Apartment Investment and Management Co (AIV) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the Aimco first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note: This event is being recorded.

I would now like to turn the conference over to Lisa Cohn. Please go ahead.

Thank you. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2015 results. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings. Actual results may differ materially from what may be discussed today.

Also, we will discuss certain non-GAAP financial measures, such as adjusted funds from operations, and funds from operations. These are defined, and are reconciled to the most comparable GAAP measures, in the supplemental information that is part of the full earnings release published on Aimco's website.

Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, Executive Vice President in Charge of Property Operations; John Bezzant our Chief Investment Officer; and Ernie Freedman, our Chief Financial Officer. A question-and-answer session will follow our prepared remarks.

I will now turn the call to Terry Considine. Terry?

Thank you, Lisa. Good morning to all of you. Thank you for your interest in Aimco.

The Aimco transformation continues, and we begin 2015 with good news to report for each of our five areas of strategic focus: property operations, redevelopment, portfolio management, balance sheet, and culture. Here is the bottom line: Our most important metric for economic success is the sum of cash dividends, plus increases in net asset value per share. As announced earlier this week, our quarterly dividend is up 15% year over year. Consensus NAV per share is also up 24% year over year.

Here is how we're making this progress: In property operations, our highest priorities are to select high-quality customers, provide outstanding customer service, control costs, and do all of these consistently. Here are a few facts: First, the quality of Aimco customers is better than ever. The median income of residents moving into an Aimco apartment during the first quarter was $80,000, up 13% compared to last year, and up 36% compared to just three years ago. Higher household incomes reflect an older and more established customer, with a median age of 35.

Second, Aimco's service quality is also at a record high. Over the last two years, Aimco customers have provided 170,000 answers to surveys, with satisfaction scores rising steadily. In the first quarter, Aimco customers graded us at 4.12 stars out of 5; and Keith and his team are working hard to fill in and earn that fifth star.

Third, by attracting and selecting the right customers, and providing excellent customer service, we keep turnover low. Aimco customers rent an Aimco apartment for an average of 24 months, up from 22 months just three years ago. This helps control costs because turnover is expensive, approximately $2,300 per turn; and over the last three years, Aimco turnover has averaged 48%, much lower than the peer average of 55%.

Lower turnover helps with controllable costs, defined as property costs before taxes, insurance and utility expense. Here our compound annual growth rate has been negative over the last six years. This is the result of hard work, and numerous small initiatives.

Now, in the first quarter, controllable costs were higher than we would like, due to seasonal costs for snowmageddon, some timing issues, and some areas where we expect improvement. Over the years, Keith and his teams have done a great job in cost control, and I expect they will continue to do so.

Let me turn to redevelopment. In the first quarter, we completed construction at Lincoln Place and Preserve at Marin. Our costs and timing were within the forecast we revised one year ago, and we are achieving rents above underwriting.

As to completed redevelopments, we expect second-generation lease rates to increase substantially, as explicit and implicit construction and lease-up discounts are recovered. For example, at Pacific Bay Vistas, completed last year, average rent increases in the first quarter were up 14%, a blend of 8% on renewals and 20% on new leases. Patti and her teams are doing an excellent job with the current crop of redevelopments, and with refilling our redevelopment pipeline for future years. They continue to expect net asset value creation equal to 30% and more of our redevelopment spending.

Next, portfolio management is one of our most important responsibilities; it's how we allocate the shareholder capital entrusted to us. Our goal is to increase portfolio quality, while maintaining geographic and price-point diversification. Our discipline is to make pair trades; that is, to sell property A to fund property B. The comparison makes it easy to see whether what we are doing is busyness or makes Aimco better.

Here is the record: During the past three years, and first quarter of this year, John and his team sold almost $2 billion of properties with rents about $900 a month, and invested the proceeds in the acquisition, redevelopment and development of properties with average rents about $2,400 a month. This increased portfolio average rents by 35% to more than $1,700, in part due to market rent growth, but mostly due to the impact of redevelopment and acquisitions funded by dispositions.

Our free cash flow margin increased by 10% through the sale of lower-rent properties, and reinvestment in higher-rent properties. The percentage of our portfolio invested in A-quality properties increased by almost a half, and was funded by reducing by 80% the percentage of our portfolio invested in C-quality properties. The percentage of net operating income earned in our target markets increased to 90%, and that improvement continues.

Portfolio average rents in the first quarter were 13.2% higher year over year. We follow this paired-trade discipline in all of our investments, large or small. We have a clear and consistent strategy; that is, we focus on 12 to15 target markets; we maintain price-point diversification while upgrading the overall quality of our portfolio; we remain within our leverage targets; and we invest in properties whose risk-adjusted free cash flow internal rates of return are greater than those of the property sold to fund the investment.

Now, when we allocate capital, we have several options. Often our most attractive uses are upgrades to properties we already own, whether through capital improvements or through redevelopment. Most of our capital spending falls into this category.

We have a second opportunity within properties we already own to increase density; that is, build new apartment homes with little or no additional land cost. Elm Creek is a recent example.

A third opportunity is to make property acquisitions. In a competitive market, we generally find pricing unattractive, except where we can add value through improved operations. Saybrook Pointe in San Jose would be an example from last year.

Finally, on rare occasion we will undertake new development, where we are unable to access a target market by either accretive redevelopment or acquisition. Examples over the past years include the Palazzos in Los Angeles and One Canal in Boston. In each of these, we selected an experienced developer whose skin in the game insulated Aimco from development risk. In each of these, we expect higher returns to compensate for the residual risk. This is exactly the model we are following at La Jolla Cove in California. We are not in the development business; we will not get into the development business; we do not have, and will not build, an internal development team.

On the balance sheet, our highest priority is safety. We focus on low leverage and on limiting entity risk, refunding risk, repricing risk, and construction funding risk. We are committed to low leverage. At the end of the first quarter, our leverage to value was about 35%. We expect that to decline as our redevelopments lease up, bringing our leverage closer to 30%.

When measured by leverage to EBITDA, our target is to be less than 7 to 1, and to be lower still at this time in the cycle, say, 6.5 to 1 or even 6 to 1. Again, we expect redevelopment lease-ups, property operations, and property that amortization paid from retained earnings, to be the basis for further improvement in this metric.

When thinking about leverage, we consider unfunded construction obligations. For example, at our Lincoln Place redevelopment, we obtained a property loan commitment for $190 million to fund construction, before we went forward. We've come to appreciate the financial flexibility of a pool of unencumbered properties. At the end of the first quarters, ours had a value of $1.3 billion. It was gratifying and a well-deserved compliment to Ernie and his team when, during the first quarter, the safety of the Aimco balance sheet was recognized by S&P as investment grade.

The continuing and substantial progress on these several clear and consistent priorities is grounded in our intentional emphasis on a collaborative, respectful and performance-oriented culture. We work as a team. We were gratified last month when the Denver Post again recognized Aimco as one of the top places to work in our state. For me, it's a great pleasure and privilege to work with a high-achieving team, not only here in Colorado but across the entire country.

This record of increasing net asset value per share, improving operations, profitable redevelopment, a high-quality portfolio, a safe balance sheet, and a positive culture, together with a positive outlook for more of the same, were the backdrop when the Aimco Board of Directors voted earlier this week to increase the quarterly dividend. In short for Aimco, business is quite good.

Now for more detail on the first quarter, I'd like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

Thanks, Terry.

We're off to a solid start in 2015, with first-quarter revenues up 4.4% year over year and 1.7% sequentially. Our on-site teams executed our plan with enthusiasm and continued commitment to world-class customer service. As a result, we achieved renewal rent increases averaging 4.8% for the quarter, with particular strength in the Bay Area, Miami and Boston. Where those leases expired and were not renewed, our new leases accelerated throughout the quarter from 30 basis points in January, to March's increase of 2.3%. As a result of our teams' hard work, our blended lease rates also improved throughout the quarter from 2.1% in January to 3.5% in March, all while increasing average daily occupancy for the quarter by 20 basis points year over year and 30 basis points sequentially.

Turnover for the quarter was 48.4%. Of the customers who decided to move out, 23% were for career moves, 17% did not renew due to price, and 13% moved out to purchase homes. There are no significant changes in these move-out reasons versus recent quarters or our long-term averages.

We continue to be successful in replacing moveouts with better-qualified residents at higher rents. The average incomes of those new customers who moved in during the first quarter was $137,000. The median income was $80,000, resulting in a consistent rent-to-income ratio of 21%. Year over year, the median income of our new residents is up 13% compared to the first quarter of 2014. This result is driven by an improvement in our portfolio and resident base.

Looking at our 10 largest markets, which make up three-quarters of our revenue, the top performers had revenue increases from 6% to nearly 10% for the quarter. This was led by the Bay Area, followed by Denver, Miami, San Diego and Los Angeles.

Our steady performers for the quarter, with mid-range growth of over 3% to better than 5%, were Boston, Chicago, Orange County and Philadelphia. And rounding out our 10 largest markets, we had Washington, DC, which was up 80 basis points.

As we look ahead to preliminary April results, blended lease rates were up 4.7%, 90 basis points ahead of April 2014, with new leases up 4.3% and renewals up 5.2%. April's average daily occupancy was 96.5%, 30 basis points ahead of last year. May and June renewal offers went out with 6% to 8% increases.

With great thanks to our teams in the field, and here in Denver, for your commitment to Aimco's success, I'll turn the call over to John Bezzant, our Chief Investment Officer. John?

Thank you, Keith.

During the first quarter, Aimco continued the improvement of its portfolio through the application of its paired-trade discipline. With the sale of lower-rated properties, and investment of the proceeds in properties with higher rents and better prospects, we sold conventional properties in Garden Grove and Cypress, California; Towson, Maryland; and suburban Denver. We also sold two affordable properties. These properties had average revenues per apartment home of less than $1,300, and sold at an average free cash flow cap rate of 4.7%.

Through redevelopment, development and acquisitions, one in the first quarter and a second in April, we invested in properties located in Boston; Venice, California; the Bay Area; Center City, Philadelphia; and the Buckhead area of Atlanta. We expect, from these investments, stabilized average revenues per apartment home of nearly $2,800, more than twice that of the properties we sold; stabilized free cash flow cap rates over 5%; and higher projected revenue growth.

An important contributor to Aimco's rapidly improving portfolio is our redevelopment program. During the first quarter, we invested $25 million in redevelopment, and, as Terry mentioned, completed construction at Lincoln Place in Venice, California, and Preserve at Marin in Corte Madera, California. These were complicated redevelopments that spanned multiple years, and we are pleased to have completed construction at a cost below the expectations we laid out at this time last year, and within the timelines we provided at that time. Today, we are over 85% leased up at Lincoln, and nearly 75% at Preserve; and Keith and his teams are achieving rents above underwriting at both communities.

During the quarter, we continued the redevelopment of our Park Towne Place and Sterling properties, both located in Center City, Philadelphia. We are executing both of these redevelopments in phases, providing us with the flexibility to adjust as we go, depending on product acceptance and competing supply. We have commenced pre-leasing of the redevelopment Tower at Park Towne Place, and the second phase of apartment homes at the Sterling. And while we are in the early days, rents are coming in above underwriting at both projects.

Construction is nearly complete at Aimco's 2900 on First redevelopment in Seattle, and work is progressing as planned at our Ocean House on Prospect redevelopment in La Jolla, California. Construction also continues on our only development project, One Canal in Boston. During the quarter, we invested $18 million in this project, and, notwithstanding some scheduling pressures due to the severe winter weather, still anticipate completion of this project during the second quarter of 2016, and within our original budget.

Before I move to our acquisition activity, I'd like to point out that, as we do once a year, we have updated our revenue projections for the redevelopment and development projects that have been on Supplemental Schedule 10 for more than a year. This annual update takes into consideration market rent growth over the last 12 months, and Aimco's project-to-date rental rate achievement. Revenue expectations were increased at Lincoln Place, Preserve at Marin, 2900 on First, and One Canal. For our more recent projects -- Ocean House, Park Towne Place and Sterling -- our original estimates remain in place.

We have updated our yield projections on these projects, and now expect a weighted average NOI yield, excluding future market rent growth, of 5.6%. This is a 20-basis-point increase from our previous estimate. With cap rates remaining flat to down in the markets where these assets are located, we believe these investments are driving even greater value creation.

On the acquisitions front, we purchased, in the first quarter, a 94-apartment-home community located in Atlanta between midtown and Buckhead for $38 million. The community was built in 2008 to condominium specifications, and has average revenue per apartment home of over $3,600. Subsequent to quarter end, we acquired, at certificate of occupancy for $63 million, a newly developed 115-apartment-home community located in the Kendall Square neighborhood of Cambridge, Massachusetts. We have started lease-up, and upon stabilization, expect average revenue per apartment home to be over $3,500.

As we look ahead to the rest of the year, we will continue to follow our pair-trade approach to portfolio management. As you'll see in our earnings release, we've increased our guidance for property sales from $250 million to $275 million at the midpoint. This guidance increase reflects additional asset sales to fund year-to-date acquisitions. We now expect to generate net proceeds to Aimco of $150 million to $160 million, a $20-million increase at the midpoint.

We continue to look for opportunities to upgrade our portfolio through selective paired trades. If we find the right investments, we will adjust our guidance for property sales accordingly.

I'd now like to turn the call over to Ernie Freedman, our Chief Financial Officer. Ernie?

Thanks, John.

I will started today with first-quarter 2015 results. AFFO of $0.46 per share was $0.01 per share ahead of the high end of our guidance range, and FFO was right at the high end of our guidance range at $0.52 per share. AFFO exceeded the high end of our guidance range due to the FFO outperformance, as well as lower capital replacement spending than planned, which we expect to make up during the balance of the year.

Within these results were a couple of offsetting non-recurring items I'd like to point out. First, casualty losses were $2.5 million or $0.015 per share higher than we had expected, due to the extreme winter conditions in the Northeast. We also incurred $1.7 million or $0.01 per share of penalties on the repayment of two property loans that were scheduled to mature next year. The pre-payment penalties were less than the interest that would have been paid until their maturity dates, so we used proceeds from our January equity offering to retire the debt.

These items were offset by $0.01 related to the reversal of a litigation reserve, and $0.01 of deferred asset management fees. We came in at the high end of our guidance for same-store operating results, with revenues 4.4% higher than first-quarter 2014, offset by expense growth of 2.9%, leading to NOI growth of 5.2%. We did experience higher-than-anticipated expense growth during the first quarter as a result of the severe winter weather in the Northeast, but this was more than offset by higher revenue growth.

On the balance sheet, in January we raised $367 million through a common equity offering, and have used the proceeds to pay off our line of credit, redeem our CRA-preferred equity, and pay off three property loans. 20 of our communities are now unencumbered, with an estimated gross asset value of $1.3 billion. We plan to repay additional property loans later this year when they open up for pre-payment without penalty.

As Terry mentioned, S&P upgraded Aimco to investment grade in March. We have met Fitch's published guidelines to consider us investment grade, and are hopeful we will receive good news later this year. Reaching investment grade was an important accomplishment for Aimco and our team.

We remain committed to continuing to improve our balance sheet by reducing leverage further, and increasing the size of our unencumbered pool. This reduction will be realized through amortization of property debt paid from retained earnings, and by increasing earnings as redevelopment and acquisition properties are stabilized. While an investment-grade rating allows us for future consideration of the use of unsecured debt, Aimco does not anticipate doing so.

Moving on to the subject of our common dividend, as Terry mentioned, we announced earlier this week, our Board of Directors approved an increase in our common dividend to an annualized rate of $1.20 per share, or a 15% increase from our dividend in 2014. In determining an appropriate dividend payout, the Board seeks to retain enough cash flow from operations to fund capital replacement spending and the required principal amortization of our property debt. With our continued overall decline in capital replacement spending due to our pair-trade portfolio management discipline, and our accelerated deleveraging that occurred earlier this year with our January equity offering, the Board recognized the opportunity to increase our dividend. At this higher dividend rate, we are now paying out approximately 65% of our AFFO.

Looking ahead in operations, we are increasing our full-year same-store revenue growth projection to reflect our expectation of stronger results in 2015. We now anticipate same-store revenue growth between 4% and 4.5%. On the expense side, our expectations for the full year remain unchanged at a growth rate of 2.5% to 3%. With these expectations, we now project full-year higher NOI growth of 4.5% to 5.5%.

For the second quarter, pro forma FFO is projected to be $0.51 to $0.55 per share, and AFFO is projected to be $0.42 to $0.46 per share. Year-over-year conventional same-store NOI growth is projected to be 4.25% to 5.25%. Second-quarter conventional same-store NOI is projected to be up 1.5% to 2.5% compared to the first quarter. We have increased both full-year pro forma FFO and AFFO.

Before we take questions, I'd like to point out one item in our supplemental schedules. As we do at the beginning of each year, we evaluated each of our properties in our non-same-store portfolios to determine whether inclusion in same-store for the upcoming year is appropriate. This year, we determined that eight of our Manhattan properties meet our same-store definition, and these properties are now reflected in our same-store results on Schedule 6.

Finally, I'd like to let everyone know that we will be hosting an Investor Day in Philadelphia in early October, which will include tours of our Park Towne Place and Sterling redevelopments. We will also be hosting tours of our West Coast redevelopment properties -- Lincoln Place, Preserve at Marin, and Pacific Bay Vistas -- a week or so later. Look for more information with specific dates from Elizabeth Coalson in the coming weeks.

With that, we will now open up the call for questions. Please limit your questions to two per time in the queue. Amy, I'll turn it over to you for the first question, please.

Thank you.

(Operator Instructions)

Our first question comes from [Nick Yullico] at UBS.

Thanks. I was wondering on the topic of asset sales. How do you view what's going on in the market right now? M&A is picking up. Pricing of portfolios is pretty strong and yet I don't think you guys have shopped a portfolio -- a larger portfolio of assets in some time. How do you think about maybe taking advantage of the sales market in a bigger way rather than just selling off individual assets and doing a sort of a bigger portfolio sale?

This is Terry. Thank you very much for your question. It's a question we ask ourselves and review regularly and there are two factors we consider in particular. The first is whether we get a better execution in a portfolio or one by one. And so far, we've concluded that we maximize proceeds to Aimco by selling individual properties rather than in a larger portfolio transaction.

Of course, the second very large governor is the reinvestment opportunity. We look at this not just a question of whether we can make a advantageous sale but whether we can reinvest the proceeds in properties that have higher rents that are consistent with our market allocations, that have higher growth prospects. And that's the real governor on our rate of sales and John has done a good job, but we encourage him to go and find more.

John, do you have anything you'd like to add?

No, I think you got it.

Okay, thanks, and just lastly, you're getting the benefit this year from the historic tax credits. Looking out after this year, are you able -- is there any benefit left next year or is it only if you start additional redevelopment projects where you might get that benefit? Thanks.

It's Ernie, and that's a correct observation that we provided in 2015 is what we expect to generate in historic tax credits from the projects we currently have in place. If we're successful with the first phase of Park Town and continue doing further phases at Park Town, each of those phases will also have historic tax credits associated with them because those credits are available for the entire project.

So we're certainly optimistic and we're off to a good start at Park Town. And if we do move forward to a Phase II and Phase III and a Phase IV, each of those would have historic tax credits certainly over the next couple years.

Similarly, if we get to the situation where we complete all of Sterling in Philadelphia, which would be a few more phases to go, that will also be eligible for some tax credits. So those two projects specifically we have line of sight to see that we have some historic tax credits available to us, not quite at the amounts you've seen that are in the numbers this year, but slowly decreasing.

And as we look at future redevelopment opportunities, certainly any of our projects that are in the age range that potentially could have historic tax credits, which would be properties that are over 50 years old, we give that consideration as to something that could help with the economics if it makes sense for what we want to do from a construction standpoint.

Thanks, guys.

The next question comes from Nick Joseph at Citigroup.

Thanks. Terry, you talked about the portfolio continuing to improve in terms of quality and average rent per unit. Is there a risk to getting to too high of a price per unit and introducing more volatility to results? Then how do you balance that price point diversification that you talked about with improving the portfolio of quality from here?

Nick, that's just a terrific question and, again, that's something we think about all the time. As and high price points have many good qualities, but they bear with them some risk. It's a risk that that price point is the one most subject to competitive new building, and so the way we think about that is to look for two points of protection.

First of all, geographic diversification. As you know, we're more highly diversified geographically than many and we hope that by doing so that we will be in a recovery mode in Washington, D.C. by the time that the Bay Area is overbuilt and vice versa.

The second thing is we give great a emphasis to location, location, location. It's the watchword of real estate. But we look for those, not just sub markets, but those special locations which are not as exposed to competitive new building, an example of which would be our Preserve at Marin project in Corde Madero, California, or perspectively our La Jolla Cove project and our Ocean House project in La Jolla.

Thanks. And then you mentioned the 6% to 8% for renewals being sent out in May and June. What spread do you expect to see there?

Nick, this is Keith. We typically see about 100 basis point melt from the ask to the ultimate take rate.

Thanks.

Thank you, Nick.

Next question comes from Rob Stevenson at Janney.

Hi, good afternoon, guys. Terry, appreciate the additional color on the existing redevelopment stuff. Can you talk a little bit about what you guys have teed up to start this year and what the overall redevelopment pie looks like within Aimco currently that would meet your return thresholds currently?

Rob, that's, again, a terrific question. One we're focused on but one that is best answered by Patti Fielding who heads that operation. Patti?

Hi, Rob. The projects we started in 2015, we have some carryover into 2016 and beyond. We have the opportunity for spend on additional phases at Sterling between $34 million to $44 million and Park Town between $88 million to $100 million. Both of these projects are in Center City, Philadelphia. This, of course, assumes that each of the projects continues to progress well.

As a reminder, each phase at Sterling represents three to five floors of the 29 story highrise and each phase at Park Town represents one of the four 19-story towers. Yorktown is a project outside of Chicago that we expect to kick off later this year and much of its spending will occur beyond 2015. We anticipate the first part of the redevelopment will incorporate the current 15-story tower and a 5-story midrise building.

At Yorktown, we also have [access] land created from an earlier rebuilding of the parking structure. A later phase may incorporate adding density to the size like we did at Elm Creek. We anticipate announcing the first phase and its cost and economics later this year.

We have opportunity at our Palazzo properties that we own in a joint venture with JPM. Our focus to date has been on the amenities and the penthouse homes at Palazzo West.

We have the opportunity to renovate the remaining homes at West as well as at Palazzo East and our smaller, more boutique property, Villas property. We anticipate announcing this next phase later this year.

Finally, we're really excited about our plans around Yacht Club Community in the Miami neighborhood of Brickell. This is a 357-home highrise. Our plans include investment in an enhanced arrival experience, amenities, apartment finishes, and the potential addition of a restaurant. This is another project we'll provide details on later this year.

Those projects are likely to be up next. My team is looking hard at another dozen or so opportunities currently that will help to backfill 2016 and 2017. We are looking at projects in New York, suburban Washington D.C., Denver, the Bay Area and San Diego.

The limiter for us is not the number of opportunities, frankly. It's our appetite for risk. As we look to spend about 2% to 3% of our gross asset value a year in redub.

Okay. And, Ernie, can you talk a little bit about your comment about not looking to do unsecured debt in the future? I mean, what drives that decision? Is it just pricing? Is it stuff additional stuff that you'd have to do in order to do a deal? Can you provide some color there?

Rob, it's really around risk appetite. We are just comfortable. We aren't concerned around pricing, as we certainly see today we're able to get property debt depending on the quality of the property and location of the property, that's certainly competitive with unsecured financing. It's really around what Aimco has done for the last 20 years in managing our risk around the balance sheet in that we like using non-recourse, long-dated, fixed-rate amortizing property debt. That said, I do like the option of having unsecured in our back pocket, if that's something we need to pursue.

Frankly, Rob, we haven't talked to rating agencies about that because we aren't looking to do it, so we may certainly have to do things a little bit different than we have today, but by having investment grade from S&P and, hopefully, won not too far away from Fitch, it's an easier discussion to have. But I don't want to mislead anyone by us getting investment grade that we're considering something else.

But we put a lot of value on optionality. We like having the option. We like having that available to us if that's something to consider in the future. But as of today, we're very comfortable with our very current strategy and continue to grow our unencumbered pool and flexibility and maintaining our low leverage by employing property debt and, importantly, preferred equity.

Thanks, guys.

The next question comes from Jordan Sadler at KeyBanc Capital Markets.

Quick one on the portfolio overall and the current scale in the context of where this portfolio has been over time. I hear questions about additional sales and as I look across your portfolio and see markets where you've got one or two communities, I am curious, given your perspective over time, are there benefits of scale or are there no benefits of scale? And what are your thoughts on these smaller markets for Aimco?

Jordan, am I right, the scale you're asking about is operating scale and operating efficiency?

Correct.

There are some advantages in having a concentration in a particular market. They aren't as huge as in other, say, manufacturing businesses, but there's a very real one, I know, in management which is that it's fewer places to go and easier for Keith and his team to get there and have their feet on the ground and hands around the problems that we're looking at. So I think over time we're likely to either get larger or smaller -- or larger or exit markets in which we have only one or two properties.

I guess regarding the redevelopment, I didn't quite catch, is there a current yield on Lincoln Place that you could kind of offer, give us some context? And just the targeted yield on redevelopment on the 2% to 3% per year. Is there a hurdle?

Sure, Jordan. This is Ernie. We have not disclosed specifically yields on individual projects. That's actually something we'll provide at our Investor Day as we get further along in the rent-up to give you a more of a real number versus what I'd say is a hypothetical number based on where we think things are going.

That said, with the information we disclosed in Schedule 10 and using a reasonable assumption around margin, you should probably be able to get pretty close to what the deal would be on something like Lincoln Place. For the entire redevelopment portfolio, John mentioned we are projecting a yield overall of 5.6% on that current group. So that's the answer to your question on Lincoln Place, Jordan.

Your other question, if you could just remind me, please?

Just is there a hurdle rate in terms of the 2% to 3% redevelopment spend annually you'd target?

John, do you want to talk about how we try to do that from a pair- trade perspective and what we try to target for the premium we expect from redevelopments?

Sure. So as we look at sales, which has been our primary source of capital for redevelopment and other investments that we make, we measure primarily at the free cash flow internal rate of return level. For an investment in an acquisition, for example, operating property, fully operating property, we would be looking at 150 basis points roughly -- excuse me. I'm going to start with the baseline of an acquisition in a market we would look at as our baseline for a yield.

For redev we would look at 150 to 250 basis points above that. For a development, we would look in the 200 to 250 basis points above that as targeted yield at inception of the project.

Okay, thank you.

Thanks, Jordan.

The next question comes from Jana Galen at Bank of America.

Hi, thank you. As you discuss your capital recycling and geographic allocation goals, I was curious if you're reviewing any deals outside your target markets? And the one that comes to mind is Nashville has been trending very well for you for the last few quarters.

John?

Sure. We look actively in all of the markets that we are in, that we are targeted. And Nashville is one of ours that I would say is kind of on the soft cusp of our target market strategy.

We do continue to look at transactions and opportunities there. We've obviously not found any and we do look regularly at disposition opportunities within and outside of the target markets, primarily outside but within the target markets, focused on where we can sell and make a trade, a paired trade, to come out of a, if you will, an older, more suburban asset with lesser prospects into one that we feel has greater prospects. That goes on every day all across the portfolio.

Thank you. And I was wondering if you could provide a little bit more detail on how Washington performed in the quarter and particularly the trends you're seeing in April by submarkets?

Jana, this is Keith. I'll take that. What we're seeing is we're definitely seeing an improvement from where we stood a year ago, as we think about -- two markets that we really are in is suburban Maryland and suburban Virginia specifically.

And in suburban Maryland, that would be where we are seeing more strength. And suburban Virginia, specifically with Alexandria, there's just some more inventory we have to work our way through and so we've got to work through that. But generally speaking what we're seeing is some acceleration and definitely improvement from where we were a year ago.

Keith, if you want to comment on what you've seen January through April with regards to leasing activity?

Sure, Ernie. What Ernie is referring to is we've seen some acceleration, specifically around new lease pricing. From January, February, March and through April, we've seen a sequential improvement every month.

In January, as an example, we were seeing negative 5% on new leases. And now in April, just barely at negative 1%, so there's definitely been some improvement, but with that being said, there's more work to be done.

Thank you, Keith.

The next question comes from Dan Oppenheim at Selman & Associates.

Thanks very much. Was wondering if you could talk about the acquisition in Atlanta. I guess Mazo was originally contemplated as a condo and then was converted to a rental. Did you buy that with any thought of converting it to condos at some point in the future or do you think about this as a rental going forward?

No, we really bought it as a rental and looked to operate it as a rental going forward. All of our underwriting is done on a rental basis. We don't assume a condo exit to justify a purchase.

Okay. And then, just overall, you talked about increasing the assumptions for acquisitions. That's primarily based on the two, Atlanta and Cambridge, not so much optimism that it's becoming easier to buy over the remainder of the year; correct?

Yes, certainly wouldn't measure that it's going to be easier to buy. I would, though, qualify we are continuing to look at opportunities every day and so that opportunity for additional guidance for sales would be a direct result, if we are successful in finding other opportunities where we can make an accretive paired trade that is an improvement to the portfolio.

Dan, our original guidance for the year in dispositions had some flexibility with its range to be able to fund a very low level of acquisitions. When you combine the two that John has done through April, that's why you've seen that we moved our disposition guidance up a little bit at the midpoint to cover the funding for both of those acquisitions.

Thanks very much.

Thanks, Dan.

Our next question comes from [Drew Baven] at Robert W. Baird.

Good afternoon. First question is just on submarkets within LA. The big story this year is obviously LA joined the growth party in California, trailing the tech-heavy markets as the economy gains broader traction. Can you break it down by submarket at all or are you seeing just a broader pickup in the entire market?

Drew, let me start and I'll kick it over to Keith. I'd tell you that Keith and the team actually saw pretty positive results in LA as we finished up last year too, so it's good to see that LA is strengthening and you're seeing it across-the-board from lots of folks.

But we had pretty good success and acceleration in LA starting, really, in 2014. But, Keith, you may want to talk about where our communities are and what you're seeing?

Drew, if we think about Los Angeles, really where we're seeing strength is the West Side of LA and mid-Wilshire, our Palazzo communities and Hillcrest, and things of that nature. That's really where we are seeing the strength that has been building. And in addition to that, our Hillcrest Community, which is on the border of Century City in Beverly Hills has also been really accelerating this 2015.

Okay, that's helpful. Question for Ernie on 2016 debt maturities. Can you talk at all about the -- and sorry if I missed something on this -- the setup in terms of 2016 compared to 2015? Could there be a scenario possible where an equity issuance makes sense early in the year to prepay substantial maturities?

Well, we certainly don't need to do that, Drew, to continue to get to where we want from a leverage target perspective. But, of course, all options are always open. What we've been able to do actually over the last period of time is take advantage of adding some leverage to certain assets and taking those excess proceeds to pay off other loans to keep growing our unencumbered pool. We don't need [to issue] common equity to do that.

One of our larger maturities in 2016, the early part of 2015, actually opens for prepayment in 2015 and it is for one of our best communities we have in our portfolio. I would expect that will actually refinance in 2015 and we'll do a refinance there because that property, that community is in a joint venture, so you actually see that the opportunity for us to potentially do something with maturities for 2016 is more in the back half of 2016, not the first half.

We're not contemplating issuing equity to pay down debt, but if we are in a position where the equity is trading at a real advantageous price for us to consider it, it's certainly an option that's on the table, but not one I will consider in the base case.

Great, thank you; that's helpful. That's all I've got.

Thanks, Drew.

Next question is from John Kim at BMO Capital Markets.

Thank you. It sounds like the S&P upgrade came ahead of your expectations as far as the timing, but I'm still trying to understand why you're not contemplating offering an unsecured debt offering?

I'm sorry, John, so the first part was about the investment grade and not doing unsecured debt offering?

Yes, you mention you value the optionality, but I'm trying to wonder why did you go through this process of getting investment grade credit rating if you're not going to use it?

A couple things I'll tell you, John. One, we've met with the rating agencies for 20 years and not been an unsecured borrower because that's just something you do as a public company. Two, we haven't done anything differently than we would have done anyway. It just so happens the rating agencies have seen that what we are doing is as safe as what others are doing.

So we've been committed for many years to bring leverage down. It's something we talked about as early as 2012 and we achieved that target about two years earlier than we thought, at the end of 2013 versus 2015.

We've been committed to create a larger unencumbered pool to provide flexibility. If we're going to be lower levered, let's say leverage in the 30% to 35% range, it doesn't make sense to encumber every property at 30% to 35%. It makes more sense to encumber maybe about half of them at 60% and the other half without to get to a number like that. So it really isn't anything different.

Patti Fielding and Paul Beldon and my team enjoy going to see the rating agencies quarterly and talking to them. It's just they've come around to say what we're doing works.

And we're very comfortable with our cost of capital but, more importantly, we're very comfortable with the risk associated with how we finance the Company. But as the CFO of the organization, having more options is better than not.

We don't plan on using it today. It wasn't a big effort to ask for the investment grade and it's good to know if we do change our mind in the future or if the market is in a condition where it makes sense for us to change our mind, we'll have that capability.

So, for instance, it's not a large amount but you have some perpetual preferred that's redeemable next year? Is that something you'd contemplate refinancing with longer term debt?

Certainly. We've taken out preferreds in the past. And you're referring to, I believe, our class Z that came out in 2011 would be redeemable. If we feel at that time that that's a cost of capital that doesn't make sense and we could replace it, we would certainly give consideration to doing a new preferred equity offering if it's at a significantly cheaper price than where that's at today at 7% and/or replacing that with longer-term debt.

But we like, John, just make sure we're clear, we like having a weighted average maturity that's much longer versus much shorter. And, as you know, compared to our peers, we have one of the longest and what we love about perpetual preferred equity is just that. It's perpetual. It doesn't come due. So forever equity in the 6% to 7% range is a pretty good spot and certainly will be a better spot for us in the future, having one, if not two, investment grades, so we'll keep that as an option for us as well.

Okay. And then I had a follow-up on the disposition guidance. Did this increase because you expect better pricing on dispositions or the composition changed or you are selling more assets? What's the primary reason?

It's purely to have the cash available to pay for the two properties that the communities that John acquired here in the first quarter and the beginning part of the second quarter. Our original guidance contemplated John would have some flexibility to potentially acquire a smaller property and now that he's completed the two at a combined purchase price of a little over $100 million, we just want to balance our sources and uses. So it's just around balancing that out from activity that's happened today and then a redevelopment and development activity that's anticipated for the remainder of the year.

So they are different assets you're looking to sell?

No, at this point there would be one asset that was added to the list to get us to a higher number than we originally contemplated, yes.

Okay' got it. Thank you.

Thanks John.

The next question is from Dave Bragg at Green Street Advisors.

Hi; good afternoon.

Hi, Dave.

First question for you relates to just the disclosure on CapEx. Looks like you account for $1,000 a unit in your AFFO calculation but $1,200 in your free cash flow calcs. Why the difference between the two?

Sure. One, I'd say, is more economic and one is the accounting rules that we established many years ago, Dave, around accounting for capital replacement and capital improvement spending. Without getting into too much detail on how we do that, we would try to understand when we acquired an asset how much had been used up to that point? And if we're replacing that asset we just buy it or if we're making an improvement to it? And I know we've talked about that over the years with folks in how we do that.

In reality we think the economics around what happens with capital replacement is closer to $1,200 and, frankly, maybe even a little bit higher. So we want to use a consistent number and a consistent measure that is not impacted by timing from quarter to quarter or year to year on larger capital plans. So when John puts together both our projected IRRs for what we own today, as well as any underwriting that he's doing with Patti on redevelopment projects or on acquisitions, we want to use that consistent $1,200 and that's why we've chosen to keep it there.

Okay, thank you, Ernie. Second question, thanks for the disclosures as always on disposition, cap rates, and free cash flow cap rates. Can you provide the same for the acquisitions that you've made so far this year?

Dave, as you know, in the past, we have shied away from giving specific cap rate but we hope by giving the rents and by showing a reasonable margin assumption that you can make, you can triangulate and get pretty close on what the cap rates would be. But I tell you, from a free cash flow IRR perspective, we expect both of these acquisitions, John, to be 100 basis points plus over what the properties that we sold. Anything you want to comment there?

Yes, and I think in my comments our total investment, we think are -- through redev, acquisitions, everything else, free cash flow cap rates in excess of 5% at stabilization. I could call out on the Cambridge deal we just bought and closed late last week, it's empty. It's a brand new building just completed, and so today the cap rate is zero. I will give you that. But we expect that it will stabilize above the [4.7] free cash flow cap rate on the sales that we made to fund it.

And stabilized for you all, what does that mean? What time frame there, on both the Atlanta and the Cambridge deal?

Atlanta is stabilized today at those rents over $3,600. The Cambridge deal stabilization for us is leaseup, which is modeled based on what we think the period would be on any given asset on that particular one, but we would anticipate it being leased up later this year.

Then really one cycle of turn that we get stabilized. As Terry noted in his comments, on our redevelopments, for example, we see whether it's implicit or explicit construction period discounts or concessions that are done during leaseup while construction is going on around it, and we expect that in a normal leaseup on a newly acquired building like Axium, there would be some level of concessions to get the building leased up in the season. And then we expect that after year two we burn those off and recapture them, so stabilization in our model on a new building like Axion would be in year three.

Dave, importantly, when we talk about those stabilized yields, we don't include market rent growth as we consider those. So when we give our redevelopment yields they are as of rents today, not in the future, which, as John just described, in a property like Cambridge, the stabilized yield that he's talking about, certainly will probably be 18 to 24 months out because of what he described. But he's not including market rent growth that may occur between now and then. So that would only be if market continues to grow in Cambridge, that would be an addition to that number.

Okay, thanks for that. One last question. You provide specific disposition, guidance, we can see that that went up and you explained that that's because you did more acquisitions than expected in the first quarter. But did you also say that your expectations for acquisitions this year have continued to increase over the balance of the year? What should we think about as a right number for acquisitions in 2015 to go with this dispo number?

Dave, I would tell you that we're out in the hunt every day. We don't have anything under contract today to buy, but we bid actively and aggressively every week. We put LOIs out on deals around the country and we don't land very many of them. Our numbers last year and in gross/gross terms, we looked at about 400 deals.

We underwrote and offered on a little over 200 deals and we bought 6. And so as we look at this year, we anticipate we are going to retain that same momentum we have on the bidding side and we'll buy something. We bought these two deals that we've disclosed today and we'll buy some more over the course of the year. But I honestly can't tell you, because the market is so competitive out there, that I don't know whether I'm going to land one out of 100 or one out of 1,000.

Thank you.

Dave, I guess one last comment I'll make on that is that we're not looking to crazily or wildly grow the Aimco portfolio. We talk about the fact that we would expect to sell about 5% to 10% of our properties on a yearly basis to fund reinvestment. And in our current dispositions guidance right now, we're at about 3%. And for two of the last three years we didn't do much more than that. We did maybe 4% to 5% last year. We did do more.

We did about 7%, so our current dispositions guidance is laid out, funds, everything that we've laid out for you. The two acquisitions that John has done, as well as our planned spending on redevelopment and then the development project at One Canal for the rest of the year.

John is tasked to see if he can find better communities for us to be invested in than what we have today. And we're cheering for him and hope he's successful, but there's a likelihood he won't be. But there is also a possibility he will be and that you will see, as we go out through the year, some more dispositions higher than our guidance level that would fund, potentially, accretive acquisitions, but not to go to wildly grow the Aimco portfolio, but to see if we can continue on this continued march that John has led us on in terms of improved portfolio quality.

Okay, thank you.

Thanks, Dave.

The next question comes from Rich Anderson at Mizuho.

Thanks. I guess my first question -- potentially awkward question, but they're always the most fun. Assuming, Terry, you're going to work until you're 150 years old -- and no one would be surprised by that -- and we look at good but plateauing fundamentals in the multi-family space, a lot of M&A chatter, both real and potentially imagined, from your perspective what happens first, succession or sale?

At Aimco?

Yes. Meaning you relinquish your role or the Company gets sold?

Based on everything I know today, we're going to continue to operate through that 150 years. And when we enter into these 43- year loans, for example, that finance Lincoln Place at Venice, I worry a lot about the refunding risk that I'm going to have to deal with in 2055.

Okay, so the answer then is succession, unless you've got a magic potion that we aren't aware of, is that right?

Some of this information is proprietary.

And then just a really basic question for Ernie. Schedule 1 is missing the weighted average shares? I'm wondering where that is?

Oh, I'll check on that and we'll get that out to you, Rich, if it got neglected this time around, to make sure it's available for everyone. I appreciate you pointing that out. We'll get that out.

Okay, great; thank you.

Our next question is from Mike Salinsky at RBC Capital Markets.

Good afternoon, guys. I want to go back to Dave's question because you touched upon recycling and acquisitions. As you continue with the recycling of the portfolio, selling the bond 10%, moving that money back into redevelopment but in acquisitions, at what point do you get to the point where you really can't shrink the portfolio much larger without losing efficiencies or scale in markets?

I'll start with that, Mike. I think as we look at it, there's still plenty of runway. I want to point out that we are buying. Part of the reasons for the acquisitions activity is that we are acquiring and keeping the size of the enterprise the same or even bigger than what it was from an asset value standpoint, and that's our goal.

From a unit-count standpoint, I would look at the process as one of distillation more than anything else, and that as we look at these 12 to15 target markets, within them our unit counts may, in fact, shrink. But our goal is to have the dollars reallocated and to grow within them and that growth would be through, we hope, higher revenue growth in assets that we select and selling out of lower revenue growth markets and higher margins and just the opportunities that we see as we distill, by choice, the portfolio into these 12 to 15 target markets.

And maybe I'll follow along with the silence in my own answering a little bit more. I don't know that there is a magic number that we look at and say this is too small. We are really looking at it literally paired trade, asset by asset, what's it valued to us on a free cash flow internal rate of return basis? And can we do better?

But I might add, John, Mike, you've studied this and thought about this before, Mike, that the Company is measured by gross asset values growing. Its capital is increasingly concentrated in fewer units, but those units are ones that are efficiently operated and that may even benefit by increased focus of having a smaller footprint.

And I think the impact on the portfolio quality has been quite substantial and I think it will continue to be quite substantial. I think you'll be quite pleased to look back in three years to see that the three years past was prologued to continue portfolio upgrade.

That's helpful. That actually leads me to my second question here. Just in terms of the focus on a free cash flow IRR, NAV, and you look at the different CapEx in terms of As versus Bs, if you look at your acquisitions over the last two years of predominantly A properties, you're redeveloping some of these, moving these up to As, can you continue -- as you look at the portfolio today, is it inherently going to increase more on the A side?

And how do you balance out the diversification of As or Bs and Cs versus the free cash flow IRR growth potential of an A?

Well, the free cash flow IRR growth potential of an A or B is dependent on multiple factors, including price. And we would like to be balanced between As and Bs, but what we are -- the underlying theme will be is that we're selecting for A ground, because the Bs that we will find attractive will be ones that are in wonderful locations that over time Patti will be able to redevelop and upgrade. And so that's sort of the balance point. We might be buying at a B price point but hopefully it's A ground.

I would add too, Mike, that just to get into the nitty-gritty on the Mazo deal, for example, in Atlanta. Very high-end finishes, wood floors, these kind of things that are a higher turn cost. Our free cash flow internal rate of return that we calculate for that acquisition incorporates a higher cost for turns on that property to reflect the fact that it's got Wolfe appliances and higher-end finishes and these other things going on.

And then it also includes that $1,200 a door capital replacement reserve, as does every deal that we buy, so we think that the free cash flow internal rate of return, through both expense modeling, turn costs and the capital replacement budget accurately reflects the additional costs that we put into it for asset grade.

Fair enough. I'll yield the floor.

Thanks, Mike.

Would you like to make any closing remarks?

Yes, thank you very much, and thanks you for all of you on the call. Appreciate your interest in Aimco. For many of you, Ernie and Elizabeth Colson and I look forward to seeing you in New York next month for REIT week. In the meantime, please call Elizabeth or Ernie or me if you have any questions. Thank you and have a good weekend.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.