##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM                    TO
   Commission File Number 1-024497   AIMCO Properties, L.P.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    84-1275621
(I.R.S. Employer
Identification No.)4582 South Ulster Street Parkway, Suite 1100
Denver, Colorado
(Address of principal executive offices)
    
    80237
(Zip Code)
 (303) 757-8101
(Registrants telephone number, including area code) Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes þ No o   The number of Partnership Common Units outstanding as of October 29, 2004: 103,247,272




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AIMCO PROPERTIES, L.P. FORM 10-Q INDEX PagePART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003
    
    
    2Consolidated Statements of Income for the Three and Nine Months Ended September 30,
2004 and 2003 (unaudited)
    
    
    3Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004
and 2003 (unaudited)
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5ITEM 2.
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20ITEM 3.
    
    
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    34ITEM 4.
    
    
    
    Controls and Procedures
    
    
    34PART II.
    
    OTHER INFORMATIONITEM 1.
    
    
    
    Legal Proceedings
    
    
    35ITEM 2.
    
    
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35ITEM 5.
    
    
    
    Other Information
    
    
    36ITEM 6.
    
    
    
    Exhibits
    
    
    37Signatures
    
    
    
    
    
    
    38
 1




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AIMCO PROPERTIES, L.P. CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data) September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSReal estate:Land
    
    $
    2,162,735
    
    
    $
    1,960,984Buildings and improvements
    
    
    8,423,560
    
    
    
    7,899,164Total real estate
    
    
    10,586,295
    
    
    
    9,860,148Less accumulated depreciation
    
    
    (1,934,434
    )
    
    
    (1,704,232
    )Net real estate
    
    
    8,651,861
    
    
    
    8,155,916Cash and cash equivalents
    
    
    122,570
    
    
    
    114,432Restricted cash
    
    
    269,223
    
    
    
    239,662Accounts receivable
    
    
    56,327
    
    
    
    66,868Accounts receivable from affiliates
    
    
    54,451
    
    
    
    56,874Deferred financing costs
    
    
    67,139
    
    
    
    69,360Notes receivable from unconsolidated real estate partnerships
    
    
    155,206
    
    
    
    139,930Notes receivable from non-affiliates
    
    
    51,318
    
    
    
    68,771Notes receivable from Aimco
    
    
    12,448
    
    
    
    11,955Investment in unconsolidated real estate partnerships
    
    
    182,145
    
    
    
    235,013Other assets
    
    
    309,494
    
    
    
    265,879Assets held for sale
    
    
    264,541
    
    
    
    684,971Total assets
    
    $
    10,196,723
    
    
    $
    10,109,631LIABILITIES AND PARTNERS CAPITALSecured tax-exempt bond financing
    
    $
    1,092,607
    
    
    $
    1,064,250Secured notes payable
    
    
    4,477,074
    
    
    
    4,126,080Mandatorily redeemable preferred securities
    
    
    15,019
    
    
    
    113,619Term loans
    
    
    250,000
    
    
    
    354,387Credit facility
    
    
    168,400
    
    
    
    81,000Total indebtedness
    
    
    6,003,100
    
    
    
    5,739,336Accounts payable
    
    
    46,369
    
    
    
    35,004Accrued liabilities and other
    
    
    375,081
    
    
    
    364,025Deferred income
    
    
    25,289
    
    
    
    25,589Security deposits
    
    
    37,879
    
    
    
    38,169Deferred income taxes payable, net
    
    
    29,613
    
    
    
    26,065Liabilities related to assets held for sale
    
    
    209,023
    
    
    
    511,164Total liabilities
    
    
    6,726,354
    
    
    
    6,739,352Minority interest in consolidated real estate partnerships
    
    
    222,915
    
    
    
    195,464Partners capital:Preferred units
    
    
    1,080,867
    
    
    
    952,952General Partner and Special Limited Partner
    
    
    1,889,330
    
    
    
    1,919,947Limited Partners
    
    
    295,116
    
    
    
    319,992High performance units
    
    
    (8,708
    )
    
    
    (8,064
    )Less: Investment in Aimco Class A Common Stock
    
    
    (9,151
    )
    
    
    (10,012
    )Total partners capital
    
    
    3,247,454
    
    
    
    3,174,815Total liabilities and partners capital
    
    $
    10,196,723
    
    
    $
    10,109,631
 See notes to consolidated financial statements. 2




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##### 



AIMCO PROPERTIES, L.P. CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Unit Data)
(Unaudited) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003REVENUES:Rental and other property revenues
    
    $
    359,416
    
    
    $
    340,408
    
    
    $
    1,037,381
    
    
    $
    1,003,509Property management revenues, primarily from affiliates
    
    
    8,713
    
    
    
    9,652
    
    
    
    26,032
    
    
    
    28,498Activity fees and asset management revenues, primarily from affiliates
    
    
    5,985
    
    
    
    3,285
    
    
    
    24,381
    
    
    
    12,184Total revenues
    
    
    374,114
    
    
    
    353,345
    
    
    
    1,087,794
    
    
    
    1,044,191EXPENSES:Property operating expenses
    
    
    176,090
    
    
    
    153,365
    
    
    
    492,080
    
    
    
    440,030Property management expenses
    
    
    2,406
    
    
    
    1,961
    
    
    
    6,737
    
    
    
    6,003Activity and asset management expenses
    
    
    2,272
    
    
    
    2,003
    
    
    
    9,299
    
    
    
    5,810Depreciation and amortization
    
    
    90,298
    
    
    
    81,508
    
    
    
    265,981
    
    
    
    245,305General and administrative expenses
    
    
    18,765
    
    
    
    10,926
    
    
    
    54,612
    
    
    
    27,802Other expenses (income), net
    
    
    (215
    )
    
    
    (2,265
    )
    
    
    (1,093
    )
    
    
    (9,160
    )Total expenses
    
    
    289,616
    
    
    
    247,498
    
    
    
    827,616
    
    
    
    715,790Operating income
    
    
    84,498
    
    
    
    105,847
    
    
    
    260,178
    
    
    
    328,401Interest income
    
    
    10,400
    
    
    
    5,210
    
    
    
    25,949
    
    
    
    19,379Provision for losses on notes receivable
    
    
    (672
    )
    
    
    23
    
    
    
    (1,773
    )
    
    
    (1,465
    )Interest expense
    
    
    (95,930
    )
    
    
    (86,029
    )
    
    
    (276,452
    )
    
    
    (254,893
    )Deficit distributions to minority partners, net
    
    
    (7,824
    )
    
    
    (11,827
    )
    
    
    (14,907
    )
    
    
    (20,928
    )Equity in losses of unconsolidated real estate partnerships
    
    
    (1,197
    )
    
    
    (1,767
    )
    
    
    (3,669
    )
    
    
    (6,581
    )Impairment loss on investment in unconsolidated real
estate partnerships
    
    
    (583
    )
    
    
    
    
    
    
    (2,316
    )
    
    
    Gain on dispositions of real estate related to unconsolidated entities
and other
    
    
    39,138
    
    
    
    1,449
    
    
    
    41,218
    
    
    
    2,209Income before minority interest, discontinued operations and
cumulative effect of change in accounting principle
    
    
    27,830
    
    
    
    12,906
    
    
    
    28,228
    
    
    
    66,122Minority interest in consolidated real estate partnerships
    
    
    1,558
    
    
    
    (1,198
    )
    
    
    6,896
    
    
    
    (3,266
    )Income from continuing operations
    
    
    29,388
    
    
    
    11,708
    
    
    
    35,124
    
    
    
    62,856Income from discontinued operations, net
    
    
    152,909
    
    
    
    32,753
    
    
    
    181,999
    
    
    
    73,471Income before cumulative effect of change in accounting principle
    
    
    182,297
    
    
    
    44,461
    
    
    
    217,123
    
    
    
    136,327Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (3,957
    )
    
    
    Net income
    
    
    182,297
    
    
    
    44,461
    
    
    
    213,166
    
    
    
    136,327Net income attributable to preferred unitholders
    
    
    26,635
    
    
    
    29,032
    
    
    
    72,475
    
    
    
    82,108Net income attributable to common unitholders
    
    $
    155,662
    
    
    $
    15,429
    
    
    $
    140,691
    
    
    $
    54,219Earnings (loss) per common unit  basic:Income (loss) from continuing operations (net of preferred
distributions)
    
    $
    0.03
    
    
    $
    (0.16
    )
    
    $
    (0.36
    )
    
    $
    (0.18
    )Income from discontinued operations
    
    
    1.46
    
    
    
    0.31
    
    
    
    1.75
    
    
    
    0.70Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net income attributable to common unitholders
    
    $
    1.49
    
    
    $
    0.15
    
    
    $
    1.35
    
    
    $
    0.52Earnings (loss) per common unit  diluted:Income (loss) from continuing operations (net of preferred
distributions)
    
    $
    0.03
    
    
    $
    (0.16
    )
    
    $
    (0.36
    )
    
    $
    (0.18
    )Income from discontinued operations
    
    
    1.46
    
    
    
    0.31
    
    
    
    1.75
    
    
    
    0.70Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net income attributable to common unitholders
    
    $
    1.49
    
    
    $
    0.15
    
    
    $
    1.35
    
    
    $
    0.52Weighted average common units outstanding
    
    
    104,296
    
    
    
    104,684
    
    
    
    104,266
    
    
    
    104,715Weighted average common units and equivalents outstanding
    
    
    104,443
    
    
    
    104,684
    
    
    
    104,266
    
    
    
    104,715Distributions declared per common unit
    
    $
    0.60
    
    
    $
    0.60
    
    
    $
    1.80
    
    
    $
    2.24
 See notes to consolidated financial statements. 3




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AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited) For the Nine MonthsEnded September 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    213,166
    
    
    $
    136,327Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    265,981
    
    
    
    245,305Deficit distributions to minority partners, net
    
    
    14,907
    
    
    
    20,928Equity in losses of unconsolidated real estate partnerships
    
    
    3,669
    
    
    
    6,581Gain on dispositions of real estate related to unconsolidated entities and other
    
    
    (41,218
    )
    
    
    (2,209
    )Impairment loss on investment in unconsolidated real estate partnerships
    
    
    2,316
    
    
    
    Cumulative effect of change in accounting principle
    
    
    3,957
    
    
    
    Minority interest in consolidated real estate partnerships
    
    
    (6,896
    )
    
    
    3,266Stock-based compensation expense
    
    
    4,460
    
    
    
    4,498Amortization of deferred loan costs and other
    
    
    6,594
    
    
    
    (5,504
    )Discontinued operations:Depreciation and amortization
    
    
    13,391
    
    
    
    33,340Recovery of deficit distributions to minority partners, net
    
    
    (3,308
    )
    
    
    (4,079
    )Gain on dispositions of real estate, net of minority partners interest
    
    
    (196,066
    )
    
    
    (67,459
    )Impairment loss on real estate assets sold or held for sale
    
    
    9,942
    
    
    
    8,560Minority interest in consolidated real estate partnerships
    
    
    713
    
    
    
    1,321Changes in operating assets and operating liabilities:Accounts receivable
    
    
    15,995
    
    
    
    18,343Other assets
    
    
    (20,388
    )
    
    
    (4,746
    )Accounts payable, accrued liabilities and other
    
    
    11,875
    
    
    
    22,916Deferred income taxes
    
    
    3,548
    
    
    
    (13,333
    )Total adjustments
    
    
    89,472
    
    
    
    267,728Net cash provided by operating activities
    
    
    302,638
    
    
    
    404,055CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of real estate
    
    
    (153,817
    )
    
    
    (117,907
    )Capital expenditures
    
    
    (191,379
    )
    
    
    (187,755
    )Proceeds from dispositions of real estate
    
    
    628,073
    
    
    
    479,220Purchases of non-real estate related corporate assets
    
    
    (23,967
    )
    
    
    (15,418
    )Cash from newly consolidated properties
    
    
    14,827
    
    
    
    5,045Purchases of general and limited partnership interests and other assets
    
    
    (67,437
    )
    
    
    (36,676
    )Originations of notes receivable primarily from unconsolidated real estate partnerships
    
    
    (134,169
    )
    
    
    (47,833
    )Proceeds from repayment of notes receivable
    
    
    103,823
    
    
    
    40,894Cash paid in connection with merger/acquisition related costs
    
    
    (2,378
    )
    
    
    (13,983
    )Distributions received from Aimco
    
    
    861
    
    
    
    945Distributions received from investments in unconsolidated real estate partnerships
    
    
    44,973
    
    
    
    51,106Net cash provided by investing activities
    
    
    219,410
    
    
    
    157,638CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from secured notes payable borrowings
    
    
    407,620
    
    
    
    351,964Principal repayments on secured notes payable
    
    
    (465,555
    )
    
    
    (553,020
    )Proceeds from tax-exempt bond financing
    
    
    69,471
    
    
    
    14,505Principal repayments on tax-exempt bond financing
    
    
    (169,945
    )
    
    
    (62,774
    )Net borrowings (paydowns) on term loans and revolving credit facility
    
    
    (16,987
    )
    
    
    108,376Payment of loan costs
    
    
    (10,058
    )
    
    
    (14,080
    )Proceeds from issuance (redemption) of mandatorily redeemable preferred securities
    
    
    (98,875
    )
    
    
    97,250Proceeds from issuance of common units, High Performance Units and
exercise of options/warrants
    
    
    3,601
    
    
    
    147,062Proceeds from issuance of preferred units, net
    
    
    207,072
    
    
    
    Redemption of preferred units
    
    
    (149,926
    )
    
    
    (239,770
    )Principal repayments received on notes due on common unit purchases
    
    
    1,777
    
    
    
    6,049Repurchase and redemption of common units
    
    
    (13,469
    )
    
    
    (1,177
    )Contributions from minority interest
    
    
    27,697
    
    
    
    Payment of distributions to minority interest
    
    
    (42,903
    )
    
    
    (49,009
    )Payment of distributions to General Partner and Special Limited Partner
    
    
    (170,040
    )
    
    
    (229,878
    )Payment of distributions to Limited Partners
    
    
    (15,759
    )
    
    
    (23,709
    )Payment of distribution to High Performance Units
    
    
    (4,372
    )
    
    
    (5,854
    )Payment of preferred unit distributions
    
    
    (73,259
    )
    
    
    (77,098
    )Net cash used in financing activities
    
    
    (513,910
    )
    
    
    (531,163
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    8,138
    
    
    
    30,530CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    114,432
    
    
    
    99,550CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    122,570
    
    
    $
    130,080
 See notes to consolidated financial statements. 4




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AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited) NOTE 1  Organization AIMCO Properties, L.P., a Delaware limited partnership, or the
Partnership, and together with its consolidated subsidiaries and other
controlled entities, the Company, was formed on May 16, 1994 to conduct the
business of acquiring, redeveloping, leasing, and managing multifamily
apartment properties. Our securities include Partnership Common Units, or
common OP Units, Partnership Preferred Units, or preferred OP Units, and High
Performance Partnership Units, or High Performance Units, which are
collectively referred to as OP Units. Apartment Investment and Management
Company, or Aimco, is the owner of our general partner, AIMCO-GP, Inc., or the
General Partner, and special limited partner, AIMCO-LP, Inc., or the Special
Limited Partner. The General Partner and Special Limited Partner hold common
OP Units and are the primary holders of outstanding preferred OP Units.
Limited Partners refers to individuals or entities that are our limited
partners, other than Aimco, the General Partner or the Special Limited Partner,
and own common OP Units or preferred OP Units. Generally, after holding the
common OP Units for one year, the Limited Partners have the right to redeem
their common OP Units for cash, subject to our prior right to cause
Aimco to acquire some or
all of the common OP Units tendered for redemption in exchange for shares of
Aimco Class A Common Stock. Common OP Units redeemed for Aimco Class A Common
Stock are generally on a one-for-one basis (subject to antidilution
adjustments). Preferred OP Units and High Performance Units may or may not be
redeemable based on their respective terms, as provided for in the Third
Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P.
as amended, or the Partnership Agreement. We, through our operating divisions and subsidiaries, hold substantially
all of Aimcos assets and manage the daily operations of Aimcos business and
assets. Aimco is required to contribute all proceeds from offerings of its
securities to us. In addition, substantially all of Aimcos assets must be
owned through the Partnership; therefore, Aimco is generally required to
contribute all assets acquired to us. In exchange for the contribution of
offering proceeds or assets, Aimco receives additional interests in us with
similar terms (e.g., if Aimco contributes proceeds of a preferred stock
offering, Aimco (through the General Partner and Special Limited Partner)
receives preferred OP Units with terms substantially similar to the preferred
securities issued by Aimco). Aimco frequently consummates transactions for our benefit. For legal, tax
or other business reasons, Aimco may hold title or ownership of certain assets
until they can be transferred to us. However, we have a controlling financial
interest in substantially all of Aimcos assets in the process of transfer to
us. As of September 30, 2004, we owned or managed 1,546 apartment properties
containing 271,859 apartment units located in 47 states, the District of
Columbia and Puerto Rico. We serve approximately one million residents per
year. As of September 30, 2004, we:  
    
    owned an equity interest in and consolidated 172,900 units in 693
properties (which we refer to as consolidated), of which 172,748
units were also managed by us;
    
    owned an equity interest in and did not consolidate 51,474 units in
371 properties (which we refer to as unconsolidated), of which 44,944
units were also managed by us; and
    
    provided services or managed, for third party owners, 47,485 units
in 482 properties, primarily pursuant to long-term agreements
(including 39,294 units in 409 properties that are asset managed only,
and not property managed), although in certain cases we may indirectly
own a small interest (generally less than one percent) in such
properties through a partnership syndication or other fund. At September 30, 2004, we had outstanding 103,247,272 common OP Units,
44,885,558 preferred OP Units and 2,379,084 High Performance Units (includes
only those units that have met the required measurement benchmarks and are
dilutive  see Note 6). Except as the context otherwise requires, we, our, us and the
Company refer to the Partnership, the Partnerships consolidated corporate
subsidiaries and consolidated real estate partnerships, collectively. Except
as the context otherwise requires, Aimco refers to Aimco and Aimcos
consolidated corporate subsidiaries and consolidated real estate partnerships,
collectively. 5




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##### 



NOTE 2  Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and nine months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and disclosures required by generally accepted accounting principles for
complete financial statements. For further information, refer to the financial statements and notes
thereto included in AIMCO Properties, L.P.s Annual Report on Form 10-K for the
year ended December 31, 2003. Certain 2003 financial statement amounts have
been reclassified to conform to the 2004 presentation, including certain
intercompany eliminations and the treatment of discontinued operations. The accompanying consolidated financial statements include the accounts of
the Partnership, its consolidated corporate subsidiaries and consolidated real
estate partnerships. Pursuant to a Management and Contribution Agreement
between the Partnership and Aimco, we have acquired, in exchange for interests
in the Partnership, the economic benefits of subsidiaries of Aimco in which we
do not have an interest, and Aimco has granted us a right of first refusal to
acquire such subsidiaries assets for no additional consideration. Pursuant to
the agreement, Aimco has also granted us certain rights with respect to assets
of such subsidiaries. As used herein, and except where the context otherwise
requires, partnership refers to a limited partnership or a limited liability
company and partner refers to a limited partner in a limited partnership or a
member in a limited liability company. Interests held in consolidated real
estate partnerships by limited partners other than us are reflected as minority
interest in consolidated real estate partnerships. All significant
intercompany balances and transactions have been eliminated in consolidation.
The assets of consolidated real estate partnerships owned or controlled by
Aimco or us generally are not available to pay creditors of Aimco or the
Partnership. We reflect partners interests in consolidated real estate partnerships as
minority interest in consolidated real estate partnerships. Minority interest
in consolidated real estate partnerships represents the non-controlling
partners share of the underlying net assets of our consolidated real estate
partnerships. When these consolidated real estate partnerships make cash
distributions to partners in excess of their minority interest balances, we
record a charge equal to the minority partners excess of distributions over
their minority interest balances, even though there is no economic effect or
cost. We classify this charge in the consolidated statements of income as
deficit distributions to minority partners. We allocate losses to minority
partners until such time as such losses exceed the minority partners capital
account balances, in which case, we recognize 100% of the losses when the
partnership is in a deficit equity position, even though there is no economic
effect or cost. Approximately $2.1 million and $4.6 million in depreciation
related net losses were charged to operations for the three and nine months
ended September 30, 2004, respectively, and approximately $0.4 million in
depreciation related net recoveries and $1.3 million in depreciation related
net losses were charged to operations for the three and nine months ended
September 30, 2003, respectively. NOTE 3  Acquisitions and Joint Ventures On September 29, 2004, we completed the acquisition of a property located
on the Upper West Side of Manhattan, containing 200 units and ground-floor
retail space. We funded the purchase price of $51.0 million through
non-recourse, long-term, fixed rate, partially amortizing property debt of
$26.5 million, with an interest rate of 5.13%, and tax-free exchange funds. On September 30, 2004, we completed the acquisition of a property located
in Miami, Florida, containing 471 units. We funded the purchase price of $63.8
million through tax-free exchange funds and the assumption of $48.2 million of
existing debt. Additionally, during the third quarter, we purchased two other
properties, containing a total 6




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of 141 units, for an aggregate purchase price of approximately $13.4
million funded with cash and tax-free exchange funds. During May 2004, we completed the acquisition of five contiguous apartment
properties located in New York City on the Upper East Side of Manhattan,
containing an aggregate of 72 units, for a total purchase price of $14.5
million. We funded the acquisition primarily through tax-free exchange funds
and the assumption of mortgage debt of approximately $9.3 million.
Additionally, we completed the acquisition of a property located in Fall River,
Massachusetts, containing 240 units, for a total purchase price of $19.0
million. We funded the acquisition primarily through tax-free exchange funds
and the assumption of mortgage debt of approximately $10.0 million. On January 30, 2004, Aimco completed the acquisition of The Palazzo at
Park La Brea located in Los Angeles, California, a mid-rise apartment community
with 521 units, for $162.9 million, which included $0.5 million in transaction
costs. The Palazzo at Park La Brea is the second of three phases recently
completed as part of the Park La Brea development. Aimco paid approximately
$69.7 million in cash and was required to repay existing construction loan
financing of approximately $92.7 million. The repayment of existing
mortgage indebtedness was funded primarily through a non-recourse, long-term, variable
rate, partially amortizing property note of $88.1 million, with an interest
rate of 1.50% over 30-day LIBOR. In order to fund the acquisition of The Palazzo at Park La Brea, we loaned
$69.7 million to Aimco in exchange for a note receivable, which we refer to as
The Palazzo at Park La Brea Note. The note bears interest at the rate of 5.25%
per annum, with interest payments due on December 31 of each year, with all
unpaid principal and interest due on December 31, 2014. Upon completion of the
purchase, Aimco contributed the assets and liabilities of The Palazzo at Park
La Brea to us in exchange for 2,787,111 Class Twelve Partnership Preferred
Units, or the Class Twelve Preferred Units. The Class Twelve Preferred Units
paid distributions of $1.3125 per unit on December 31 of each year, with the
first distribution being prorated from the date of issuance. Aimco repaid The
Palazzo at Park La Brea Note with the proceeds from the issuance of Class U
Cumulative Preferred Stock (see Note 6). Additionally during the first quarter, we
completed the acquisition of a three-property portfolio located in New York
City, containing an aggregate of 75 units, for a total purchase price of $17.8
million. We funded the acquisition primarily through non-recourse, long-term,
fixed rate, partially amortizing property notes totaling $12.2 million, with
interest rates of 5.38%. GE Joint Venture On December 30, 2003 we entered into an equity financing with GE Real
Estate in the form of a joint venture, which we refer to the as the GE JV. In
March 2004, we contributed to the GE JV interests in an additional four of our
apartment properties with a total of 900 units, and GE Real Estate contributed
cash, of which we received approximately $11.0 million before transaction costs
and funding of reserves. The four apartment properties we contributed had an
agreed upon transaction value of approximately $36.0 million and mortgage debt
of approximately $21.0 million that was assumed by the GE JV. We have a 25%
managing member interest in the GE JV and GE Real Estate has a 75% non-managing
member interest. As a result of our control over day-to-day operations, we
continue to consolidate the properties contributed to the GE JV in our
consolidated financial statements and did not recognize any gain as a result of
this transaction. GE Real Estates interest in these net assets through the GE
JV is included in minority interest in consolidated real estate partnerships. NOTE 4  Mandatorily Redeemable Preferred Securities In April 2003, Aimco sold 4,000,000 shares of floating rate Class S
Cumulative Redeemable Preferred Stock, or the Class S Preferred Stock, through
a private placement to an institutional investor. The proceeds were
contributed to the Partnership in exchange for Class S Partnership Preferred
Units, or the Class S Preferred Units. On January 30, 2004, Aimco redeemed
1,015,228 shares of the Class S Preferred Stock at a redemption price of
$24.625 per share. Additionally, on March 26, 2004, with proceeds from the
issuance of the 7.75% Class U Cumulative Preferred Stock (see Note 6), Aimco
redeemed the remaining 2,984,772 shares of the Class S Preferred Stock at a
redemption price of $24.75 per share. Concurrently with these redemptions, we
redeemed for cash 1,015,228 and 2,984,772 Class S Preferred Units. In
accordance with Statement of Financial Accounting Standards No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, or SFAS 150, for the nine months ended September 30, 2004, we recorded
to interest expense approximately $0.8 million of distributions paid on the
Class S Preferred Units and $0.4 million resulting from a redemption value
adjustment on February 1, 2004. 7




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NOTE 5  Commitments and Contingencies Commitments In connection with the March 11, 2002 acquisition of Casden Properties,
Inc., or Casden, which included the merger of Casden into Aimco, and the merger
of a subsidiary of Aimco into another real estate investment trust affiliated
with Casden, all of which we collectively refer to as the Casden Merger, we and
Aimco have commitments to:  
    
    purchase Palazzo East at Park La Brea upon satisfactory completion
of construction and attainment of 60% occupancy. Palazzo East at Park
La Brea is comprised of a total of 610 units, construction of which was
completed in December 2003, and which we expect to acquire in early
2005 for a contractually agreed minimum consideration of approximately
$199 million. With regard to our previously disclosed commitment to
purchase Westwood, on August 11, 2004, a Casden affiliate delivered
written notice exercising its right (pursuant to documents entered into
in connection with the Casden Merger) to acquire Westwood. We are in
the process of negotiating documentation to reflect this, which will
extinguish our obligation to purchase Westwood;
    
    provide a stand-by facility of $64.5 million in debt financing
associated with the development of Palazzo East at Park La Brea and
Westwood (as of September 30, 2004, no funds have been drawn on this
stand-by facility). In connection with the Westwood agreement
negotiation described above, the maximum amount we will be required to
provide through this stand-by facility will be reduced to $32.1
million;
    
    invest up to $50 million for a 20% limited liability company
interest in Casden Properties LLC. As of September 30, 2004, we had
invested $39.1 million. Casden Properties LLC acts as general
contractor for the entity that is developing Palazzo East at Park La
Brea and Westwood. In addition, Casden Properties LLC intends to
pursue new development opportunities in Southern California and other
markets. We have an option, but not an obligation, to purchase at
completion all multifamily rental projects developed by Casden
Properties LLC; and
    
    pay $2.5 million per quarter for five years (for an aggregate
amount of $50 million) to Casden Properties LLC as a retainer on
account for redevelopment services on our assets (as of September 30,
2004, $25.0 million has been paid). Guarantees In the ordinary course of business, we provide various guarantees that are
covered by the provisions of Financial Accounting Standards Board, or FASB,
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,or FIN 45.
These guarantees include: (i) standby letters of credit, which we may provide
to enhance credit or guarantee our performance under contractual obligations;
(ii) limited guarantees, which we may provide to certain of our lenders and
that may require us to provide funds to maintain required loan-to-value ratios;
and (iii) guarantees in connection with our syndication of historical and
affordable housing tax credits, which we may provide to make available
additional funding to cover operating cash flow deficiencies, cover shortfalls
related to the delivery of tax credits and cover financing shortfalls related
to project development. These guarantees have varying expiration dates ranging
from less than one year to fourteen years. The fair values of these guarantees
issued after December 31, 2002 (effective date under FIN 45), are not material
to our financial statements. Legal Matters In addition to the matters described below, we are a party to various
legal actions and administrative proceedings arising in the ordinary course of
business, some of which are covered by liability insurance, and none of which
we expect to have a material adverse effect on our consolidated financial
condition or results of operations. Limited Partnerships In connection with our acquisitions of interests in real estate
partnerships, we are sometimes subject to legal actions, including allegations
that such activities may involve breaches of fiduciary duties to the partners
of such 8




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real estate partnerships or violations of the relevant partnership
agreements. We may incur costs in connection with the defense or settlement of
such litigation. We believe that we comply with our fiduciary obligations and
relevant partnership agreements. Although the outcome of any litigation is
uncertain, we do not expect any such legal actions to have a material adverse
affect on our consolidated financial condition or results of operations. Environmental Various Federal, state and local laws subject property owners or operators
to liability for management, and 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 or presence of the hazardous substances. The
presence of, or the failure to manage or remedy properly, hazardous substances
may adversely affect occupancy at affected apartment communities and the
ability to sell or finance affected properties. In addition to the costs
associated with investigation and remediation actions brought by government
agencies, the presence of hazardous substances 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,
remediation or disposal of hazardous substances through a licensed disposal or
treatment facility. Anyone who arranges for the disposal or treatment of
hazardous 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. Mold As previously disclosed, Aimco has been named as a defendant in lawsuits
that have alleged personal injury as a result of the presence of mold. In
addition, we are aware of lawsuits against owners and managers of multifamily
properties asserting claims of personal injury and property damage caused by
the presence of mold, some of which have resulted in substantial monetary
judgments or settlements. We have only limited insurance coverage for property
damage loss claims arising from the presence of mold and for personal injury
claims related to mold exposure. We have implemented a national policy and
procedures to prevent or eliminate mold from our properties and believe that
our measures will eliminate, or at least 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 abate mold conditions.
Because the law regarding mold is unsettled and subject to change we can make
no assurance that 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. San Francisco Litigation As previously disclosed, Aimco and four of its affiliated partnerships are
parties to a lawsuit with the City and County of San Francisco and certain of
its agents. A settlement agreement among the parties resolving the litigation
became effective on November 4, 2004. The settlement was subject to certain
previously disclosed conditions subsequent that have been satisfied. Aimco intends to complete a renovation of the properties. The
settlement and anticipated renovation of the properties has had no material
adverse effect on our consolidated financial condition or results of
operations. National Union Litigation As previously disclosed, National Program Services, Inc. and Vito Gruppuso
(collectively NPS) were insurance agents who sold to Aimco property insurance
issued by National Union Fire Insurance Company of Pittsburgh, Pennsylvania
(National Union). The financial failure of NPS resulted in defaults under
two agreements by which NPS indemnified Aimco from losses relating to the
matters described below. As a result of such defaults Aimco had a $16.7
million insurance-related receivable that was subsequently reduced to $6.7
million following Aimcos settlement with Lumbermens Mutual Casualty Company
(Lumbermens) and an insurance agency. In addition, Aimco has pending
litigation against National Union, First Capital Group, a New York based
insurance wholesaler, NPS and other agents of National Union, for a refund of
at least $10 million of the prepaid premium plus other damages. The contingent
liabilities arising from the NPS defaults also resulted in litigation against
us by Cananwill, Inc. (Cananwill), a premium funding company, regarding an
alleged balance due of $5.7 million on a premium finance agreement that funded
premium payments made to National Union. Aimco is also a plaintiff in
litigation against Cananwill and Combined Specialty Insurance Company, formerly
known as Virginia Surety Company, Inc., alleging Cananwills conversion of $1.6
million of unearned premium belonging to Aimco 9




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and misapplication of such funds to the alleged debt asserted in the
lawsuit initiated by Cananwill. The matter in which Aimco is a plaintiff has
been stayed by the court pending resolution of the action filed by Cananwill
against us. The previously disclosed litigation brought by WestRM  West Risk
Markets, Ltd. (WestRM) against XL Reinsurance America, Inc. (XL), Greenwich
Insurance Company (Greenwich) and Lumbermens in which Aimco had been made a
third party defendant continues. Summary judgment has been entered against
defendants XL and Greenwich. Similarly, the previously disclosed litigation
brought by Highlands Insurance Company (Highlands) against Cananwill, XL,
Greenwich and Aimco also continues. In those cases in which Aimco is a
defendant, Aimco believes that it has meritorious defenses to assert, and will
vigorously defend itself against claims brought against it. In addition, Aimco
will vigorously prosecute its own claims. Although the outcome of any claim or
matter in litigation is uncertain, we do not believe that we will incur any
material loss in connection with the insurance-related receivable or that the
ultimate outcome of these separate but related matters will have a material
adverse effect on our consolidated financial condition or results of
operations. FLSA Litigation As previously disclosed, we and NHP Management Company (NHPMN), an
affiliate of ours, are defendants in a lawsuit alleging that we willfully
violated the Fair Labor Standards Act (FLSA) by failing to pay maintenance
workers overtime for all hours worked in excess of forty per week. The
complaint attempts to bring a collective action under the FLSA and seeks to
certify state subclasses in California, Maryland, and the District of Columbia.
Specifically, the plaintiffs contend that we and NHPMN failed to compensate
maintenance workers for time that they were required to be on-call.
Additionally, the complaint alleges we and NHPMN failed to comply with the FLSA
in compensating maintenance workers for time that they worked in responding to
a call while on-call. We have filed an answer to the amended complaint
denying the substantive allegations. The parties are actively engaging in
discovery. Although the outcome of any litigation is uncertain, we do not
believe that the ultimate outcome will have a material adverse effect on our
consolidated financial condition or results of operations. SEC Investigation As previously disclosed, the Central Regional Office of the United States
Securities and Exchange Commission (the SEC) is conducting a formal
investigation relating to certain matters. Although the staff of the SEC is
not limited in the areas that it may investigate, we believe the areas of
investigation include Aimcos miscalculated monthly net rental income figures
in third quarter 2003, forecasted guidance, accounts payable, rent concessions,
vendor rebates, capitalization of payroll and certain other costs, and tax
credit transactions. Aimco is cooperating fully. We are not able to predict
when the matter will be resolved. We do not believe that the ultimate outcome
will have a material adverse effect on our consolidated financial condition or
results of operations. NOTE 6  Partners Capital Preferred OP Units Redemptions On September 30, 2004, Aimco completed a partial redemption for cash of
2,000,000 outstanding shares of its 9.0% Class N Convertible Cumulative
Preferred Stock, or the Class N Preferred Stock, for a total redemption price
of $25.68125 per share, which included a redemption price of $25 per share,
$0.18125 per share of accumulated and unpaid dividends through September 30,
2004, and a 2%, or $0.50 per share, redemption premium. The redemption premium
was included in preferred distributions for the three and nine months ended
September 30, 2004. Concurrently, we redeemed 2,000,000 Class N Partnership
Preferred Units, or the Class N Preferred Units, at a price per unit equal to
the redemption price per share of the Class N Preferred Stock. On April 21, 2004, Aimco redeemed for cash all 3,999,662 outstanding
shares of the 9.0% Class P Convertible Cumulative Preferred Stock, or the Class
P Preferred Stock, for a total redemption price of $25.0375 per share, which
included a redemption price of $25 per share, and $0.0375 per share of
accumulated and unpaid dividends through April 20, 2004. Concurrently, we
redeemed each of the Class P Partnership Preferred Units at a price per unit
equal to the redemption price per share of the Class P Preferred Stock. 10




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Exchanges On September 30, 2004, Aimco issued 1,904,762 shares of 8.1% Class W
Cumulative Convertible Preferred Stock, par value $0.01 per share, or the Class
W Preferred Stock, in exchange for all 1,904,762 shares of its 9.0% Class O
Cumulative Convertible Preferred Stock, or the Class O Preferred Stock, in a
private transaction. Concurrently, we issued 1,904,762 Class W Partnership
Preferred Units, or the Class W Preferred Units, in exchange for all 1,904,762
Class O Partnership Preferred Units. The Class W Preferred Units have
substantially the same terms as the shares of Class W Preferred Stock. Holders
of the Class W Preferred Stock are entitled to receive cash dividends (paid
quarterly) in an amount per share equal to the greater of (i) $4.2525 per year
(equivalent to 8.1% of the $52.50 liquidation preference), or (ii) the cash
dividends payable on the number of shares of Common Stock into which a share of
Class W Preferred Stock is convertible. Each share of Class W Preferred Stock
is convertible, at the option of the holder, into one share of Aimco Class A
Common Stock (the same conversion rate as the Class O Preferred Stock), subject
to certain anti-dilution adjustments. The initial conversion price was in
excess of the fair market value of a share of Aimco Class A Common Stock on the
commitment date. Class W Preferred Stock is senior to Aimco Class A Common
Stock as to dividends and liquidation. Upon any liquidation, dissolution or
winding up of Aimco, before payments of dividends/distributions by Aimco are
made to any holders of Aimco Class A Common Stock or common OP Units, the
holders of the Class W Preferred Stock and Class W Preferred Units are entitled
to receive a liquidation preference of $52.50 per share/unit, plus accumulated,
accrued and unpaid dividends/distributions. Each share of Class W Preferred
Stock is redeemable at Aimcos option beginning September 30, 2007 for cash at
a price per share equal to 102% of the liquidation preference, plus all accrued
and unpaid dividends, if any, to the date fixed for redemption. Following this
exchange, no shares of Class O Preferred stock or Class O Partnership Preferred
Units remained outstanding as of September 30, 2004. Distributions will be
made on the Class W Preferred Units at the same time and in the same amount as
dividends on the Class W Preferred Stock. On September 30, 2004, Aimco issued 2,000,000 shares of 8.5% Class X
Cumulative Convertible Preferred Stock, par value $0.01 per share, or the Class
X Preferred Stock, in exchange for 2,000,000 shares of its 9.0% Class N
Preferred Stock in a private transaction. Concurrently, we issued 2,000,000
Class X Partnership Preferred Units, or the Class X Preferred Units, in
exchange for 2,000,000 Class N Preferred Units. The Class X Preferred Units
have substantially the same terms as the shares of Class X Preferred Stock.
Holders of the Class X Preferred Stock are entitled to receive cash dividends
(paid quarterly) in an amount per share equal to the greater of (i) $2.125 per
year (equivalent to 8.5% of the $25 liquidation preference), or (ii) the cash
dividends payable on the number of shares of Aimco Class A Common Stock into
which a share of Class X Preferred Stock is convertible. Beginning on April 1,
2006, holders of Class X Preferred Stock are entitled to receive an amount per
share equal to the greater of (i) $2.25 per year (equivalent to 9.0% of the
liquidation preference), or (ii) the cash dividends payable on the number of
shares of Aimco Class A Common Stock into which a share of Class X Preferred
Stock is convertible. Each share of Class X Preferred Stock is convertible, at
the option of the holder, into 0.4762 shares of Aimco Class A Common Stock (the
same conversion rate as the Class N Preferred Stock), subject to certain
anti-dilution adjustments. The initial conversion price was in excess of the
fair market value of a share of Aimco Class A Common Stock on the commitment
date. Class X Preferred Stock is senior to Aimco Class A Common Stock as to
dividends and liquidation. Upon any liquidation, dissolution or winding up of
Aimco, before payments of dividends/distributions by Aimco are made to any
holders of Aimco Class A Common Stock or common OP Units, the holders of the
Class X Preferred Stock and Class X Preferred Units are entitled to receive a
liquidation preference of $25 per share/unit, plus accumulated, accrued and
unpaid dividends/distributions. Each share of Class X Preferred Stock is
redeemable at Aimcos option beginning March 31, 2006 for cash in the amount of
$25 per share, plus all accrued and unpaid dividends, if any, to the date fixed
for redemption. Under certain circumstances prior to March 31, 2006, the Class
X Preferred Stock may be redeemable at 102% of the liquidation preference.
Following this exchange, no shares of Class N Preferred Stock or Class N
Preferred Units remained outstanding as of September 30, 2004. Distributions
will be made on the Class X Preferred Units at the same time and in the same
amount as dividends on the Class X Preferred Stock. The partial redemption and exchanges in third quarter 2004 of the Class N
Preferred Stock and the Class O Preferred Stock (and the related redemptions
and exchanges of the Class N Preferred Units and the Class O Preferred Units)
resulted in $2.1 million of redemption related preferred unit issuance costs
and a $1.0 million redemption premium being deducted from net income to arrive
at net income attributable to common unitholders and thereby reduced by $0.03
our earnings per basic and diluted common unit for the three and nine months
ended September 30, 2004. 11




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Issuances On September 29, 2004, Aimco sold 3,450,000 shares of 8.0% Class V
Cumulative Preferred Stock, par value $0.01 per share, or the Class V Preferred
Stock, in a registered public offering generating net proceeds of approximately
$83.5 million. The net proceeds were contributed by Aimco to us in exchange
for 3,450,000 Class V Partnership Preferred Units, or the Class V Preferred
Units. Of the total net proceeds, we used $50.0 million to
provide the majority of the funding necessary to redeem 2,000,000 Class N Preferred Units and the remainder to pay down
our revolving credit facility with the intention of redeeming Class D
Partnership Preferred Units, on November 5, 2004 (see Note 13). The Class V
Preferred Units have substantially the same terms as the shares of Class V
Preferred Stock. Holders of the Class V Preferred Stock are entitled to
receive quarterly dividend payments of $0.50 per share, equivalent to $2.00 per
share on an annual basis, or 8.00% of the $25 per share liquidation preference.
Class V Preferred Stock is senior to Aimco Class A Common Stock as to
dividends and liquidation. Upon any liquidation, dissolution or winding up of
Aimco, before payments of dividends/distributions by Aimco are made to any
holders of Aimco Class A Common Stock or common OP Units, the holders of the
Class V Preferred Stock and Class V Preferred Units are entitled to receive a
liquidation preference of $25 per share/unit, plus accumulated, accrued and
unpaid dividends/distributions. Each share of Class V Preferred Stock is
redeemable at Aimcos option beginning September 29, 2009 for cash in the
amount of $25 per share, plus all accrued and unpaid dividends, if any, to the
date fixed for redemption. Distributions will be made on the Class V Preferred
Units at the same time and in the same amount as dividends on the Class V
Preferred Stock. On March 24, 2004, Aimco sold 8,000,000 shares of 7.75% Class U Cumulative
Preferred Stock, par value $0.01 per share, or the Class U Preferred Stock, in
a registered public offering generating net proceeds of approximately $193.7
million. Proceeds of $69.8 million were paid by Aimco to us to repay The
Palazzo at Park La Brea Note (see Note 3) and concurrently 2,787,111 Class
Twelve Preferred Units were converted into 2,787,111 Class U Partnership
Preferred Units, or the Class U Preferred Units. The remaining net proceeds
were contributed by Aimco to us in exchange for 5,212,889 Class U Preferred
Units. We used approximately $74.0 million of the net proceeds to redeem the
floating rate Class S Preferred Units (see Note 4) and the remainder to pay
down our revolving credit facility, and redeem the Class P Partnership
Preferred Units on April 21, 2004 as discussed above. The Class U Preferred
Units have substantially the same terms as the shares of Class U Preferred
Stock. Holders of the Class U Preferred Stock are entitled to receive
quarterly dividend payments of $0.484375 per share, equivalent to $1.9375 per
share on an annual basis, or 7.75% of the $25 per share liquidation preference.
Class U Preferred Stock is senior to Aimco Class A Common Stock as to
dividends and liquidation. Upon any liquidation, dissolution or winding up of
Aimco, before payments of dividends/distributions by Aimco are made to any
holders of Aimco Class A Common Stock or common OP Units, the holders of the
Class U Preferred Stock and Class U Preferred Units are entitled to receive a
liquidation preference of $25 per share/unit, plus accumulated, accrued and
unpaid dividends/distributions. Each share of Class U Preferred Stock is
redeemable at Aimcos option beginning March 24, 2009 for cash in the amount of
$25 per share, plus all accrued and unpaid dividends, if any, to the date fixed
for redemption. Distributions will be made on the Class U Preferred Units at
the same time and in the same amount as dividends on the Class U Preferred
Stock. Common OP Units During the three and nine months ended September 30, 2004, we completed
tender offers for limited partnership interests resulting in the issuance of
approximately 48,000 and 72,000 common OP Units, respectively. During the three
and nine months ended September 30, 2003, we completed tender offers for
limited partnership interests resulting in the issuance of approximately none
and 22,000 common OP Units, respectively. During the three and nine months ended September 30, 2004, approximately
51,000 and 713,000 common OP Units, respectively, were tendered for redemption
and acquired by Aimco in exchange for shares of Aimco Class A Common Stock.
During the three and nine months ended September 30, 2003, approximately 35,000
and 119,000 common OP Units, respectively, were tendered for redemption and
acquired by Aimco in exchange for shares of Aimco Class A Common Stock. During
the three and nine months ended September 30, 2004, approximately 142,000 and
147,000 common OP Units, respectively, were redeemed in exchange for cash.
During the three and nine months ended September 30, 2003, approximately 2,000
and 26,000 common OP units, respectively, were redeemed in exchange for cash. 12




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In addition, during the three and nine months ended September 30, 2004,
approximately 4,000 and 484,000 restricted shares of Aimco Class A Common
Stock, respectively, were issued to certain officers and employees, compared to
approximately 2,000 and 234,000 for the three and nine months ended September
30, 2003. The issuance of restricted stock was recorded at the fair market
value of the Aimco Class A Common Stock on the date of issuance. Concurrently,
we issued to Aimco the same number of common OP Units. On February 18, 19 and 24, 2004, Aimco purchased on the open market
30,000, 60,000 and 20,000 shares of Aimco Class A Common Stock, respectively,
at an average price per share of approximately $32.03, $32.17 and $31.26,
respectively. Concurrently, we purchased 30,000, 60,000 and 20,000 common OP
Units from Aimco. As previously disclosed, prior to the March 2002 Casden Merger in which
Aimco acquired National Partnership Investments Corp. (NAPICO), investors
holding limited partnership units in various limited partnerships of which
NAPICO is the corporate general partner commenced an action (the REAL
Litigation) against NAPICO and certain other defendants. On December 30,
2003, a settlement agreement (the Settlement Agreement) between NAPICO and
Aimco and the prior shareholders of Casden Properties, Inc. closed in
accordance with its terms. Among other things, the Settlement Agreement
provided that The Casden Company deliver promissory notes (each a Note and
collectively, the Notes) to NAPICO in an aggregate amount of $35 million ($7
million per year for 5 years), plus interest, on a secured, non-recourse basis.
The Notes are secured by (i) approximately 804,000 shares of
Aimco Class A Common Stock and
(ii) cash proceeds of recoveries or settlements that Alan I. Casden or any of
his affiliates, or any of the former shareholders of Casden
Properties, Inc.,
receive in connection with or related to the REAL Litigation. On February 24, 2004, Aimco completed the purchase of 287,272 shares of
Aimco Class A Common Stock from the representatives of the plaintiffs in the
REAL Litigation. Aimco paid in cash an aggregate of approximately $9.1 million
to the representatives of the plaintiffs for the shares, or $31.60 per share.
The plaintiffs received these shares from Alan I. Casden on December 30, 2003
pursuant to the previously disclosed Stipulation of Settlement with the
plaintiffs and their counsel relating to the REAL Litigation and the previously
disclosed Settlement Agreement with the prior shareholders of Casden
Properties, Inc., NAPICO, and Aimco. Concurrently, we purchased
287,272 common
OP Units from Aimco. On September 22, 2004, Aimco entered into an agreement with respect to
certain proceeds to be received by Alan I. Casden and Casdens right to deliver
Aimcos Class A Common Stock at an agreed upon value of $47 per share in
satisfaction of the Notes. Subject to court approval, which was granted on
November 1, 2004, Aimco will receive $20 million in cash as payment in full on
the three Notes due in 2004, 2005 and 2006. Thereafter, at various intervals
spanning approximately 1.5 years, we will receive cash payments of $4 million,
$3 million and $2.5 million in satisfaction of the Notes
due in 2007 and 2008.
This transaction resolves a contingency based on the price of Aimco Class A
Common Stock related to the Casden acquisition. In accordance with Statement
of Financial Accounting Standards No. 141, Business
Combinations, we recorded a $4.8 million charge to
partners capital, representing the
difference between the $29.1 million fair value of the consideration to be paid
pursuant to the settlement and the $33.9 million book value of the Notes. High Performance Units On April 30, 2004, Aimco stockholders approved the sale of up to 5,000
Class VII High Performance Partnership Units, or the Class VII Units, for which
the valuation period began on January 1, 2004 and will end on December 31,
2006. On June 18, 2004, we issued 2,892 Class VII Units to a limited liability
company owned by a limited number of employees for an aggregate offering price
of approximately $530,000. On August 25, 2004, we issued an additional 1,217
Class VII Units to a limited liability company owned by a limited number of
employees for an aggregate offering price of approximately $222,000. These two
issuances resulted in a total of 4,109 Class VII Units outstanding for a total
aggregate offering price of approximately $752,000. Additionally,
at September 30, 2004, we had outstanding 4,398 Class V High
Performance Partnership Units, or the Class V Units, for which the valuation
period began on January 1, 2002 and will end on
December 31, 2004 and 5,000 Class VI High Performance Partnership
Units, or the Class VI Units, for which the valuation period began on January
1, 2003 and will end on December 31, 2005. At September 30, 2004, we did not meet
the required measurement benchmarks for the Class V Units, Class VI Units or
Class VII Units. Therefore, as of September 30, 2004 such High Performance Units
have no dilutive effect. 13




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##### 



NOTE 7  Stock-Based Compensation Aimco, from time to time, issues stock options. Upon exercise of the
stock options, Aimco must contribute to us the proceeds received in exchange
for the same number of common OP Units as shares of Aimco Class A Common Stock
issued in connection with the exercised stock options. Therefore, the
following disclosures are made pertaining to Aimcos stock options. Effective January 1, 2003, Aimco adopted the accounting provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation,or SFAS 123, as amended by Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123,or SFAS 148, and applied
the prospective method set forth in SFAS 148 with respect to the transition.
Under this method, Aimco now applies the fair value recognition provisions of
SFAS 123 to all employee awards granted, modified, or settled on or after
January 1, 2003, which has resulted in compensation expense being recorded
based on the fair value of the stock options. Prior to January 1, 2003, Aimco
followed Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, or APB 25, and related interpretations in accounting.
Under APB 25, because the exercise price of Aimcos employee stock options and
warrants equaled the market price of the underlying stock on the date of grant,
no compensation expense was recognized. For purposes of the pro forma
disclosures below, the estimated fair values for all awards made prior to
January 1, 2003 are amortized over the respective vesting period for each such
option and are shown as expense as if SFAS 123 had been applied to all such
awards. The following table illustrates the effect on net income and earnings per
unit if the fair value based method had been applied to all outstanding and
unvested awards in each period presented. Our pro forma information for the
three and nine months ended September 30, 2004 and 2003 is as follows (in
thousands, except per unit data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income attributable to common unitholders, as reported
    
    $
    155,662
    
    
    $
    15,429
    
    
    $
    140,691
    
    
    $
    54,219Add: Stock-based employee compensation expense included in
reported net incomeRestricted stock awards
    
    
    1,567
    
    
    
    1,390
    
    
    
    3,272
    
    
    
    3,829Stock options
    
    
    413
    
    
    
    251
    
    
    
    1,188
    
    
    
    669Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards:Restricted stock awards
    
    
    (1,567
    )
    
    
    (1,390
    )
    
    
    (3,272
    )
    
    
    (3,829
    )Stock options
    
    
    (1,584
    )
    
    
    (1,061
    )
    
    
    (4,701
    )
    
    
    (3,637
    )Pro forma net income attributable to common unitholders
    
    $
    154,491
    
    
    $
    14,619
    
    
    $
    137,178
    
    
    $
    51,251Basic earnings per common unit:Reported
    
    $
    1.49
    
    
    $
    0.15
    
    
    $
    1.35
    
    
    $
    0.52Pro forma
    
    $
    1.48
    
    
    $
    0.14
    
    
    $
    1.32
    
    
    $
    0.49Diluted earnings per common unitReported
    
    $
    1.49
    
    
    $
    0.15
    
    
    $
    1.35
    
    
    $
    0.52Pro forma
    
    $
    1.48
    
    
    $
    0.14
    
    
    $
    1.32
    
    
    $
    0.49
 14




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##### 



NOTE 8  Discontinued Operations and Assets Held for Sale At September 30, 2004, we had 30 properties with an aggregate of 6,455
units and one parcel of land classified as held for sale. For the three and
nine months ended September 30, 2004 and 2003, we included the results of
operations of these 30 properties in discontinued operations. During the nine
months ended September 30, 2004, we sold 32 properties with an aggregate of
7,587 units. For the three and nine months ended September 30, 2004 and 2003,
we also included in discontinued operations the results of operations of these
32 properties before the sale and the related gain/loss on sale. During the
year ended December 31, 2003, we sold 72 properties with an aggregate of 18,291
units. For the three and nine months ended September 30, 2003, we also
included in discontinued operations the results of operations of these 72
properties before the sale and the related gain/loss on sale. The following is a summary of the components of income from discontinued
operations for the three and nine months ended September 30, 2004 and 2003
(dollars in thousands): For the Three Months Ended
    
    For the Nine MonthsSeptember 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Rental and other property revenues
    
    $
    21,700
    
    
    $
    47,415
    
    
    $
    75,362
    
    
    $
    158,694Property operating expense
    
    
    (11,455
    )
    
    
    (20,329
    )
    
    
    (35,125
    )
    
    
    (68,744
    )Net operating income
    
    
    10,245
    
    
    
    27,086
    
    
    
    40,237
    
    
    
    89,950Other (expenses) income, net
    
    
    (151
    )
    
    
    (94
    )
    
    
    (917
    )
    
    
    (616
    )Depreciation and amortization
    
    
    (3,747
    )
    
    
    (8,800
    )
    
    
    (13,391
    )
    
    
    (33,340
    )Interest expense
    
    
    (5,843
    )
    
    
    (9,838
    )
    
    
    (19,496
    )
    
    
    (39,289
    )Interest income
    
    
    26
    
    
    
    70
    
    
    
    82
    
    
    
    221Minority interest in consolidated real estate
partnerships
    
    
    (216
    )
    
    
    (746
    )
    
    
    (713
    )
    
    
    (1,321
    )Income from operations
    
    
    314
    
    
    
    7,678
    
    
    
    5,802
    
    
    
    15,605Gain on dispositions of real estate, net of
minority partners interest
    
    
    174,497
    
    
    
    22,921
    
    
    
    196,066
    
    
    
    67,459Impairment
loss on real estate assets sold or held for sale
    
    
    (9,451
    )
    
    
    (619
    )
    
    
    (9,942
    )
    
    
    (8,560
    )(Deficit distributions) recovery of deficit
distributions to minority partners, net
    
    
    (5
    )
    
    
    3,579
    
    
    
    3,308
    
    
    
    4,079Income tax arising from disposals
    
    
    (12,446
    )
    
    
    (806
    )
    
    
    (13,235
    )
    
    
    (5,112
    )Income from discontinued operations
    
    $
    152,909
    
    
    $
    32,753
    
    
    $
    181,999
    
    
    $
    73,471
 We are currently marketing for sale certain real estate properties that
are inconsistent with our long-term investment strategy. We expect that all
properties classified as held for sale will sell within one year from the date
classified as held for sale. Assets classified as held for sale of $264.5
million at September 30, 2004 include real estate with a net book value of
$256.0 million and restricted cash and other assets of $8.5 million.
Liabilities related to assets classified as held for sale of $209.0 million at
September 30, 2004 include mortgage debt of $201.8 million. Assets classified
as held for sale of $685.0 million at December 31, 2003 include real estate net
book value of $657.7 million, represented by 62 properties with 14,042 units
and one parcel of land that were classified as assets held for sale during 2003
and 2004. Liabilities related to assets classified as held for sale of $511.2
million at December 31, 2003 include mortgage debt of $499.2 million. The
estimated proceeds, less anticipated costs to sell certain of these assets,
were less than the net book value, and therefore we recorded impairments of
$9.5 million and $9.9 million for the three and nine months ended September 30,
2004, respectively, and impairments of $0.6 million and $8.6 million for the
three and nine months ended September 30, 2003, respectively. We are also
marketing for sale properties other than those described above, both
consolidated and unconsolidated that are not accounted for as assets held for
sale because they do not meet the required criteria. 15




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##### 



NOTE 9  Earnings Per Unit We calculate earnings per unit based on the weighted average number of
shares of common OP Units, common OP unit equivalents and dilutive convertible
securities outstanding during the period. The following table illustrates the
calculation of basic and diluted earnings per unit for the three and nine
months ended September 30, 2004 and 2003 (in thousands, except
per unit data). For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Income from continuing operations
    
    $
    29,388
    
    
    $
    11,708
    
    
    $
    35,124
    
    
    $
    62,856Less net income attributable to preferred unitholders
    
    
    (26,635
    )
    
    
    (29,032
    )
    
    
    (72,475
    )
    
    
    (82,108
    )Numerator for basic and diluted earnings per unit
 Income (loss) from continuing operations
    
    $
    2,753
    
    
    $
    (17,324
    )
    
    $
    (37,351
    )
    
    $
    (19,252
    )Income from discontinued operations
    
    $
    152,909
    
    
    $
    32,753
    
    
    $
    181,999
    
    
    $
    73,471Cumulative effect of change in accounting principle
    
    $
    
    
    
    $
    
    
    
    $
    (3,957
    )
    
    $
    Net income
    
    $
    182,297
    
    
    $
    44,461
    
    
    $
    213,166
    
    
    $
    136,327Less net income attributable to preferred unitholders
    
    
    (26,635
    )
    
    
    (29,032
    )
    
    
    (72,475
    )
    
    
    (82,108
    )Numerator for basic and diluted earnings per unit
 Net income attributable to common
unitholders
    
    $
    155,662
    
    
    $
    15,429
    
    
    $
    140,691
    
    
    $
    54,219Denominator:Denominator for basic earnings per unit  weighted
average number of shares of common units
outstanding
    
    
    104,296
    
    
    
    104,684
    
    
    
    104,266
    
    
    
    104,715Effect of dilutive securities:Dilutive potential common units
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted earnings per unit
    
    
    104,443
    
    
    
    104,684
    
    
    
    104,266
    
    
    
    104,715Earnings (loss) per common unit:Basic earnings (loss) per common unit:Income (loss) from continuing operations (net of
preferred distributions)
    
    $
    0.03
    
    
    $
    (0.16
    )
    
    $
    (0.36
    )
    
    $
    (0.18
    )Income from discontinued operations
    
    
    1.46
    
    
    
    0.31
    
    
    
    1.75
    
    
    
    0.70Cumulative effect of change in accounting principle.
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net income attributable to common
unitholders
    
    $
    1.49
    
    
    $
    0.15
    
    
    $
    1.35
    
    
    $
    0.52Diluted earnings (loss) per common unit:Income (loss) from continuing operations (net of
preferred distributions)
    
    $
    0.03
    
    
    $
    (0.16
    )
    
    $
    (0.36
    )
    
    $
    (0.18
    )Income from discontinued operations
    
    
    1.46
    
    
    
    0.31
    
    
    
    1.75
    
    
    
    0.70Cumulative effect of change in accounting principle.
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net income attributable to common
unitholders
    
    $
    1.49
    
    
    $
    0.15
    
    
    $
    1.35
    
    
    $
    0.52
 All of our convertible preferred OP Units are anti-dilutive on an as
converted basis, therefore, we deduct all of the distributions payable on the
convertible preferred OP Units to arrive at the numerator and no additional
units are included in the denominator. We have excluded from diluted earnings
per unit the common OP Unit equivalents related to approximately 11.0 million
and 12.3 million of vested and unvested stock options, units issued for
non-recourse notes receivable, and restricted stock awards for the three and
nine months ended September 30, 2004, respectively, and approximately 5.6
million and 9.0 million for the three and nine months ended September 30, 2003
because their effect would be anti-dilutive. For purposes of calculating
diluted earnings per unit in accordance with Statement on Financial Accounting
Standards No. 128, Earnings per Share,we treat the unvested portion of
restricted shares as common OP Unit equivalents. 16




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##### 



NOTE 10  Business Segments We have two reportable segments: real estate (owning and operating
apartments) and investment management business (providing property management,
syndication based activities, and other services relating to the apartment
business to third parties and affiliates). We own and operate properties
throughout the United States and Puerto Rico that generate rental and other
property related income through the leasing of apartment units to a diverse
base of residents. We separately evaluate the performance of each of our
properties. However, because each of our properties has similar economic
characteristics, the properties have been aggregated into a single apartment
communities, or real estate, segment. All real estate revenues are from
external customers and no real estate revenues are generated from transactions
with other segments. No single resident or related group of residents
contributed 10% or more of total revenues during the three and nine months
ended September 30, 2004 and 2003. A significant portion of the revenues
earned in the investment management business are from transactions with
affiliates in the real estate segment. Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, or SFAS 131, requires that
segment disclosures present the measure(s) used by the chief operating decision
maker for purposes of assessing segment performance. Our chief operating
decision maker is comprised of several members of our executive management team
who use several generally accepted industry financial measures to assess the
performance of the business including net operating income, free cash flow,
funds from operations, and adjusted funds from operations. In 2004, the chief
operating decision maker has emphasized net operating income as a key
measurement of segment profit or loss. Accordingly, below we disclose net
operating income for each of our segments. Net operating income is defined as
segment revenues (after the elimination of intersegment revenues) less direct
segment operating expenses. In 2003, we reported free cash flow as the primary
basis for measurement of segment profit or loss. Certain reclassifications have
been made to the 2003 amounts to conform to the 2004 presentation. These
reclassifications primarily represent presentation changes related to
discontinued operations and intercompany eliminations. The following table presents revenues and net operating income for the
three and nine months ended September 30, 2004 and 2003, from these segments,
and reconciles net operating income of reportable segments to operating income
as reported in the Consolidated Statements of Income (in thousands): For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Real estate segment
    
    $
    359,416
    
    
    $
    340,408
    
    
    $
    1,037,381
    
    
    $
    1,003,509Investment management segment:Gross revenues
    
    
    33,836
    
    
    
    32,753
    
    
    
    105,417
    
    
    
    101,638Elimination of intersegment revenues
    
    
    (19,138
    )
    
    
    (19,816
    )
    
    
    (55,004
    )
    
    
    (60,956
    )Net revenues after elimination
    
    
    14,698
    
    
    
    12,937
    
    
    
    50,413
    
    
    
    40,682Total revenues of reportable segments
    
    $
    374,114
    
    
    $
    353,345
    
    
    $
    1,087,794
    
    
    $
    1,044,191Net operating income:Real estate segment
    
    $
    183,326
    
    
    $
    187,043
    
    
    $
    545,301
    
    
    $
    563,479Investment management segment
    
    
    10,020
    
    
    
    8,973
    
    
    
    34,377
    
    
    
    28,869Total net operating income of reportable segments
    
    
    193,346
    
    
    
    196,016
    
    
    
    579,678
    
    
    
    592,348Reconciliation of net operating income of reportable
segments to operating income:Depreciation and amortization
    
    
    (90,298
    )
    
    
    (81,508
    )
    
    
    (265,981
    )
    
    
    (245,305
    )General and administrative expenses
    
    
    (18,765
    )
    
    
    (10,926
    )
    
    
    (54,612
    )
    
    
    (27,802
    )Other (expenses) income, net
    
    
    215
    
    
    
    2,265
    
    
    
    1,093
    
    
    
    9,160Operating income
    
    $
    84,498
    
    
    $
    105,847
    
    
    $
    260,178
    
    
    $
    328,401
 17




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##### 



September 30,
    
    December 31,ASSETS (in thousands)
    
    2004
    
    2003Total assets for reportable segments (1)
    
    $
    9,788,898
    
    
    $
    9,707,867Corporate and other assets
    
    
    407,825
    
    
    
    401,764Total consolidated assets
    
    $
    10,196,723
    
    
    $
    10,109,631
  (1)
    Total assets for reportable segments include assets associated with both
the real estate and investment management business segments. NOTE 11  Recent Accounting Developments FASB Interpretation No. 46 As of March 31, 2004, we adopted FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities,or FIN 46, and
applied its requirements to all entities in which we hold a variable interest.
FIN 46 addresses the consolidation by business enterprises of variable interest
entities. Generally, a variable interest entity, or VIE, is an entity with one
or more of the following characteristics: (a) the total equity investment at
risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support; (b) as a group the holders of the
equity investment at risk lack (i) the ability to make decisions about an
entitys activities through voting or similar rights, (ii) the obligation to
absorb the expected losses of the entity, or (iii) the right to receive the
expected residual returns of the entity; or (c) the equity investors have
voting rights that are not proportional to their economic interests and
substantially all of the entitys activities either involve, or are conducted
on behalf of, an investor that has disproportionately few voting rights. FIN
46 requires a VIE to be consolidated in the financial statements of the entity
that is determined to be the primary beneficiary of the VIE. The primary
beneficiary generally is the entity that will receive a majority of the VIEs
expected losses, receive a majority of the VIEs expected residual returns, or
both. Upon adoption of FIN 46, we determined that we were the primary
beneficiary of 27 previously unconsolidated and five previously consolidated
VIEs. These VIEs consisted of partnerships that are engaged, directly or
indirectly, in the ownership and management of 29 apartment properties with
3,478 units. The initial consolidation of the previously unconsolidated
entities as of March 31, 2004 resulted in an increase in our consolidated total
assets (primarily real estate), liabilities (primarily indebtedness) and
minority interest of approximately $113.5 million, $90.6 million and $26.8
million, respectively. We recorded a charge of approximately $4.0 million for
the cumulative effect on retained earnings resulting from the adoption of FIN
46. This charge is attributable to our recognition of cumulative losses
allocable to minority interests that would otherwise have resulted in minority
interest deficits. As of September 30, 2004, we were the primary beneficiary of 34
consolidated VIEs, which owned 31 apartment properties with 4,012 units.
Substantially all of the assets of each consolidated VIE are collateral for the
VIEs obligations. The creditors of the consolidated VIEs do not have recourse
to our general credit. As of September 30, 2004, we also held variable
interests in 64 VIEs for which we were not the primary beneficiary. Those 64
VIEs consist primarily of partnerships, in which we acquired an interest prior
to the adoption of FIN 46, that are engaged, directly or indirectly, in the
ownership and management of 71 apartment properties with 7,722 units. We are
involved with those VIEs as a non-controlling equity holder, lender, management
agent, or through other contractual relationships. Our maximum exposure to
loss as a result of our involvement with unconsolidated VIEs is limited to our
recorded investments in and receivables from those VIEs totaling $34.9 million
at September 30, 2004. We may be subject to additional losses to the extent of
any financial support that we voluntarily provide in the future. NOTE 12  Related Party Notes Receivable In exchange for the sale of certain real estate assets to Aimco in
December 2000, we received notes receivable, which we refer to as the Notes,
totaling $10.1 million. The Notes bear interest at the rate of 5.7% per annum.
Of the $10.1 million total, $7.6 million is due upon demand, and the remainder
is due in scheduled semi-annual payments with all unpaid principal and interest
due on December 31, 2010. At September 30, 2004, the balance of the Notes
totaled $12.4 million, which includes accrued and unpaid interest. 18




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##### 



NOTE 13  Subsequent Events Redemption of Class D Partnership Preferred Units On November 5, 2004, Aimco redeemed 1,450,000 shares of Class D Cumulative
Preferred Stock at a redemption price of $25 per share plus an amount equal to
accumulated and unpaid dividends through November 5, 2004, for a total of
$25.1276 per share. Concurrently, we redeemed 1,450,000 Class D Partnership
Preferred Units, or the Class D Preferred Units, at a price per unit equal to
the redemption price per share of the Class D Preferred Stock. Following this
redemption, 1,250,000 Class D Preferred Units remain outstanding. Senior Secured Revolving Credit Facility On November 2, 2004, we entered into an Amended and Restated Senior
Secured Credit Agreement, dated as of November 2, 2004 (the Credit
Agreement), with a syndicate of financial institutions. In addition to us,
Aimco, and two Aimco subsidiaries, NHP Management Company and AIMCO/Bethesda
Holdings, Inc. are also borrowers under the Credit Agreement. The Credit
Agreement amends and restates our two separate existing loan facilities. The original aggregate commitments under the Credit Agreement are $750
million, comprised of $450 million of revolving loan commitments and a $300
million term loan tranche. The revolving loans bear interest at a rate equal
to (i) the LIBOR rate plus a margin that can range from 1.50% to 2.00% (for
LIBOR loans) or (ii) the base rate plus a margin that can range from 0% to
0.25% (for base rate loans), in each case, depending on our leverage ratio.
The term loans bear interest at a rate equal to (i) the LIBOR rate plus 2.00%
(for LIBOR loans) or (ii) the base rate plus 0.25% (for base rate loans). The
default rate of interest for the loans is equal to the applicable rate
described above plus 3%. The revolving loans mature on November 2, 2007, and
the term loans mature on November 2, 2009. The Credit Agreement includes customary financial covenants, including the
maintenance of specified ratios with respect to total indebtedness to gross
asset value, total secured indebtedness to gross asset value, aggregate
recourse indebtedness to gross asset value, variable rate debt to total
indebtedness, debt service coverage, and fixed charge coverage; the maintenance
of a minimum adjusted tangible net worth; and limitations regarding the amount
of cross-collateralized debt. The Credit Agreement includes other customary
covenants, including a restriction on distributions and other restricted
payments, but permits distributions during any 12-month period in an aggregate
amount of up to 95% of our funds from operations for such period or such amount
as may be necessary to maintain Aimcos REIT status. The Credit Agreement also
permits Aimco to repurchase Aimco Class A Common Stock using 80% of sales
proceeds in any trailing four-quarter period. The lenders under the Credit Agreement may accelerate any outstanding
loans if, among other things: we fail to make payments when due; material
defaults occur under other debt agreements; certain bankruptcy or insolvency
events occur; material judgments against us occur; we fail to comply with
certain covenants, such as the requirement to deliver financial information or
the requirement to provide notices regarding material events (subject to
applicable grace periods in some cases); indebtedness is incurred in violation
of the covenants; or prohibited liens arise. Upon entering into the new Credit Agreement on November 2, 2004, we
borrowed $300.0 million of term loans, which bear interest at
LIBOR plus 2.0%, and $145.0 million of revolving loans, which
currently bear interest at LIBOR plus 1.75%. Proceeds from the term loans were used to repay
the outstanding loans under our previous loan facilities, and for other
corporate purposes. Proceeds from the revolving loans made on the closing date
were used to repay outstanding loans under the previous loan facilities. The
proceeds of future revolving loans are generally permitted to be used to fund
general working capital and other corporate purposes. 19




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ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations 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 Report contains or may contain information that is
forward-looking, including, without limitation, statements regarding the effect
of acquisitions, our future financial performance and the effect of government
regulations. Actual results may differ materially from those described in the
forward-looking statements and will be affected by a variety of risks and
factors including, without limitation: national and local economic conditions;
the general level of interest rates; the terms of governmental regulations that
affect us and interpretations of those regulations; 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 and 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
costs associated with prosecuting or defending claims and any adverse outcomes;
and possible environmental liabilities, including costs that may be incurred
due to necessary remediation of contamination of properties presently owned or
previously owned by us. In addition, Aimcos 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 its 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 risk factors described in our
Annual Report onForm 10-Kfor the year ended December 31, 2003 and the other
documents we file from time to time with the Securities and Exchange
Commission. As used herein and except as the context otherwise requires, we,
our, us and the Company refer to the Partnership and the Partnerships
consolidated corporate subsidiaries and consolidated real estate partnerships,
collectively. Executive Overview We are engaged in the ownership, acquisition, management and redevelopment
of apartment properties. Our property operations are characterized by
diversification of product, location and price point. As of September 30,
2004, we owned or managed 1,546 apartment properties containing 271,859 units
located in 47 states, the District of Columbia and Puerto Rico. Our primary
sources of income and cash are rents associated with apartment leases. The key financial indicators that we use in managing our business and in
evaluating our financial condition and operating performance are: Funds From
Operations, or FFO, less spending for Capital Replacements; same store property
operating results; net operating income; net operating income less spending for
Capital Replacements; financial coverage ratios; and leverage as shown on our
balance sheet. These terms are defined and described in the sections captioned
Funds From Operations and Capital Expenditures below. The key
macro-economic factors and non-financial indicators that affect our financial
condition and operating performance are: rates of job growth; unemployment
rates; single-family and multifamily housing starts; and interest rates. Because our operating results depend primarily on income from our
properties, the supply and demand for apartments substantially influences our
results. Additionally, the level of expenses required to operate and maintain
our properties and the pace and price at which we redevelop, acquire and
dispose of our apartment properties can affect our operating results. Our cost
of capital is affected by the conditions in the capital and credit markets and
the terms that we negotiate for our equity and debt financings. We have grown rapidly over the past decade, and during the past three
years our growth has moderated. During the first nine months of 2004, the
apartment industry continued to face a challenging operating environment 
unemployment, job growth at a pace slower than anticipated, low interest rates
and an abundant supply of housing alternatives. In addition, we experienced
greater difficulty as compared to our peers because our property operating
systems and structure were not as effective as our peers in meeting the
challenges presented by the apartment markets. In response, we are adjusting
our business strategies to compete successfully in challenging times and to be
ready to maximize our opportunities as the economy improves. During the first nine months of 2004, we continued to address property
operations and those efforts will continue throughout the remainder of 2004.
We have focused on a number of areas related to improving operations, including
those related to resident selection, marketing, pricing, operating cost
management and customer 20




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satisfaction. Our focus on resident selection is designed to make our
communities more desirable places to live and work, which drives better
financial performance from higher and more stable occupancy levels, increased
pricing power and reduced costs. Although, we still have a number of steps to
take to build revenue through increased occupancy with residents that meet our
financial stability standards, we believe that our improvement efforts are
working. In combination, our initiatives are resulting in improved customer
service, better pricing decisions, increased resident quality, a focus on sales
and marketing and higher employee satisfaction. These initiatives have
resulted in a positive trend in certain operating results and are the
foundation for long-term benefits that we have begun to realize in the third
quarter of 2004 and expect to continue through the fourth quarter of 2004 and
beyond. In part, these initiatives have also resulted in improved asset
quality, and we will continue to seek opportunities to reinvest in our
properties through capital expenditures and to manage our portfolio through
property sales and acquisitions. The following discussion and analysis of the results of our operations and
financial condition should be read in conjunction with the financial
statements. Results of Operations Overview Three months ended September 30, 2004 compared to three months ended
September 30, 2003 We recognized net income of $182.3 million and net income attributable to
common unitholders of $155.7 million for the three months ended September 30,
2004, compared to net income of $44.5 million and net income attributable to
common unitholders of $15.4 million for the three months ended September 30,
2003, an increase of $137.8 million and $140.3 million, respectively. These
increases were principally due to:  
    
    an increase in net gain on disposition of real estate
recognized in discontinued operations; and
    
    an increase in net gain on disposition of real estate related
to unconsolidated entities and other, primarily related to gain on
sale of land. These increases were partially offset by:  
    
    a decline in same store net operating results;
    
    an increase in interest expense;
    
    an increase in general and administrative expenses; and
    
    an increase in depreciation and amortization. Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003 We recognized net income of $213.2 million and net income attributable to
common unitholders of $140.7 million for the nine months ended September 30,
2004, compared to net income of $136.3 million and net income attributable to
common unitholders of $54.2 million for the nine months ended September 30,
2003, an increase of $76.9 million and $86.5 million, respectively. These
increases were principally due to:  
    
    an increase in net gain on disposition of real estate
recognized in discontinued operations;
    
    an increase in net gain on disposition of real estate related
to unconsolidated entities and other, primarily related to gain on
sales of land; and
    
    an increase in activity fees and asset management revenues. These increases were partially offset by:  
    
    a decline in same store net operating results; 21




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
    
    an increase in general and administrative expenses;
    
    an increase in interest expense;
    
    an increase in depreciation and amortization; and
    
    the cumulative effect of change in accounting principle due to
implementation of the Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities,
or FIN 46. The following paragraphs discuss these and other items affecting our
results of operations in more detail. Rental Property Operations Our operating income is primarily generated from the operations of our
consolidated properties. The principal components within our total
consolidated property operations are: consolidated same store properties, which
consist of all conventional properties that were owned, stabilized and
consolidated for all periods presented; and other consolidated entities, which
include acquisition, newly consolidated, affordable and redevelopment
properties. The following table summarizes the overall performance of our consolidated
properties for the three and nine months ended September 30, 2004 and 2003 (in
thousands): For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Rental and other property revenues
    
    $
    359,416
    
    
    $
    340,408
    
    
    $
    1,037,381
    
    
    $
    1,003,509Property operating expenses
    
    
    176,090
    
    
    
    153,365
    
    
    
    492,080
    
    
    
    440,030Net operating income
    
    $
    183,326
    
    
    $
    187,043
    
    
    $
    545,301
    
    
    $
    563,479
 For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, net operating income for our consolidated
property operations decreased by $3.7 million, or 2.0%. This decrease was
principally due to an $8.6 million decrease in consolidated same store net
operating income. See further discussion of same store results under the
heading Conventional Same Store Property Operating Results. Additionally,
there was a $5.3 million decrease related to net casualty losses and other
costs resulting from hurricanes and tropical storms in the third quarter of
2004, which damaged over 100 of our properties. These decreases were offset by
a $3.8 million increase related to operations of acquisition properties, which
were principally comprised of The Palazzo at Park La Brea, seven properties
purchased in 2004 and two properties purchased in 2003. The decrease was
further offset by a $4.6 million increase related to operations of newly
consolidated properties, which are properties that had been previously
unconsolidated and accounted for by the equity method (three properties that
were first consolidated in 2003 and 36 properties first consolidated in 2004,
which includes 24 properties that were consolidated due to the implementation
of FIN 46). For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, net operating income for our consolidated property
operations decreased by $18.2 million, or 3.2%. This decrease was principally
due to a $31.4 million decrease in consolidated same store net operating
income. See further discussion of same store results under the heading
Conventional Same Store Property Operating Results. Additionally, there was
a $5.3 million decrease related to net casualty losses and other costs
resulting from hurricanes and tropical storms in the third quarter of 2004,
which damaged over 100 of our properties. These decreases were offset by an
$11.3 million increase related to operations of newly consolidated properties
(12 properties that were first consolidated in 2003 and 36 properties first
consolidated in 2004, which includes 24 properties that were consolidated due
to the implementation of FIN 46) and a $9.8 million increase related to
operations of acquisition properties, which were principally comprised of The
Palazzo at Park La Brea, seven properties purchased in 2004 and three
properties purchased in 2003. 22




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Conventional Same Store Property Operating Results Same store operating results is a key indicator we use to assess the
performance of our property operations and to understand the period over period
operations of a consistent portfolio of properties. We define same store
properties as conventional properties in which our ownership interest exceeds
10% and the operations of which are stabilized for all periods presented. To
ensure comparability, the information for all periods shown is based on current
period ownership. The following table summarizes the unaudited conventional
rental property operations on a same store basis (which is not in accordance
with generally accepted accounting principles, or GAAP) and reconciles them to
consolidated rental property operations (which is in accordance with GAAP)
described in the above comparative discussions (dollars in thousands): For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Our share of same store revenues
    
    $
    260,322
    
    
    $
    262,107
    
    
    $
    745,850
    
    
    $
    760,527Our share of same store expenses
    
    
    117,417
    
    
    
    110,645
    
    
    
    327,337
    
    
    
    312,936Our share of same store net operating
income
    
    $
    142,905
    
    
    $
    151,462
    
    
    $
    418,513
    
    
    $
    447,591Adjustments to reconcile to real estate
segment net operating income (1)
    
    
    40,421
    
    
    
    35,581
    
    
    
    126,788
    
    
    
    115,888Real estate segment net operating income
    
    $
    183,326
    
    
    $
    187,043
    
    
    $
    545,301
    
    
    $
    563,479Same Store StatisticsProperties
    
    
    539
    
    
    
    539
    
    
    
    531
    
    
    
    531Apartment units
    
    
    151,169
    
    
    
    151,169
    
    
    
    149,320
    
    
    
    149,320Average physical occupancy
    
    
    92.9
    %
    
    
    92.9
    %
    
    
    89.9
    %
    
    
    91.9
    %Average rent collected/unit/month
    
    $
    714
    
    
    $
    722
    
    
    $
    720
    
    
    $
    725
 (1) Includes: (i) minority partners share of consolidated less our share
of unconsolidated property revenues and property operating expenses (at current
period ownership), (ii) property revenues and property operating expenses
related to consolidated properties other than same store properties (e.g.,
acquisition properties and redevelopment properties) and (iii) eliminations and
other adjustments made in accordance with GAAP. For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, our share of same store net operating income
decreased $8.6 million, or 5.6%. Revenues decreased $1.8 million, or 0.7%,
primarily due to lower average rent (down $8 per unit), offset by higher
utility reimbursements from residents and decreased bad debt. Expenses
increased by $6.8 million, or 6.1%, primarily due to: an increase of $5.1
million in compensation and benefit expense related to a new employee health
plan, merit increases and increased staffing levels; an increase of $4.1
million in turnover, marketing and contract services related to focused efforts
to increase occupancy, make units ready and improve the physical appearance of
the properties; and an increase of $1.2 million in uninsured costs associated
with the hurricane and tropical storm damage. These increases were offset by a
decrease in property taxes related to successful appeals and changes in
estimates related to assessments. For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, our share of same store net operating income
decreased $29.1 million, or 6.5%. Revenues decreased $14.7 million, or 1.9%,
primarily due to lower occupancy (down 2.0%), and slightly lower average rent
(down $5 per unit), offset by higher utility reimbursements from residents and
decreased bad debt. Expenses increased by $14.4 million, or 4.6%, primarily
due to: an increase of $13.8 million in compensation and benefit expense
related to a new employee health plan, merit increases and increased staffing
levels; an increase of $3.1 million in utilities due to the increase in the
cost of natural gas; and an increase of $1.2 million in uninsured costs
associated with the hurricane and tropical storm damage. These increases were
offset by a decrease in property taxes related to successful appeals and
changes in estimates related to assessments. 23




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Property Management We earn income from property management primarily from unconsolidated real
estate partnerships for which we are the general partner. The income is
primarily in the form of fees generated through property management and other
associated activities. Our revenue from property management decreases as we
consolidate real estate partnerships and the income generated is therefore
eliminated in consolidation. We expect this trend to continue as we increase
our ownership in more of these partnerships or otherwise determine that
consolidation is required by GAAP. Additionally, our revenue decreases as
properties within our unconsolidated real estate partnerships are sold.
Offsetting the revenue earned in property management are the direct expenses
associated with property management. The following table summarizes the overall performance of our property
management for the three and nine months ended September 30, 2004 and 2003 (in
thousands): For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Property management revenues, primarily from
affiliates
    
    $
    8,713
    
    
    $
    9,652
    
    
    $
    26,032
    
    
    $
    28,498Property management expenses
    
    
    2,406
    
    
    
    1,961
    
    
    
    6,737
    
    
    
    6,003Net operating income from property management
    
    $
    6,307
    
    
    $
    7,691
    
    
    $
    19,295
    
    
    $
    22,495
 For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, net operating income from property management
decreased by $1.4 million, or 18.0%. For the nine months ended September 30,
2004, compared to the nine months ended September 30, 2003, net operating
income from property management decreased by $3.2 million, or 14.2%. The
decrease in both periods was principally due to sales of properties within our
unconsolidated partnerships that had previously generated property management
revenues. Activity Fees and Asset Management Activity fees are generated from transactional activity including
dispositions, syndications, tax credit redevelopments and refinancings. These
transactions occur on varying timetables, thus the income generated may vary
from period to period. Asset management income is from the financial
management of properties, rather than management of day-to-day property
operations. Asset management income includes deferred asset management fees
that are recognized once a transaction has occurred. Offsetting the revenue
earned in activity fees and asset management are the direct expenses associated
with these activities. The following table summarizes the overall performance of our activity
fees and asset management for the three and nine months ended September 30,
2004 and 2003 (in thousands): For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Activity fees and asset management
revenues, primarily from affiliates
    
    $
    5,985
    
    
    $
    3,285
    
    
    $
    24,381
    
    
    $
    12,184Activity and asset management expenses
    
    
    2,272
    
    
    
    2,003
    
    
    
    9,299
    
    
    
    5,810Net operating income from activity fees and
asset management
    
    $
    3,713
    
    
    $
    1,282
    
    
    $
    15,082
    
    
    $
    6,374
 24




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For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, net operating income from activity fees and
asset management increased by $2.4 million. This overall increase was
principally a result of increased activity fees related to disposition and
developer activities of $1.8 million and $0.9 million, respectively, due to a
greater number of transactions in the third quarter of 2004 as compared to the
third quarter of 2003. For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, net operating income from activity fees and asset
management increased by $8.7 million. This overall increase was principally a
result of increased activity fees related to developer, disposition and
refinancing activities of $4.3 million, $3.0 million and $2.3 million,
respectively, also due to a greater number of transactions in 2004 than in
2003. Additionally, there was an increase of $3.8 million related to the
recognition of deferred asset management fees resulting from closed
transactions. These increases were offset by a $1.5 million decrease related
to syndication fees and higher expenses associated with these activities. Depreciation and Amortization For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, depreciation and amortization increased $8.8
million, or 10.8%. This increase was principally due to $3.5 million and $1.7
million of additional depreciation related to the newly consolidated and
acquisition properties, respectively, as well as $2.4 million of increased
depreciation related to the completion of certain redevelopment properties. For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, depreciation and amortization increased $20.7
million, or 8.4%. This increase was principally due to $7.9 million and $5.0
million of additional depreciation related to the newly consolidated and
acquisition properties, respectively, as well as $4.3 million of increased
depreciation related to the completion of certain redevelopment properties. General and Administrative Expenses For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, general and administrative expenses increased
$7.8 million, or 71.7%. This increase was principally due to: $6.3 million in
higher compensation related to increased staffing levels, merit increases and
variable compensation; $3.2 million related to increased health insurance costs
and the effect of a favorable change in our claims incurred but not reported
(IBNR) accrual in the third quarter of 2003; offset by $1.9 million in lower
consulting, legal and compliance costs. For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, general and administrative expenses increased $26.8
million, or 96.4%. This increase was principally due to: $11.7 million in
higher compensation related to increased staffing levels, merit increases and
variable compensation; $5.2 million related to increased health insurance costs
and the effect of a favorable change in our IBNR accrual in the first
nine months of 2003; $2.4 million in higher consulting, legal and compliance costs; $1.9
million favorable change in estimate in the second quarter of 2003 related to
the collectibility of corporate receivables from unconsolidated partnerships;
and a $1.1 million benefit in the first quarter of 2003 related to forfeited
deposits on sales. Other Expenses (Income), Net Other
expenses (income), net includes tax provision/benefit, franchise taxes, risk
management activities related to our unconsolidated partnerships and
partnership expenses. For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, other expenses (income), net decreased $2.1 million.
This decrease was principally due to a $1.8 million lower tax benefit
recognized in the third quarter of 2004 as compared to the third quarter of
2003 and $0.6 million of hurricane and tropical storm costs related to our
unconsolidated partnerships. In the three months ended September 30, 2004,
there was a tax benefit of $0.8 million recorded, as compared to $2.6 million
in the three months ended September 30, 2003. For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, other expenses (income), net decreased $8.1 million. This
change was principally due to an $8.1 million lower tax benefit recognized in 2004
as compared to 2003 and $0.6 million of hurricane and tropical storm costs
related to our unconsolidated 25




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partnerships. In the nine months ended September 30, 2004, there was a
tax benefit of $7.4 million recorded, as compared to $15.5 million in the nine
months ended September 30, 2003. During the nine months ended September 30,
2003, there was an $8.0 million tax benefit related to the reversal of a
deferred income tax asset valuation allowance. Interest Expense For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, interest expense, which includes the
amortization of deferred financing costs, increased $9.9 million, or 11.5%.
This increase was principally due to: $4.7 million resulting from interest on
the additional debt related to the newly consolidated and acquisition
properties; a $3.2 million increase due to higher average principal balances on
our credit facility and term loans along with an increase in the average
interest rates; and a $1.9 million decrease in capitalized interest due to
redevelopment properties being placed in service. For the nine months ended September 30, 2004, compared to the nine months
ended September 30, 2003, interest expense increased $21.6 million, or 8.5%.
This increase was principally due to: $12.3 million resulting from interest on
the additional debt related to the newly consolidated and acquisition
properties; an $8.0 million decrease in capitalized interest due to
redevelopment properties being placed in service; and a $6.4 million increase
due to total higher average principal balances on our credit facility and term
loans along with an increase in the average interest rates. These increases
were partially offset by lower weighted average effective interest rates on
mortgage debt due to refinancings that occurred in 2003 and 2004. Gain on Dispositions of Real Estate Related to Unconsolidated Entities and
Other Gain on dispositions of real estate related to unconsolidated entities and
other includes our share of gain related to dispositions of real estate within
our unconsolidated real estate partnerships, gain on dispositions of land and
costs related to asset disposal activities. For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, gain on disposition of real estate related to
unconsolidated entities and other increased $37.7 million. For the nine
months ended September 30, 2004, compared to the nine months ended September
30, 2003, gain on disposition of real estate related to unconsolidated entities
and other increased $39.0 million. The increases in both periods were
principally due to a $34.6 million gain on the sale of a parcel of land located
in Florida. Minority Interest in Consolidated Real Estate Partnerships For the three months ended September 30, 2004, compared to the three
months ended September 30, 2003, minority interest in consolidated real estate
partnerships changed $2.8 million. For the nine months ended September 30,
2004, compared to the nine months ended September 30, 2003, minority interest
in consolidated real estate partnerships changed $10.2 million. The changes in
both periods were principally a result of decreased earnings caused by lower
property operating results than in the prior year offset by increases due to
the minority interest partners share of our joint venture with GE Real Estate. Discontinued Operations For properties accounted for as held for sale, the results of operations
for properties sold during the period or designated as held for sale at the end
of the period are required to be classified as discontinued operations. The
property-specific components of net earnings that are classified as
discontinued operations include all property-related revenues and operating
expenses, depreciation expense recognized prior to the classification as held
for sale, property-specific interest expense to the extent there is secured
debt on the property and the associated minority interest. In addition, any
impairments on assets held for sale, and the net gain on the eventual disposal
of properties held for sale are reported as discontinued operations. For the three months ended September 30, 2004 and 2003, income from
discontinued operations totaled $152.9 million and $32.8 million, respectively,
which includes income from operations of $0.3 million and $7.7 million,
respectively. For the nine months ended September 30, 2004 and 2003, income
from discontinued operations totaled $182.0 million and $73.5 million,
respectively, which includes income from operations of $5.8 million and $15.6
million, respectively. For the three and nine months ended September 30, 2004,
the income from operations included 62 properties that were sold or classified
as held for sale during 2004. For the three and nine months ended 26




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September 30, 2003, the income from operations included 134 properties
that were sold or classified as held for sale in the first half of 2004 and all
of 2003. Due to varying number of properties and the timing of sales, income
(loss) from operations is not comparable period to period. During the three months ended September 30, 2004, we sold 12 properties,
resulting in a net gain on sale of approximately $162.1 million (which is net
of $12.4 million of related taxes). During the three months ended September
30, 2003, we sold 29 properties, resulting in a net gain on sale of
approximately $22.1 million (which is net of $0.8 million of related taxes).
Additionally, we recognized $9.5 million and $0.6 million in impairments on
assets sold or held for sale in the three months ended September 30, 2004 and
2003, respectively. During the nine months ended September 30, 2004, we sold 32 properties,
resulting in a net gain on sale of approximately $182.8 million (which is net
of $13.2 million of related taxes). During the nine months ended September 30,
2003, we sold 51 properties, resulting in a net gain on sale of approximately
$62.3 million (which is net of $5.1 million of related taxes). Additionally, we
recognized $9.9 million and $8.6 million in impairments on assets sold or held
for sale in the nine months ended September 30, 2004 and 2003,
respectively. Gains (losses) on properties sold are determined on a property-by-property
basis and are not comparable period to period due to individual property
differences. We considered the properties sold, as well as the properties
classified as held for sale, to be inconsistent with our long-term investment
strategy. See Note 8 of the consolidated financial statements for further
information on discontinued operations. Cumulative Effect of Change in Accounting Principle On March 31, 2004, we recorded a $4.0 million cumulative effect of change
in accounting principle related to the implementation of FIN 46. This charge
is attributable to our recognition of cumulative losses allocable to minority
interest that would otherwise have resulted in minority interest deficits. See
Note 11 of the consolidated financial statements for further information. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with GAAP,
which requires us to make estimates and assumptions. We believe that the
following critical accounting policies involve our more significant judgments
and estimates used in the preparation of our consolidated financial statements. Impairment of Long-Lived Assets Real estate and other long-lived assets are recorded at cost, less
accumulated depreciation, unless considered impaired. If events or
circumstances indicate that the carrying amount of a property may be impaired,
we make an assessment of its recoverability by estimating the undiscounted
future cash flows, excluding interest charges, of the property. If the carrying
amount exceeds the aggregate undiscounted future cash flows, we recognize an
impairment loss to the extent the carrying amount exceeds the estimated fair
value of the property. Real estate investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of our real
estate investments. These factors include:  
    
    the general economic climate;
    
    competition from other apartment communities and other housing options;
    
    local conditions, such as an increase in unemployment or an
increase in the supply of apartments, that might adversely affect
apartment occupancy or rental rates;
    
    changes in governmental regulations and the related cost of
compliance;
    
    increases in operating costs (including real estate taxes) due to
inflation and other factors, which may not necessarily be offset by
increased rents;
    
    changes in tax laws and housing laws, including the enactment of
rent control laws or other laws regulating multifamily housing;
    
    changes in market capitalization rates; and
    
    the relative illiquidity of such investments. 27




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##### 



Any adverse changes in these factors could cause an impairment in our
long-lived assets, including real estate, goodwill and investments in
unconsolidated real estate partnerships. No impairment losses were recognized
on held-for-use properties during the three and nine months ended September 30,
2004 and 2003. Allowance for Losses on Notes Receivable We evaluate notes receivable for impairment by assessing the likelihood of
collecting all amounts due according to the contractual terms of the related
loan agreement. For notes that are collateralized by real estate, our
evaluation considers whether estimated cash flows from the operation and sale
of the property are sufficient to pay principal and interest as scheduled in
the loan agreement. We establish an allowance for losses on notes receivable
when we determine that it is probable that we will be unable to collect all
amounts due in accordance with the contractual terms of the loan. In such
instances, the amount of loss to be recognized is based on the estimated fair
value of the collateral real estate. During the three and nine months ended
September 30, 2004, we identified and recorded $0.7 million and $1.8 million in
losses on notes receivable (net of recoveries), respectively, and during the
three and nine months ended September 30, 2003, we identified and recorded no
losses and $1.5 million in losses on notes receivable (net of recoveries),
respectively. We will continue to evaluate the collectibility of these notes,
and we may adjust related allowances in the future due to changes in market
conditions and other factors. Capitalized Costs We capitalize direct and allocable indirect costs (including salaries,
interest, real estate taxes and other costs) incurred in connection with
redevelopment, Capital Improvement and Capital Replacement activities. We
charge to expense as incurred indirect costs that do not relate to the above
activities, including general and administrative expenses. The amounts
capitalized depend on the volume and costs of such activities. Based on the
level of capital spending during the nine months ended September 30, 2004, if
capital activities had increased or decreased during the period by 10%, our
income would have increased or decreased, respectively, by $2.9 million. See
further discussion under the heading Capital Expenditures. Funds From Operations Funds From Operations, or FFO, is a non-GAAP financial measure that we
believe, when considered with the financial data determined in accordance with
GAAP, is helpful to investors in understanding our performance because it
captures features particular to real estate performance by recognizing that
real estate generally appreciates over time or maintains residual value to a
much greater extent than do other depreciable assets such as machinery,
computers or other personal property. The Board of Governors of the National
Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net
income, computed in accordance with GAAP, excluding gains and losses from
extraordinary items, cumulative effect of change in accounting principle, gains
on dispositions of depreciable real estate related to unconsolidated entities
and other, gains on dispositions of real estate from discontinued operations,
net of related income taxes, plus real estate related depreciation and
amortization (excluding amortization of financing costs), including
depreciation for unconsolidated real estate partnerships, joint ventures and
discontinued operations. We calculate FFO based on the NAREIT definition, as
further adjusted for amortization of management contracts and deficit
distributions to minority partners. We calculate FFO (diluted) by subtracting
redemption related preferred OP Unit issuance costs and distributions on
preferred OP Units, adding back distributions on dilutive preferred securities
and adding back the interest expense on dilutive mandatorily redeemable
convertible preferred securities. FFO should not be considered an alternative
to net income or net cash flows from operating activities, as calculated in
accordance with GAAP, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs. In addition, although FFO is a measure used for comparability in
assessing the performance of real estate investment trusts, there can be no
assurance that our basis for computing FFO is comparable with that of other
real estate investment trusts. For the three and nine months ended September
30, 2004 and 2003, our FFO is calculated as follows (amounts in thousands): 28




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##### 



For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net income attributable to common unitholders (1)
    
    $
    155,662
    
    
    $
    15,429
    
    
    $
    140,691
    
    
    $
    54,219Adjustments:Depreciation and amortization
    
    
    90,298
    
    
    
    81,508
    
    
    
    265,981
    
    
    
    245,305Depreciation and amortization related to non-real estate assets
    
    
    (4,271
    )
    
    
    (4,882
    )
    
    
    (13,481
    )
    
    
    (15,639
    )Depreciation of rental property related to minority partners
interest (2)
    
    
    (10,017
    )
    
    
    (6,751
    )
    
    
    (32,132
    )
    
    
    (21,206
    )Depreciation of rental property related to unconsolidated entities
    
    
    5,472
    
    
    
    6,289
    
    
    
    17,116
    
    
    
    19,331Gain on dispositions of real estate related to unconsolidated
entities and other
    
    
    (39,138
    )
    
    
    (1,449
    )
    
    
    (41,218
    )
    
    
    (2,209
    )Gain on dispositions of land
    
    
    34,580
    
    
    
    
    
    
    
    35,455
    
    
    
    Deficit distributions to minority partners, net
    
    
    7,824
    
    
    
    11,827
    
    
    
    14,907
    
    
    
    20,928Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    3,957
    
    
    
    Discontinued operations:Depreciation of rental property, net of minority partners
interest (2)
    
    
    3,339
    
    
    
    7,903
    
    
    
    12,075
    
    
    
    29,702Gain on dispositions of real estate, net of minority partners
interest (2)
    
    
    (174,497
    )
    
    
    (22,921
    )
    
    
    (196,066
    )
    
    
    (67,459
    )Deficit distributions (recovery of deficit distributions) to minority
partners, net
    
    
    5
    
    
    
    (3,579
    )
    
    
    (3,308
    )
    
    
    (4,076
    )Income tax arising from disposals
    
    
    12,446
    
    
    
    806
    
    
    
    13,235
    
    
    
    5,112Preferred OP Unit distributions
    
    
    24,537
    
    
    
    23,542
    
    
    
    70,289
    
    
    
    74,463Redemption related preferred OP Unit issuance costs
    
    
    2,098
    
    
    
    5,490
    
    
    
    2,186
    
    
    
    7,645Funds From Operations
    
    $
    108,338
    
    
    $
    113,212
    
    
    $
    289,687
    
    
    $
    346,116Preferred OP Unit distributions
    
    
    (24,537
    )
    
    
    (23,542
    )
    
    
    (70,289
    )
    
    
    (74,463
    )Redemption related preferred OP Unit issuance costs
    
    
    (2,098
    )
    
    
    (5,490
    )
    
    
    (2,186
    )
    
    
    (7,645
    )Distributions on dilutive preferred securities
    
    
    1,069
    
    
    
    2,097
    
    
    
    3,018
    
    
    
    8,752Interest expense on dilutive mandatorily redeemable convertible
preferred
securities
    
    
    
    
    
    
    247
    
    
    
    
    
    
    
    741Funds From Operations attributable to common unitholders
- diluted
    
    $
    82,772
    
    
    $
    86,524
    
    
    $
    220,230
    
    
    $
    273,501Weighted average number of common OP Units, common OP Unit
equivalents and dilutive preferred securities outstanding:Common OP Units and equivalents (3)
    
    
    104,443
    
    
    
    104,894
    
    
    
    104,335
    
    
    
    104,844Dilutive preferred securities
    
    
    1,590
    
    
    
    2,995
    
    
    
    1,719
    
    
    
    4,097Total
    
    
    106,033
    
    
    
    107,889
    
    
    
    106,054
    
    
    
    108,941
 Notes:  (1)
    
    Represents our numerator for earnings per common unit calculated in
accordance with GAAP(2)
    
    Minority partners interest means minority interest in our
consolidated real estate partnerships(3)
    
    Represents our denominator for earnings per common unit  diluted
calculated in accordance with GAAP plus additional common OP Unit
equivalents that are dilutive for FFO. Liquidity and Capital Resources Liquidity is the ability to meet present and future financial obligations
either through the sale or maturity of existing assets or by the acquisition of
additional funds through working capital management. Both the coordination of
asset and liability maturities and effective working capital management are
important to the maintenance of liquidity. Our primary source of liquidity is
cash flow from our operations. Additional sources are proceeds from property
sales and proceeds from refinancings of existing mortgage loans and borrowings
under new mortgage loans. Our principal uses for liquidity include normal operating activities,
payments of principal and interest on outstanding debt, capital expenditures,
distributions paid to unitholders and distributions paid to partners, and
acquisitions of, and investments in, properties. We use our cash provided by
operating activities to meet short-term liquidity needs. In the event that the
cash provided by operating activities no longer covers our short-term liquidity
demands, we have additional means, such as short-term borrowing availability,
proceeds from property sales and refinancings, to help us meet our short-term
liquidity demands. We use our outstanding revolving credit facility, which we
refer to as the Revolver, for general corporate purposes and to fund
investments on an interim basis. We expect to meet our long-term liquidity
requirements, such as debt maturities and property acquisitions, through
long- 29




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##### 



term borrowings, both secured and unsecured, the issuance of debt or
equity securities (including OP Units), the sale of properties and cash
generated from operations. At September 30, 2004, we had $122.6 million in cash and cash equivalents,
an increase of $8.1 million from December 31, 2003. At September 30, 2004, we
had $273.1 million of restricted cash (including $3.9 million of restricted
cash that is included within Assets Held for Sale), primarily consisting of
reserves and escrows held by lenders for bond sinking funds, capital
expenditures, property taxes and insurance. In addition, cash, cash
equivalents and restricted cash are held by partnerships that are not presented
on a consolidated basis. The following discussion relates to changes in cash
due to operating, investing and financing activities, which are presented in
our Consolidated Statements of Cash Flows. Operating Activities For the nine months ended September 30, 2004, our net cash provided by
operating activities of $302.6 million was primarily due to operating income
from our consolidated properties, which is determined by rental rates,
occupancy levels and operating expenses related to our portfolio of properties.
This was a decrease of $101.5 million as compared to the nine months ended
September 30, 2003, driven by lower property operating results and changes in
operating assets and liabilities. These changes were primarily the result of an
increase in our prepaid insurance accounts as a result of premiums paid and an
increase in restricted cash related to certain operating escrows. Investing Activities For the nine months ended September 30, 2004, our net cash provided by
investing activities of $219.4 million was primarily related to dispositions of
real estate, offset by the acquisitions of The Palazzo at Park La Brea and
several other properties (see Note 3 of the consolidated financial statements
for further information on acquisitions), as well as investments in our
existing real estate assets through capital spending (see further discussion on
capital expenditures under the heading Capital Expenditures). 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 continued investment, when compared to alternative uses
for our capital. In the nine months ended September 30, 2004, we sold 32
consolidated properties, 2 land parcels and 35 unconsolidated properties.
These properties were sold for an aggregate sales price of $857.1 million. The
sale of these consolidated properties generated proceeds, after payment of
transaction costs and deposits into tax-free exchange accounts, of $628.1
million. Our share of the total net proceeds from the sale of the 67
properties and land parcels, after repayment of existing debt, payment of
transaction costs and distributions to limited partners, was $369.2 million.
These proceeds were used to repay a portion of our outstanding short-term
indebtedness and for other corporate purposes. We are currently marketing for sale certain real estate properties that
are inconsistent with our long-term investment strategy. Additionally, from
time to time, we may market certain properties that are consistent with our
long-term investment strategy but offer attractive pricing alternatives.
Proceeds from 2004 dispositions have exceeded the levels of 2003, and we have
used such proceeds to reduce debt, fund capital expenditures on existing
assets, fund property and partnership acquisitions, and for other operating
needs and corporate purposes. Financing Activities For the nine months ended September 30, 2004, net cash used in financing
activities of $513.9 million primarily related to payments on our secured notes
payable, the payoff of the term loan we entered into with a syndicate of
financial institutions in connection with the Casden Merger in March 2002,
which we refer to as the Casden Loan, payment of our distributions, and
redemptions of mandatorily redeemable preferred securities, the Class P
Partnership Preferred Units and the partial redemption of the Class N
Partnership Preferred Units. These were offset by proceeds from the issuance of
Class U Partnership Preferred Units, Class V Partnership Preferred Units and
mortgage loans (see Note 6 of the consolidated financial statements for further
information on preferred unit activity). 30




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##### 



Mortgage Debt At September 30, 2004, we had $5.6 billion in consolidated mortgage debt
outstanding as compared to $5.2 billion outstanding at December 31, 2003.
During the nine months ended September 30, 2004, we refinanced or closed
mortgage loans on 25 consolidated properties generating $350.3 million of
proceeds from borrowings with a weighted average interest rate of 4.39%. Our
share of the net proceeds after repayment of existing debt, payment of
transaction costs and distributions to limited partners, was $112.3 million.
In addition, we closed mortgage loans on 18 unconsolidated properties, with a
weighted average interest rate of 3.88%. Our share of the net proceeds from
these 18 mortgage loans totaled $20.3 million and are included in our
distributions received from investments in unconsolidated real estate
partnerships within investing activities. We used our total net proceeds from
all loans closed of $132.6 million to repay existing short-term debt and for
other corporate purposes. We intend to continue to refinance mortgage debt to
generate proceeds in amounts exceeding our scheduled amortizations and
maturities. During the nine months ended September 30, 2004, we closed mortgage loans
totaling $126.8 million, with a weighted average interest rate of 3.40%, to
finance three of our acquisitions. Revolving Credit Facility and Term Loans Our Revolver was comprised of a syndicate of financial institutions having
aggregate lending commitments of $445 million. At September 30, 2004, the
Revolver had an outstanding principal balance of $168.4 million and an interest
rate of 4.95% based on weighted average LIBOR contracts outstanding with
various maturities plus 3.10%. The amount available under the Revolver at
September 30, 2004 was $258.4 million (after giving effect to $18.2 million
outstanding for undrawn letters of credit issued under the Revolver). On
November 2, 2004, we entered into an Amended and Restated Senior Secured Credit
Agreement (the Credit Agreement) with a syndicate of financial institutions.
The Credit Agreement amends and restates our two separate existing loan
facilities. Upon entering into the new Credit Agreement we borrowed $145.0
million of revolving loans, which currently bear interest at LIBOR
plus 1.75%. Proceeds from the revolving loans made on the closing date were used to
repay outstanding loans under the previous loan facilities. The proceeds of
future revolving loans are generally permitted to be used to fund general
working capital and other corporate purposes. See Note 13 of the consolidated
financial statements for detailed information on the Credit Agreement. In May 2003, we borrowed $250 million through a syndicated term loan,
which we refer to as the Term Loan. At September 30, 2004, the Term Loan had
an outstanding principal balance of $250 million and an interest rate of 4.70%
(based on a designated LIBOR rate plus 3.10%). Upon entering into the new
Credit Agreement on November 2, 2004, this Term Loan was repaid and we borrowed
$300.0 million of new term loans, which bear interest at LIBOR
plus 2.0%. Proceeds from the term loans were used to repay the outstanding loans
under our previous loan facilities, and for other corporate purposes. During September of 2004, the remaining balance on the Casden Loan of
$93.0 million was paid off and there was no outstanding balance as of September
30, 2004. At September 30, 2004, we were in compliance with all of our
covenant requirements. Capital Expenditures Effective January 1, 2004, we classify all capital spending as either
Capital Replacements (which we refer to as CR), Capital Improvements (which we
refer to as CI) or redevelopment. These categories replace our prior capital
spending categories  capital replacements, capital enhancements,
redevelopment, initial capital expenditures, and disposition capital
expenditures. We believe the new classifications are simpler to apply, allow
more discrete differentiation between categories, facilitate sound economic
decisions, and assist investors and analysts in better understanding our
capital spending. Non-redevelopment capitalizable expenditures are apportioned between CR
and CI based on the useful life of the capital item under consideration and the
period we have owned the property (i.e., the portion that was consumed during
our ownership of the item represents CR; the portion of the item that was
consumed prior to our ownership represents CI). For the nine months ended September 30, 2004, we spent a total of $54.4
million on CR. These are expenditures that do not increase the value,
profitability or useful life of an asset from its original purchase condition,
but 31




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##### 



represent the share of expenditures that are deemed to replace the consumed
portion of acquired capital assets. For the nine months ended September 30,
2004, we spent a total of $51.1 million and $50.6 million, respectively, on CI
and redevelopment. CI expenditures represent all non-redevelopment capital
expenditures that are made to enhance the value, profitability or useful life
of an asset from its original purchase condition, and redevelopment
expenditures represent expenditures that substantially upgrade the property. The table below details our share of actual spending, on both consolidated
and unconsolidated real estate partnerships, for CR, CI and redevelopment for
the nine months ended September 30, 2004 on a per unit and total dollar basis
(based on approximately 158,000 ownership equivalent units), and reconciles it
to our Consolidated Statement of Cash Flows for the same period (in thousands,
except per unit amounts). Actual Cost
    
    Cost Per UnitCapital Replacements Detail:Building interiors
    
    $
    11,664
    
    
    $
    74Includes: hot water heaters, kitchen/bathBuilding exteriors
    
    
    8,911
    
    
    
    56Includes: roofs, exterior painting, electrical, plumbingLandscaping and grounds
    
    
    5,765
    
    
    
    36Includes: parking lot improvements, pool improvementsTurnover related
    
    
    20,192
    
    
    
    128Includes: carpet, vinyl, tile, appliance, and fixture replacementsCapitalized payroll and other indirect costs
    
    
    7,885
    
    
    
    50Total our share of Capital Replacements
    
    $
    54,417
    
    
    $
    344Capital Replacements:Conventional
    
    $
    47,635Affordable
    
    
    6,782Total our share of Capital Replacements
    
    
    54,417Capital Improvements:Conventional
    
    
    39,224Affordable
    
    
    11,863Total our share of Capital Improvements
    
    
    51,087Redevelopment:Conventional
    
    
    42,197Affordable
    
    
    8,365Total our share of redevelopment
    
    
    50,562Total our share of capital expenditures
    
    
    156,066Plus minority partners share of consolidated spending
    
    
    43,846Less our share of unconsolidated spending
    
    
    (8,533
    )Total capital expenditures per Consolidated Statement of Cash Flows
    
    $
    191,379
 We funded all of the above capital expenditures with cash provided by
operating activities, working capital, and borrowings under the Revolver. 32




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##### 



Contractual Obligations This table summarizes information regarding contractual obligations and
commitments as of September 30, 2004 (amounts in thousands): Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    one year
    
    1  3 years
    
    3  5 years
    
    5 yearsScheduled long-term debt maturities
    
    $
    5,569,681
    
    
    $
    293,758
    
    
    $
    864,637
    
    
    $
    658,613
    
    
    $
    3,752,673Secured credit facility and term loan
    
    
    418,400
    
    
    
    
    
    
    
    168,400
    
    
    
    250,000
    
    
    
    Mandatorily redeemable preferred securities
    
    
    15,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,019Leases for space occupied
    
    
    24,125
    
    
    
    6,008
    
    
    
    11,207
    
    
    
    6,910
    
    
    
    Development fee payments (1)
    
    
    25,000
    
    
    
    10,000
    
    
    
    15,000
    
    
    
    
    
    
    
    Total
    
    $
    6,052,225
    
    
    $
    309,766
    
    
    $
    1,059,244
    
    
    $
    915,523
    
    
    $
    3,767,692
  (1)
    
    The development fee payments above were established in connection
with the Casden Merger and represent Aimcos and our commitment related
to Casden Properties LLC. Aimco agreed to pay $2.5 million per quarter
for five years (up to an aggregate amount of $50.0 million) to Casden
Properties LLC as a retainer on account for redevelopment services on
our assets. Additionally, in connection with the Casden Merger, we committed to
purchase two properties for minimum contractually agreed consideration of
approximately $400 million, provide a stand-by facility of $64.5 million in
debt financing associated with development, and invest up to $50 million for a
20% limited liability company interest in Casden Properties LLC. With regard
to our commitment to purchase Westwood, which is one of the two properties, we are in the process
of negotiating documentation that will extinguish our obligation to purchase
it, will reduce our overall purchase obligation associated with the remaining
property to approximately $199 million, and will reduce to $32.1 million the
amount we are obligated to provide through the stand-by facility. See Note 5 of
the consolidated financial statements for detailed information on these
commitments. Future Capital Needs In addition to the items set forth in Contractual Obligations above, we
expect to fund any future acquisitions, redevelopment and Capital Improvements
principally with proceeds from property sales (including tax-free exchange
proceeds), short-term borrowings, debt and equity financings and operating cash
flows. For the remainder of 2004, we plan to continue spending on as many as
40 redevelopments with average spending per project in the $2 million to $10
million range. Off-Balance Sheet Arrangements We own general and limited partner interests in unconsolidated real estate
partnerships, which interests were acquired through portfolio acquisitions,
direct purchases and separate offers to other limited partners. Our total
ownership interests in these unconsolidated real estate partnerships ranges
from 1% to 50%. However, based on the provisions of the related partnership
agreements, which grant varying degrees of control, we are not deemed to have
control of these partnerships sufficient to require or permit consolidation for
accounting purposes. The requirement or ability to consolidate a real estate
partnership is affected by FIN 46 (see Note 11 of the consolidated financial
statements). There are no lines of credit, side agreements, or any other
derivative financial instruments related to or between our unconsolidated real
estate partnerships and us and no material exposure to financial guarantees
(see Note 5 of the consolidated financial statements). Accordingly, our
maximum risk of loss related to these unconsolidated real estate partnerships
is limited to the aggregate carrying amount of our investment in the
unconsolidated real estate partnerships and any outstanding notes receivable as
reported in our consolidated financial statements. 33




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##### 



ITEM 3.Quantitative and Qualitative Disclosures about Market Risk Our primary market risk exposure relates to changes in interest rates. We
are not subject to any foreign currency exchange rate risk or commodity price
risk, or any other material market rate or price risks. We use predominantly
long-term, fixed-rate and self-amortizing non-recourse mortgage debt in order
to avoid the refunding and repricing risks of short-term borrowings. We use
short-term debt financing and working capital primarily to fund short-term uses
and acquisitions and generally expect to refinance such borrowings with cash
from operating activities, property sales proceeds, long-term debt or equity
financings. We had $1,544.8 million of floating rate debt outstanding at September 30,
2004. Of the total floating rate debt, the major components were floating rate
tax-exempt bond financing ($727.2 million), floating rate secured notes ($399.2
million), the revolving credit facility ($168.4 million), and the term loans
($250.0 million). Based on this level of debt, an increase in interest rates
of 1% would result in our income before minority interest and cash flows being
reduced by $15.4 million on an annual basis. Historically, changes in
tax-exempt interest rates have been at a ratio less than 1:1 with changes in
taxable interest rates. Floating rate tax-exempt bond financing is benchmarked
against the BMA Index, which since 1981 has averaged 52.2% of the 10-year
Treasury Yield. If this relationship continues, an increase in interest rates
of 1% (0.52% in tax-exempt interest rates) would result in our income before
minority interests and cash flows being reduced by $12.0 million on an annual
basis. At September 30, 2004, we had $4,458.3 million of fixed-rate debt
outstanding. As of September 30, 2003, based on our level of floating rate
debt of $1,677.4 million, an increase in interest rates of 1% would have
resulted in our income before minority interest and cash flows being reduced by
$16.8 million on an annual basis. The potential reduction of income before
minority interests and cash flows due to an increase in interest rates
decreased $1.4 million for 2004 compared to 2003 due to lower floating rate
balances resulting from the redemption of Class S Cumulative Redeemable
Preferred Stock and repayment of the Casden Loan. We believe that the fair value of our floating rate secured tax-exempt
bond debt and floating rate secured long-term debt as of September 30, 2004
approximate their carrying values. ITEM 4.Controls and Procedures The Partnerships management, with the participation of our chief
executive officer and chief financial officer of the General Partner, who are
the equivalent of the Partnerships chief executive officer and chief financial
officer, respectively, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end
of the period covered by this report. Based on such evaluation, our chief
executive officer and chief financial officer of the General Partner, who are
the equivalent of the Partnerships chief executive officer and chief financial
officer, respectively, have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, the information required to be
disclosed in the reports that we file or submit under the Exchange Act. In addition, there have been no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 34




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PART II. OTHER INFORMATION ITEM 1.Legal Proceedings See Note 5 in the consolidated financial statements in this Form 10-Q for
information regarding legal proceedings, which information is incorporated by
reference in this Item 1. ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds (a) We completed tender offers for limited partnership interests
resulting in the issuance of approximately
48,000 common OP Units for the three months ended September 30, 2004. On August 25, 2004, we issued 1,217 Class VII Units to a limited liability
company owned by a limited number of employees for an aggregate offering price
of approximately $222,000. This issuance, along with the issuance in the
second quarter of 2004, resulted in a total of 4,109 Class VII Units
outstanding for a total aggregate offering price of approximately $752,000. In the event of a change of control of Aimco, holders of the Class VII
Units, subject to certain restrictions, may require us to redeem all or a
portion of such units in exchange for a cash payment per unit equal to their
market value at the time of redemption. Our obligation to pay the redemption
price is subject to the prior right of Aimco to acquire such units in exchange
for an equal number of shares of Aimco Class A Common Stock (subject to certain
adjustments). All of the foregoing issuances were made in private placement transactions
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. (c) Our Partnership Agreement generally provides that after holding the
common OP Units for one year, our Limited Partners have the right to redeem
their common OP Units for cash, subject to our prior right to cause Aimco to
acquire some or all of the common OP Units tendered for redemption in exchange
for shares of Aimco Class A Common Stock. Common OP Units redeemed for Aimco
Class A Common Stock are generally on a one-for-one basis (subject to
antidilution adjustments). The following table summarizes repurchases of our
equity securities for cash for the three months ended
September 30, 2004. In addition, during the three months ended
September 30, 2004, Aimco purchased approximately 51,000 Common
OP Units in exchange for approximately 51,000 shares of Aimco
Class A Common Stock. Maximum NumberTotal Number of
    
    of Units thatAverage
    
    Units Purchased as
    
    May Yet BeTotal
    
    Price
    
    Part of Publicly
    
    Purchased UnderNumber
    
    Paid
    
    Announced Plans or
    
    Plans or ProgramsFiscal period
    
    of Units Purchased
    
    per Unit
    
    Programs (1)
    
    (1) (in millions)July 1  July 30, 2004
    
    
    1,404
    
    
    
    32.45
    
    
    
    n/a
    
    
    
    n/aAugust 1  August 31, 2004
    
    
    1,860
    
    
    
    32.44
    
    
    
    n/a
    
    
    
    n/aSeptember 1  September 30, 2004
    
    
    139,197
    
    
    
    33.94
    
    
    
    n/a
    
    
    
    n/aTotal
    
    
    142,461
    
    
    
    33.91
    
    
    
    n/a
  (1)
    
    The terms of our Partnership Agreement do not provide for a maximum
number of Units that may be repurchased, and other than the express
terms of our Partnership Agreement we have no publicly announced plans
or programs of repurchase. 35




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ITEM 5.Other Information On November 5, 2004, Aimco redeemed 1,450,000 shares of Class D Cumulative
Preferred Stock, or the Class D Preferred Stock, at a redemption price of $25
per share plus an amount equal to accumulated and unpaid dividends through
November 5, 2004, for a total of $25.1276 per share. Concurrently, we redeemed
1,450,000 Class D Partnership Preferred Units at a price per unit equal to the
redemption price per share of the Class D Preferred Stock. Following this
redemption, 1,250,000 Class D Partnership Preferred Units remain outstanding. As previously announced, effective October 15, 2004, Mr. Kompaniez
resigned from the Board of Directors of AIMCO-GP, Inc., our general partner.
To fill the vacancy created by Mr. Kompaniezs resignation, the Board elected
Paul J. McAuliffe. Mr. McAuliffe joined the Board on October 15, 2004
immediately following the effectiveness of Mr. Kompaniezs resignation. Mr.
McAuliffe is currently the Executive Vice President and Chief Financial Officer
of Aimco and AIMCO-GP, Inc. On November 2, 2004, Aimco entered into an Amended and Restated Senior
Secured Credit Agreement (the Credit Agreement) with a syndicate of financial institutions. In
addition to us, Aimco and two Aimco subsidiaries, NHP Management Company and
AIMCO/Bethesda Holdings, Inc. are also borrowers under the Credit Agreement.
The Credit Agreement amends and restates our two separate existing loan
facilities. See additional information regarding the terms of the Credit Agreement in Note 13 to the consolidated
financial statements. 36




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ITEM 6. Exhibits The following exhibits are filed with this report: EXHIBIT NO.10.1
    
    Forty-First Amendment to Third Amended and Restated Agreement of
Limited Partnership of AIMCO Properties, L.P. (Exhibit 4.1 to AIMCO
Properties, L.P.s Current Report on Form 8-K dated September 24,
2004, is incorporated herein by this reference)10.2
    
    Forty-Second Amendment to Third Amended and Restated Agreement of
Limited Partnership of AIMCO Properties, L.P. (Exhibit 4.2 to AIMCO
Properties, L.P.s Current Report on Form 8-K dated September 24,
2004, is incorporated herein by this reference)10.3
    
    Forty-Third Amendment to Third Amended and Restated Agreement of
Limited Partnership of AIMCO Properties, L.P. (Exhibit 4.1 to AIMCO
Properties, L.P.s Current Report on Form 8-K dated September 29,
2004, is incorporated herein by this reference)10.4
    
    Amended and Restated Secured Credit Agreement, dated as of November
2, 2004, by and among Aimco, AIMCO Properties, L.P., AIMCO/Bethesda
Holdings, Inc., and NHP Management Company as the borrowers and Bank
of America, N.A., Keybank National Association, and the Lenders
listed therein (Exhibit 10.4 to Aimcos Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2004 is incorporated
herein by this reference)31.1
    
    Certification of equivalent of chief executive officer pursuant to
Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of equivalent of chief financial officer pursuant to
Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Agreement re: disclosure of long-term debt instruments
 37




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AIMCO PROPERTIES, L.P. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. AIMCO PROPERTIES, L.P.By: AIMCO-GP, Inc. its general partnerBy:
    /s/ PAUL J. McAULIFFEPaul J. McAuliffeExecutive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer) By:
    /s/ THOMAS M. HERZOGThomas M. HerzogSenior Vice President and
Chief Accounting Officer Date: November 8, 2004 38




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EXHIBIT NO.10.1
    
    Forty-First Amendment to Third Amended and Restated Agreement of
Limited Partnership of AIMCO Properties, L.P. (Exhibit 4.1 to AIMCO
Properties, L.P.s Current Report on Form 8-K dated September 24,
2004, is incorporated herein by this reference)10.2
    
    Forty-Second Amendment to Third Amended and Restated Agreement of
Limited Partnership of AIMCO Properties, L.P. (Exhibit 4.2 to AIMCO
Properties, L.P.s Current Report on Form 8-K dated September 24,
2004, is incorporated herein by this reference)10.3
    
    Forty-Third Amendment to Third Amended and Restated Agreement of
Limited Partnership of AIMCO Properties, L.P. (Exhibit 4.1 to AIMCO
Properties, L.P.s Current Report on Form 8-K dated September 29,
2004, is incorporated herein by this reference)10.4
    
    Amended and Restated Secured Credit Agreement, dated as of November
2, 2004, by and among Aimco, AIMCO Properties, L.P., AIMCO/Bethesda
Holdings, Inc., and NHP Management Company as the borrowers and Bank
of America, N.A., Keybank National Association, and the Lenders
listed therein (Exhibit 10.4 to Aimcos Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2004 is incorporated
herein by this reference)31.1
    
    Certification of equivalent of chief executive officer pursuant to
Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of equivalent of chief financial officer pursuant to
Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Agreement re: disclosure of long-term debt instruments