to 4582 South Ulster Street Parkway, Suite 1100, Denver, Colorado Our telephone number is (303) We make all of our filings with the Securities and Exchange Commission available free of charge as soon as reasonably practicable through our website at The information contained on our website is not incorporated into this Annual Report. Our Common Stock is listed on the New York Stock Exchange under the symbol "AIV."

5 2002 Developments Casden Merger On March 11, 2002, we completed the acquisition of Casden Properties, Inc., or Casden, which included the merger of Casden into the Company. We refer to this transaction as the Casden Merger. In the Casden Merger we acquired 4,975 conventional apartment units located in Southern California and 11,027 affordable apartment units located in 25 states. In that transaction, we also acquired National Partnership Investments Corp., which we refer to as NAPICO, a subsidiary of Casden, which, as general partner and/or limited partner of numerous limited partnerships, has interests in more than 400 properties with more than 41,000 apartment units. We paid approximately $1.1 billion for the properties and NAPICO, which included an earnout of $15 million as a result of property performance for the period ended December 31, To fund this acquisition we issued million shares of Common Stock and 882,784 common OP Units (valued at $164.9 million and $41.5 million, respectively, based on $47 per share/unit), paid approximately $198 million in cash, acquired title subject to existing mortgage indebtedness of approximately $685 million, and assumed short-term indebtedness of approximately $48 million. We also incurred approximately $15 million in transaction costs comprised largely of professional fees, which included legal, accounting, tax and acquisition due diligence. In connection with the Casden Merger, we borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan that we refer to as the Casden Loan, to pay the cash and transaction costs required to complete the Casden Merger. During 2002, we repaid approximately 60% of the Casden Loan principally with portions of the proceeds from our public offering of Common Stock, our offering of Class R Cumulative Preferred Stock, property sales and other net cash flow from operations. The outstanding balance on the Casden Loan was $115 million at December 31, For additional information on the Casden Loan see Note 10 of the consolidated financial statements in Item 8 of this Annual Report. In addition, as part of the Casden Merger we committed to purchase two properties currently under development, upon satisfactory completion and attainment of 60% occupancy. On November 27, 2002, we closed on the purchase of The Villas at Park La Brea, a mid-rise apartment community with 250 units for approximately $55.5 million. The Villas at Park La Brea is the first of three phases to be completed as part of the Park La Brea development, which is one of the two development properties we have committed to purchase. The other two phases of the Park La Brea development are scheduled to be complete sometime in 2003 and There is not yet a schedule for completion of the second of the two development properties. New England Properties Acquisition On August 29, 2002, we completed the acquisition of certain New England area apartment properties. In this acquisition, which we refer to as the New England Properties Acquisition, we acquired 11 conventional garden and mid-rise properties primarily located in the greater Boston, Massachusetts area. The 11 properties include 4,323 apartment units located on approximately 553 acres in the aggregate. The total cost of the acquisition included a purchase price of $500 million for the properties, $2.5 million in transaction costs and $34.2 million of initial capital expenditures (of which $28 million will be spent to complete a kitchen and bath program and $6.2 million will be spent to address other identified property needs). We funded the acquisition through a combination of non-recourse property debt of $308.7 million and $200 million from our credit facility. We expect to repay the borrowings on the credit facility with operating cash flows and proceeds from property sales. 3 Property Dispositions During 2002, we sold 53 conventional properties, 26 affordable properties, one commercial property and seven senior living facilities for an aggregate sales price of $551.8 million. These sales resulted in net proceeds to the partnerships of $184.5 million after repayment of existing debt and payment of transaction costs (net of cash in the partnerships) totaling $367.3 million. Our share of the net proceeds was $137.2 million and was used to repay a portion of our outstanding short-term indebtedness and for other corporate purposes. Of the total property dispositions, 44 were unconsolidated and accounted for under the equity method. Debt Assumptions and Financings On February 14, 2003, we and our lenders amended our revolving credit facility to provide for a $100 million increase, at our option, in the available commitment to $500 million (such commitment in excess of $400 million is not available until it has been syndicated), reduce the minimum fixed charge coverage ratio from 1.60:1 to 1.50:1 through the maturity date and extend the maturity date one year to July 31, Upon the effective date of the amendment, the margin on LIBOR-based loans and base rate loans was amended to a range between 2.05% to 2.65% and.55% to 1.15%, respectively, based on the fixed charge coverage ratio. For additional information on the credit facility see Note 11 of the consolidated financial statements in Item 8 of this Annual Report. During the year ended December 31, 2002, we refinanced or closed 93 mortgage loans generating $1,031.7 million of total proceeds at a weighted average interest rate of 4.26%, of which $937.9 million related to consolidated properties (these mortgages do not include the $308.7 million in mortgage loans related to the New England Properties Acquisition that are discussed below). Each loan is non-recourse. Among the 93 loans, 81 are individually secured by one of 81 properties with no cross-collateralization, and 12 loans totaling $228.4 million are

6 cross-collateralized with certain other loans. After repayment of existing debt and payment of transaction costs totaling $832.0 million, our share of the total $199.7 million in net proceeds was $165.8 million, which was used to repay existing short-term debt and for other corporate purposes. In connection with the New England Properties Acquisition, we closed 11 mortgage loans generating $308.7 million of long-term, fixed rate, fully amortizing notes with a weighted average interest rate of 5.69%. Each loan is non-recourse and is individually secured by one of the 11 properties, with no cross-collateralization. In connection with our purchase of the Villas at Park La Brea, we closed a $38.0 million, long-term, fixed rate, fully amortizing note with an interest rate of 6.01%. This note is non-recourse and secured by the property. In addition, in connection with the Casden Merger, we assumed $684.7 million of primarily long-term, fixed-rate, fully amortizing notes payable with a weighted average interest rate of 6.85%. Each of the notes is individually secured by one of 116 properties with no crosscollateralization. Equity Transactions Preferred Stock In 2002, we issued $51.1 million of preferred stock in two underwritten public offerings yielding approximately $50.0 million of net proceeds. These transactions are summarized below: Transaction Type Date Number of Shares Total Proceeds in Millions Dividend or Distribution Rate Class R Cumulative Preferred Stock of AIMCO Public March ,000,000 $ 25.8 (1) Class R Cumulative Preferred Stock of AIMCO Public April ,000, (1) Gross proceeds $ 51.1 (1) Dividends on the Class R Cumulative Preferred Stock, or Class R Preferred Stock, are paid quarterly in an amount per share equal to $2.50 per year (equivalent to 10% per annum of the $25.00 liquidation preference). 4 Common Stock The following table summarizes our significant 2002 issuances of Common Stock: Transaction Date Number of Shares Total Value in Millions Net Issue Price per Share Casden Merger March ,508,000 $ 165 $ Public Offering June ,000, Gross value $ 534 $ In addition, the AIMCO Operating Partnership issued 882,784 common OP Units (valued at $41.5 million, based on $47 per unit) in connection with the Casden Merger, and 331,451 OP Units (valued at $16.9 million) in connection with acquisitions of limited partnership and other interests. Acquisitions of Limited Partnership Interests From time to time, we have offered and, in the future, may offer to acquire the interests held by third party investors in certain partnerships for which we act as general partner. Any such acquisitions will require funds to pay the cash purchase price for such interests. During the year ended December 31, 2002, we made separate offers to the limited partners of 323 partnerships to acquire their limited partnership interests, and purchased limited partnership interests for an aggregate of approximately $31.0 million, of which $27.7 million was in cash and the remainder in

7 common OP Units. This compares to the year ended December 31, 2001 when we made separate offers to the limited partners of 261 partnerships to acquire their limited partnership interests, and purchased approximately $178.0 million, of which $135.6 million was in cash and the remainder in common OP Units. Although the reason for this year over year decline is uncertain, we believe four primary factors contributed: improved real estate partnership results (including cash distributions to partners in recent years in increasing amounts resulting in increased returns); the relative attractiveness of investments in real estate as compared to other investment opportunities; greater sensitivity on the part of investors to tax liabilities related to such sales in the current volatile investment marketplace; and less third party equity available in affiliated partnerships as a result of our prior purchases. Transactions Involving Notes Receivable During 2002, we completed a thorough collectibility analysis of each of our notes receivable, primarily from unconsolidated real estate partnerships. As a result of this process, we recorded a provision for loan losses of approximately $9.0 million. In addition, we identified transactions (including sales, refinancings, foreclosures and rights offerings) that would provide for collection of certain notes receivable (either in cash or by obtaining title to the property or additional ownership interest in the partnership owning the property). In 2002, we executed such transactions on notes receivable with carrying values of $111.2 million, and based on their fair values, recorded accretion income of approximately $36.8 million. Financial Information About Industry Segments We operate in two industry segments: the acquisition, ownership, operation and redevelopment of a diversified portfolio of properties; and providing management and other services relating to the apartment business to third parties and affiliates. For further information on these segments and other related information on the various components of our operations, see Note 24 of the consolidated financial statements in Item 8, and Management's Discussion and Analysis in Item 7, of this Annual Report. Operating and Financial Strategies Our principal operating objectives are to increase long-term stockholder value by increasing operating cash flows, and to provide long-term, predictable Funds From Operations, or FFO (as defined by the National Association of Real Estate Investment Trusts), per share of Common Stock, less capital spending for replacements and enhancements. For a description of the meaning of FFO and its use and limitation as an operating measure, see the discussion titled "Funds From Operations" in Item 7 of this Annual Report. We strive to meet our objective by implementing operating and financing strategies that include the following: 5 Acquisition of Properties at Less Than Replacement Cost. We attempt to acquire properties at a significant discount to their replacement cost. Geographic Diversification. We operate in 47 states, the District of Columbia and Puerto Rico. This geographic diversification insulates us, to some degree, from inevitable downturns in any one market. Our income before depreciation and interest expense, is currently earned in more than 198 local markets. In 2002, the largest single market (Washington, D.C.) contributed approximately 12% to income before depreciation and interest expense, and the five largest markets (Washington, D.C., Chicago, greater Los Angeles, southeast Florida and Houston) together contributed approximately 32%. With the properties acquired through the New England Properties Acquisition, in the last quarter of 2002, the greater Boston market became one of our five largest markets. Although we intend to maintain broad geographic diversification, we plan to concentrate conventional operations in core markets in order to achieve economies of scale in management and operations. Market Growth. We seek to operate in markets where population and employment growth are expected to exceed the national average and where we believe we can become a regionally significant owner or manager of properties. Price Point Diversification. Our portfolio of properties covers a broad range of average monthly rental rates, with most between $500 and $1,200 per month. Product Diversification. Our portfolio of properties spans a wide range of apartment community types, both within and among markets, including garden and high-rise apartments. In addition to community types, we have a wide range of quality, from A to C rated properties, with our principal focus on B rated properties. Capital Replacements and Capital Enhancements. We believe that the physical condition and amenities of our apartment properties are important factors in our ability to maintain and increase rental rates. In 2002, we spent approximately $478 per owned apartment unit for Capital Replacements, which are expenditures required to maintain the related asset, and $46 per owned apartment unit for Capital Enhancements, which are expenditures that add a new feature or revenue source at a property. Debt Financing. Our strategy is generally to incur debt to increase our return on equity while maintaining acceptable interest coverage ratios. We seek to maintain a ratio of free cash flow to combined interest expense and preferred stock dividends of between 2:1 and 3:1 and to match debt maturities to the character of the assets financed. For the year ended December 31, 2002,

8 however, we had a ratio of free cash flow to combined interest expense and preferred stock dividends of 1.81:1, and this ratio in prior periods has also deviated from our goal. This ratio is below our desired minimum and primarily resulted from the difficult national economy and weaker operations. Our goal over time is to increase the coverage ratio to 2.2:1 through debt repayment from property sales, debt amortization, conversions of convertible preferred securities, redemptions of preferred securities and improved operating performance. As a comparison to our free cash flow ratio, for the year ended December 31, 2002, we had a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense equal to 2.6:1. We predominantly use long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid the refunding and repricing risks of short-term borrowings. We use short-term debt to fund short-term uses as well as acquisitions and generally expect to repay acquisition borrowings with operating earnings, property sales proceeds or long-term debt financings. As of December 31, 2002, approximately 9% of our outstanding debt was short-term debt and 91% was long-term debt. Dispositions. Although we hold all of our properties for investment, we sell properties when they do not meet our investment criteria or are located in areas that we believe do not justify our continued investment, in both cases as compared to alternative uses for our capital. We have identified approximately 300 conventional properties comprising 75,000 apartment units that we characterize as "intermediate-term hold" properties. We intend to sell these properties over the next four years and use the proceeds to fund repayment of short-term debt, improvements to "long-term hold" properties, acquisitions of properties and limited partnership interests, share repurchases or redemptions of preferred securities and other corporate purposes. Approximately 440 conventional properties comprising 130,000 apartment units concentrated in 27 primary markets are what we characterize as "long-term hold" properties. Dividend Policy. We pay dividends to our stockholders. We distributed 70.7%, 60.7%, and 59.9% of FFO to holders of Common Stock for the years ended December 31, 2002, 2001 and 2000, respectively. It is the present policy of our Board of Directors to increase the dividend annually in an amount equal to one-half of 6 Growth Strategies the projected increase in Adjusted Funds From Operations, or AFFO (which is FFO adjusted for Capital Replacement and Capital Enhancement spending), subject to minimum distribution requirements to maintain our REIT status. Beginning with the year ended December 31, 2002, AFFO includes a deduction for Capital Enhancements, a discretionary spending item, as well as a deduction for Capital Replacements. Our Board of Directors considers the discretionary nature of Capital Enhancement spending in its consideration of AFFO as it relates to our dividend policy. The dividend paid in February 2003 of $0.82 per share, which was the same dividend amount as was paid in each quarter of 2002, represents a distribution of 96% of AFFO (before deducting Capital Enhancements) and 78% of FFO for the quarter ended December 31, We continue to monitor the dividend as a percentage of AFFO (before deducting Capital Enhancements). If the payout were to exceed 100% for a sustained period, our Board of Directors would consider a change in the dividend to match our operating profitability. We seek growth through four primary sources property operations, affordable activities, redevelopment of properties and acquisitions. Property Operations We pursue operational growth primarily through the following strategies: Revenue Increases. We increase rents where feasible and seek to improve occupancy rates. We are also focused on the automation of on-site operations, as we believe that timely and accurate collection of property performance and resident profile data will enable us to maximize revenue through better property management and leasing decisions. In addition, we intend to continue our emphasis on the quality of our on-site employees through recruiting, training and retention programs, which we believe lead to increased occupancy rates through improved customer service and enhanced performance. Controlling Expenses. Cost reductions are accomplished by local focus at the regional operating center level and by taking advantage of economies of scale at the corporate level. As a result of the size of our portfolio and our creation of regional concentrations of properties, we have the ability to spread over a large property base fixed costs for general and administrative expenditures and certain operating functions, such as purchasing, insurance and information technology. We are automating our supply chain to provide better control over purchasing decisions and to take advantage of volume discounts. Ancillary Services. We believe that our ownership and management of properties provide us with unique access to a customer base that allows us to provide additional services and thereby increase occupancy and rents, while also generating incremental revenue. We currently provide cable television, telephone services, appliance rental, and carport, garage and storage space rental at certain properties. Resident Selection and Retention. In apartment properties, neighbors are a part of the product together with the location of the property and the physical quality of the apartment units. We have created a resident acquisition and retention department to focus efforts on attracting and retaining residents who are good neighbors and are credit worthy. We are taking a national approach to

9 marketing to take advantage of our scale in media buying, with pricing decisions being made at the regional level. Focus on Top Properties. Our conventional properties are ranked by their contribution to free cash flow. We have 25 properties that contribute approximately 23% of our total free cash flow, which we characterize as our "Top 25." In these properties, management decision-making is close to the property level as 20 properties out of the Top 25 properties have community managers that report directly to a Regional Vice President. Affordable Activities In 2002, we formed Aimco Capital to integrate our affordable property operations, asset management and transaction activities. Our primary objective with Aimco Capital is to provide a predictable and increasing free cash flow through ownership and expertise in affordable properties and transactions. In order to enhance the value of our affordable properties, we seek to identify redevelopment opportunities and increase rent levels. In addition, we manage assets and transactions generating fees to Aimco Capital. 7 Redevelopment of Properties We believe redevelopment of selected properties in superior locations provides advantages over ground-up development, enabling us to generate rents comparable to new properties with relatively lower financial risk, in less time and with reduced delays due to governmental regulation. Our current policy is to generally limit redevelopments to approximately 10% of total common and preferred equity market capitalization, which, as of December 31, 2002 was approximately $5.0 billion. As of December 31, 2002, we had 10 properties with 3,678 units under redevelopment having an estimated total investment (fair market value prior to redevelopment plus new redevelopment spending) of $601 million, of which approximately $34 million remains to be spent. Our share of the estimated total investment is $501 million of which approximately $21 million remains to be spent. Acquisitions We believe our acquisition strategies may increase profitability and predictability of earnings by expanding operations in select markets, gaining economies of scale and increasing opportunities to provide ancillary services to residents at acquired properties. We acquire additional properties primarily in three ways: Direct Acquisitions. We may directly, including through mergers and other business combinations, acquire individual apartment properties or portfolios of apartment properties and controlling interests in entities that own or control such properties or portfolios. To date, a significant portion of our growth has resulted from the acquisition of other companies that owned or controlled apartment properties. Increasing our Interest in Partnerships. For properties where we own a general partnership interest in the property-owning partnership, we may seek to acquire, subject to our fiduciary duties, the interests in the partnership held by third parties for cash or, in some cases, in exchange for OP Units. Since 1996, we have completed over 2,500 tender offers with respect to various partnerships resulting in over 160,000 transactions totaling $826 million in cash and OP Units spent to purchase additional interests in such partnerships. Acquisition of Managed Properties. Our property management operations have contributed to our acquisition activities. Since our initial public offering, we have acquired from our managed portfolio 16 properties comprising 5,697 apartment units for total consideration of $189.9 million. In addition, in September 2000, we acquired interests in 167 Oxford properties comprising 36,949 apartment units, which we had managed for a number of years previously, for a total purchase price of approximately $1.2 billion. Property Management Strategies We seek to improve the operating results from our property management operations by, among other methods, combining centralized financial control and uniform operating procedures with localized property management decision-making and market knowledge. Currently, our property management operations are organized by our two major business components of conventional and affordable. Our conventional management operations are organized into 15 regional operating centers, each of which is supervised by a Regional Vice-President. As discussed previously, we formed Aimco Capital to integrate our affordable property operations, asset management and transaction activities. Within Aimco Capital, the affordable management operations are organized into four regional operating centers, each of which is supervised by a Regional Vice-President. Our Taxation We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, commencing with our taxable year ended December 31, 1994, and intend to continue to operate in such a manner. Our current and continuing qualification as

10 a REIT depends on our ability to meet the various requirements imposed by the Code, through actual operating results, distribution levels and diversity of stock ownership. If we qualify for taxation as a REIT, we will generally not be subject to United States Federal corporate income tax on our net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that generally results from investment in a corporation. If we fail to qualify as a REIT in any taxable year, our taxable income will be subject to United States Federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes and to United States Federal income and excise taxes on our undistributed income. 8 If in any taxable year we fail to qualify as a REIT and incur additional tax liability, we may need to borrow funds or liquidate certain investments in order to pay the applicable tax and we would not be compelled to make distributions under the Code. Unless entitled to relief under certain statutory provisions, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us to fail to qualify as a REIT or may cause our Board of Directors to revoke the REIT election. We and our stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which we or they transact business or reside. The state and local tax treatment that we and our stockholders receive may not conform to the United States Federal income tax treatment. Certain of our operations (property management, asset management, risk, etc.) are conducted through Taxable REIT Subsidiaries, each of which we refer to as a TRS. A TRS is a C-corporation that has not elected REIT status and as such is subject to United States Federal corporate income tax. We use the TRS format to facilitate our ability to offer certain services and activities to our residents that are not generally considered as qualifying REIT activities. Competition In attracting and retaining residents we compete with numerous other housing alternatives. Our properties compete directly with other rental apartments and with single family homes that are available for rent or purchase in the markets in which our properties are located. Our properties also compete for residents with new and existing condominiums. The number of competitive properties in a particular area has a material effect on our ability to lease apartment units at our properties and on the rents we charge. We compete with numerous real estate companies in acquiring, developing and managing apartment properties and in seeking residents to occupy our properties. Regulation General Apartment properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which would adversely affect our cash flows from operating activities. In addition, future enactment of rent control or rent stabilization laws or other laws regulating multifamily housing may reduce rental revenue or increase operating costs in particular markets. Environmental Various Federal, state and local laws subject property owners and operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to remedy properly, hazardous substances may adversely affect both occupancy at affected apartment communities and also the ability to sell or finance the affected properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of properties, we could potentially be liable for environmental liabilities or costs associated with our properties or properties we acquire or manage in the future. There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. We have been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. Prior to

11 March 31, 2002, we generally 9 were insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, our insurance coverage for property damage loss claims arising from the presence of mold has become more limited and generally includes only limited coverage for catastrophic property damage due to mold. In addition, since December 31, 2002, our insurance coverage for personal injury claims related to mold exposure has also become more limited. We have implemented protocols and procedures to prevent or eliminate mold from our properties and believe that our measures will reduce, or even minimize, the effects that mold could have on our residents. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abatement of mold conditions. However, because the law regarding mold is unsettled and subject to change we can make no assurance that future liabilities resulting from the presence of, or exposure to, mold will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole. Affordable Housing As of December 31, 2002, we owned a controlling equity interest in 137 properties, held a non-controlling equity interest in 383 properties and managed for third parties and affiliates 523 properties that benefit from governmental programs intended to provide housing to people with low or moderate incomes. These programs, which are usually administered by the United States Department of Housing and Urban Development, or HUD, or state housing finance agencies, typically provide mortgage insurance, favorable financing terms, tax credits or rental assistance payments to the property owners. As a condition of the receipt of assistance under these programs, the properties must comply with various requirements, which typically limit rents to pre-approved amounts. If permitted rents on a property are insufficient to cover costs, a sale of the property may become necessary, which could result in a loss of management fee revenue. We usually need to obtain the approval of HUD in order to manage, or acquire a significant interest in, a HUD-assisted property. We may not always receive such approval. Laws benefiting disabled persons Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons. Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. These and other Federal, state and local laws may require modifications to our properties, or restrict renovations of the properties. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. Although we believe that our properties are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA and the FHAA. Insurance We believe that our insurance coverages insure our properties adequately against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood and other perils. AIMCO Assurance Ltd., a Bermuda domiciled insurer wholly owned by us, has a reinsurance contract with a third party insurer to cover 100% of the first $1 million loss from any casualty related to the conventional properties. The affordable properties are insured for the first $1 million through an independent third party carrier. For the policy year ending February 28, 2003, we were insured for any casualty loss in excess of $1 million, up to $230 million, by a combination of several "excess" insurance providers, all of which were at least A-rated. For the policy year ending February 28, 2003, we also have retained an annual aggregate exposure of $4 million above the first $1 million per occurrence. As a result of the Terrorism Risk Insurance Act of 2002, we are currently evaluating the price of offers, mandated by the legislation, to purchase terrorism insurance. In addition, we have self-insured retentions in workers' compensation and general liability coverage. In workers' compensation, we retain the first $500,000 per incident. We perform regular analyses to ensure adequate reserves for losses. Recent insurance marketplace conditions led to a dramatic increase in general liability insurance premiums. To mitigate proposed increases, we chose to take a self-insured retention. Effective December 31, 2002, AIMCO Assurance Ltd., reinsures 100% of the risk of the first $250,000 of any general liability loss. We have established loss prevention, loss mitigation, claim handling, litigation management, and loss reserving procedures to manage our exposure. Where appropriate, in order to comply with HUD regulations, we separate segments of our properties into different insurance programs. 10 We believe that our ability to manage successfully these retentions creates a competitive cost advantage relative to other smaller competitors; however the realization of this potential advantage depends upon the skill with which we manage this risk. Employees

12 We currently have approximately 7,500 employees, of which approximately 6,500 are at the property level, performing various on-site functions. The balance of our employees manage corporate and regional operations, including investment transactions, legal, financial reporting, accounting, information systems, human resources and other support functions. Fewer than 200 of our employees are represented by unions. We have never experienced a work stoppage and believe we maintain satisfactory relations with our employees. Risk Factors The risk factors noted in this section and other factors noted throughout this Annual Report, describe certain risks and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement. If we are not able successfully to acquire, operate, redevelop and expand properties, our growth and results of operations will be adversely affected. The selective acquisition, redevelopment and expansion of properties is one component of our growth strategy. However, we may not be able to complete successfully transactions in the future. Although we seek to acquire, operate, develop and expand properties only when such activities increase our net income on a per share basis, such transactions may fail to perform in accordance with our expectations. When we develop or expand properties, we are subject to the risks that: costs may exceed original estimates; occupancy and rental rates at the property may be below our projections; financing may not be available on favorable terms or at all; redevelopment and leasing of the properties may not be completed on schedule; and we may experience difficulty or delays in obtaining necessary zoning, land-use, building, occupancy and other governmental permits and authorizations. We may have difficulty integrating any acquired businesses or properties. We have grown rapidly. Since our initial public offering in July 1994, we have completed numerous acquisition transactions, expanding our portfolio of owned or managed properties from 132 properties with 29,343 apartment units to 1,788 properties with 318,152 apartment units as of December 31, These acquisitions have included purchases of properties and interests in entities that own or manage properties, as well as corporate mergers. Our ability to integrate successfully acquired businesses and properties depends, among other things, on our ability to: attract and retain qualified personnel; integrate the personnel and operations of the acquired businesses; maintain standards, controls, procedures and policies; and maintain adequate accounting and information systems. We can provide no assurance that we will be able to accomplish these goals and successfully integrate any acquired businesses or properties. If we fail to integrate successfully such businesses, our results of operations could be adversely affected. As our size increases, it becomes more difficult for us to achieve a comparably rapid rate of growth in assets. Our rapid growth since our initial public offering in July 1994 was achieved when we were a smaller company. As a result of our current size, future acquisitions of the same size and magnitude will likely have a smaller effect on us. It may also be more difficult for us to identify and complete acquisitions of greater size that are consistent with our growth strategy. We are subject to litigation associated with partnership acquisitions that could increase our expenses and prevent completion of beneficial transactions. 11 We have engaged in, and intend to continue to engage in, the selective acquisition of interests in limited partnerships that own apartment properties. In some cases, we have acquired the general partner of a partnership and then made an offer to acquire the limited partners' interests in the partnership. In these transactions, we may be subject to litigation based on claims that we, as the general partner, have breached our fiduciary duty to our limited partners or that the transaction violates the relevant partnership agreement or state law. Although we intend to