The past two years have been particularly challenging for Denver-based Apartment Investment and Management Co. Inc. (AIMCO), the nation's largest apartment real estate investment trust (REIT). By March 31 of this year, the company's stock had dropped 27% from its 52-week high. Meanwhile, its balance sheet has been hammered by seven straight months of net rental income declines through February.

While apartment REITs registered a total return of 4.6% during the first quarter, AIMCO's return was negative 8.7%, according to financial research firm SNL Financial. That made AIMCO the weakest performer in the sector, and much of that decline took place in March. “The general view is that there will have to be some significant management restructuring at AIMCO,” says Barry Vinocur, editor of Realty Stock Review, a REIT newsletter.

The firm also is facing a formal probe by the Securities and Exchange Commission. The basis for that probe remains unclear — the company claims that the SEC is looking into incorrect rental income figures from 2003. AIMCO, for its part, declined to comment on the probe or broader issues facing the company.

Indeed, the past few years have hobbled the REIT. AIMCO has repeatedly missed earnings and lowered its earnings estimates over the past two years. Then last fall, the firm cut its quarterly dividend from $0.82 to $0.60 per share. It is now seeking to fill its CFO post by the end of the year.

“They've mismanaged their portfolio, and there's no easy fix here. There are just a lot of areas where the company is hurting,” says Craig Leupold, principal at real estate consulting firm Green Street Advisors.

He traces the origin of AIMCO's troubles back to 2001, when its highly regarded COO Tom Toomey joined competitor United Dominion Realty Trust. Leupold says that AIMCO hasn't found an adequate replacement for Toomey, who continues to receive high marks for his stewardship at United Dominion.

“The AIMCO portfolio grew very quickly, but they never managed to build the company along the way,” adds Leupold, who believes that AIMCO has done a poor job operationally. In response, the company is currently overhauling its property management operation by filling several vacant positions throughout the nation.

The good news for AIMCO and its peers is that the national apartment market may be turning around. Gleb Nechayev, an economist with Torto-Wheaton Research, says that concessions are gradually burning off in most apartment markets.

Torto-Wheaton projects that the national apartment vacancy rate will average 6.6% in 2004 compared with 6.4% in 2003. “You may also see stabilization in the apartment market, if interest rates start to climb,” says Nechayev, as a rate hike should lessen the number of renters who choose to become homeowners.

Despite fewer concessions and the higher interest rates, Nechayev believes that the balance of 2004 into the start of 2005 will present a challenge to apartment owners.

The task at hand for AIMCO may be an even greater challenge, however. “It's the circumstances that are weighing on AIMCO right now,” says Vinocur. “I think that [CEO] Terry Considine has to do something very quickly.”