Apartment Investment and Management Co (AIV) 2015 Q2 法說會逐字稿

Good afternoon and welcome to the Aimco second quarter 2015 conference call. All participants will be in listen-only mode.

(Operator Instructions)

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 FFO and AFFO. 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 over to Terry Considine. Terry?

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

Business is good. During the recently completed second quarter, Aimco continued on plan. Before my colleagues report on the particulars, I'd like to point out a few highlights.

In property operations, business is better year-over-year and the rate of improvement has accelerated. Rent growth and average daily occupancy are both higher and operating expenses are down in second quarter and are up only little more than 1% year to date.

Keith and his team beat the high end of second quarter same store NOI guidance by 145 basis points and this made for a good quarter and a solid book of business for the balance of this year and for next year, too. In redevelopment, our ongoing redevelopment projects are on time, on budget, and creating value about equal to $0.30 for every dollar invested. Patti and her team are doing a great job reaching several milestones in the second quarter, including completion of construction on 2900 on First in Seattle, approval of the next phase of the redevelopment of The Sterling in Center City, Philadelphia, 97% occupancy at Lincoln Place in Venice, California, and rent increases averaging 21% at Pacific Bay Vistas as we move past the initial lease-up.

In portfolio management, second-quarter revenue per apartment home was $1,760, up 14% year-over-year. John and his team continue to sell our lowest-rated properties and reinvest the proceeds in properties with higher rents and better prospects. And, of course, when we make investments, we follow a pair-trade discipline explicitly comparing what we buy to what we sell. We invest only where portfolio quality is enhanced and the projected free cash flow return internal rate of return is greater than that of the property being sold.

And on the balance sheet, it was gratifying and a well-deserved compliment to Ernie, Patti and the entire finance team when Fitch upgraded its rating of Aimco to investment grade. For these good results, I offer a sincere thanks to my Aimco teammates, both here in Denver as well as across the country. It's a privilege and a pleasure to work with you.

And now for a more detailed report on second quarter operations, I'd like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

Thanks, Terry. I'm pleased to report that we had a solid quarter in operations, with revenues up 4.5% year-over-year and 1.2% sequentially, an acceleration from our results in the second quarter of 2014.

Expenses were down 10 basis points year over year with NOI at 6.7% for the quarter, both an improvement over prior year's results. Our residents continue to increase our marks in customer satisfaction. They give us better than a four-star rating for the quarter and we continue to see improvement year-over-year. As a result, renewal rents increased 5.1% for the quarter.

We saw particular strength in Miami, the Bay Area and Boston. Renewal rents in these markets increased 6% to 7% compared to the expiring lease rates. Where those leases expired and were not renewed, our new lease pricing markedly accelerated throughout the quarter, from 4.5% in April to 6.1% in May to June's increase of 6.4%. This resulted in a quarterly increase in new lease rates of 5.7%, 100 basis points better than last year.

New lease rates were particularly strong in Denver and San Diego with increases between 9% and 11%. The Bay Area had the single greatest result in new lease premiums at 20%. As a result of our team's hard work across the country, we achieved blended lease rate increases of 5.4% for the quarter, 50 basis points better than Q2 of 2014, all while increasing average daily occupancy for the quarter by 10 basis points year over year and 50 basis points, sequentially.

Turnover for the quarter was 50.6%. Of the customers who decided to move out, 25% were for career moves, 17% did not renew due to price, and 16% moved out to purchase homes. There are no significant changes in these moveout reasons versus recent quarters or our long-term averages.

Our resident quality continues to improve. The average incomes of those new customers who moved in during the second quarter was $148,000, with a median income of $90,000. Year-over-year the median income of our new residents was up 20% compared to the second quarter of 2014 due to an increase in household incomes and portfolio quality.

Looking at our 10 largest markets which make up more than three quarters of our revenue, the top performers had revenue increases from nearly 6% to almost 11% for the quarter. This was led by the Bay Area followed by Denver, Los Angeles and Miami. Our steady performance for the quarter with midrange growth of more than 4% to better than 5%, were San Diego, Boston, Chicago, and Orange County. And rounding out our 10 largest markets, we had Philadelphia and Washington, DC, which were up 1.8% and 1.2%, respectively.

Building upon our solid second-quarter results, the momentum continued in July. Blended lease rates were up 6.1%, 50 basis points ahead of July of 2014. New leases were up 6.5% and renewals were up 5.7%. July's average daily occupancy was on plan at 95.5%, and August and September renewal offers went out with 5% to 8% increases.

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

Thank you, Keith. Good morning all. During the second quarter we invested a total of $158 million in our portfolio, through redevelopment, development and two acquisitions. We invested in properties located in Boston, Cambridge, Seattle, Center City Philadelphia, and La Jolla, California.

We expect from these investments stabilized average revenues per apartment of more than $2,900, three times that of the properties we sold to fund the investments and with higher projected rates of growth. Breaking down these activities, we invested $45 million in redevelopment during the quarter, the majority of which was related to our projects at Parke Town Place and The Sterling, 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.

At Park Towne Place, our current project includes a significant upgrade to the amenity spaces and redevelopment of the apartment homes in one of the four towers. We commenced leasing during the quarter as the initial homes were delivered, and 40 of the 65 completed homes are now occupied at rents consistent with our underwriting. At The Sterling, 80% of the 156 completed apartment homes are occupied and rents are coming in above our underwriting. With strong results project to date, Aimco approved a plan during the second quarter to redevelop an additional 103 apartment homes at The Sterling at a cost of $14 million.

Work is also progressing as planned at our Ocean House on Prospect Community in La Jolla, California, and our first new move-ins occurred earlier this month. Rental rate achievement to date is above underwriting.

During the last 12 months, we have completed the construction and leaseup of three redevelopment communities: Pacific Bay Vistas, located in the Bay Area; Lincoln Place in Venice, California; and 2900 on First in Seattle. Pacific Bay Vistas, which was leased up in the third quarter last year, is 95% occupied today and second-generation leases are being executed at rates averaging 21% above the expiring rates.

Lincoln Place, which Terry mentioned was leased up in the second quarter, is 97% occupied today. 2900 on First, which was completed and leased up during the second quarter, is 95% occupied today. And as previously reported, we completed the construction at The Preserve at Marin at the end of the first-quarter and that community is 90% occupied today. Overall our redevelopment projects are enjoying good lease pace and achieving rents at or above expectations.

On the development front, during the quarter we invested $22 million in our One Canal Street development in Boston. Construction is proceeding well and is now over 60% complete. We expect leaseup to begin early next spring.

On acquisitions, we invested $91 million in two communities in the burgeoning technology and life sciences hub around Kendall Square in Cambridge, Massachusetts. We also committed an additional $15 million to complete the development of one of these communities.

In April we acquired, for $63 million, Axiom Apartment Homes, a newly developed 115-apartment-home community. We have had strong leasing success at this property, with 24% of the apartment homes currently occupied at rents above underwriting. Upon stabilization, we expect average revenue per apartment home to be over $3,500.

In June we acquired to 270 on Third, a 91-apartment home community currently under construction just a few blocks away from Axiom. Our total projected investment in 270 on Third is $45 million, which includes the $28 million acquisition price, a maximum of $15 million in costs to complete the development, which costs are guaranteed by the developer, and $2 million of other improvements and capitalized costs. Upon stabilization, revenues per apartment home are expected to average $2,600.

These acquisitions are a continuation of our long-standing plans to upgrade the quality and location of our Boston portfolio, which has historically been concentrated in the suburbs. Through our pair-trade discipline, we will continue to look for opportunities to do so in Boston and elsewhere. The investment activity I just described was planned and paid for within our pair-trade framework, where proceeds from the sale of lower-rated properties are reinvested through redevelopment and limited development and acquisition activities in properties with higher rents and operating margins and better growth prospects.

Consistent with this methodology, during the second quarter we sold our last conventional property in the state of Michigan with average revenues per apartment home of $876, and one affordable property in suburban Chicago with average revenues per apartment home of $956.

Looking ahead, as you'll see in our earnings release, we have increased our guidance for property sales to $425 million at the midpoint, which reflects additional asset sales to fund the acquisitions I just mentioned. We now expect to generate net proceeds to Aimco of $215 million to $225 million this year.

You'll also see in our earnings release we have provided guidance for acquisitions of $129 million, which reflects our year-to-date activity. Having said that, we continue to look for opportunities to upgrade our portfolio through selective pair trades, and if we find the right investments, we will adjust our guidance accordingly.

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

Thanks, John. Starting with second quarter 2015 results, AFFO of $0.46 per share was at the high end of our guidance range. And FFO of $0.56 per share exceeded the high end of our guidance range by $0.01. Within these results, we exceeded the high end of same-store guidance with revenues 4.5% higher than second quarter 2014, and expenses 10 basis points lower, leading to NOI growth of 6.7%.

This outperformance added $0.01 to second quarter bottom line with year-over-year NOI growth improved over 2014 by 80 basis points and revenue growth accelerated 40 basis points, and sequential revenue growth accelerated over 2014 by 10 basis points. Nonrecurring income also added $0.01 to the quarter's outperformance.

At the AFFO line, these items were slightly offset by higher capital replacement spending during the quarter as we had the opportunity to accelerate some second-half projects ahead of leasing season. On the balance sheet, as we announced previously, Fitch upgraded Aimco to investment grade in June. Notwithstanding the achievement of investment grade by S&P earlier this year and now Fitch, we remain committed to continuing to improve our balance sheet by reducing leverage further and increasing the size of our unencumbered pool.

Today our unencumbered pool includes 23 communities valued at $1.5 billion. While an investment grade rating allows for future consideration of the use of corporate debt, Aimco does not anticipate doing so. Property debt markets continue to be deep and liquid. Life companies and banks are aggressively pursuing opportunities to put capital to work in the multifamily space, particularly for high-quality assets and are more competitive than the GSEs. As an example, when we refinanced a $170 million loan for our Palazzo property in West Los Angeles during the quarter, we received 15 bids and ultimately closed the ten-year loan with a life company at a rate of 3.5%.

As we look ahead to the balance of the year,, in operations we have increased our full-year same-store revenue growth projection to reflect our results to date and the strength we see for the balance of the year. We now anticipate same-store revenue growth between 4.25% and 4.75%.

On the expense side, we are reducing our expense growth projections to a range of 2% to 2.5%. With these expectations, we now project full-year NOI growth of 5% to 6%. For the third quarter, we are projecting NOI to increase 4.5% to 5.5% compared to the third quarter of last year, and to decrease 25 to 125 basis points compared to this most recently completed quarter.

As to earnings we have established third-quarter pro forma FFO guidance of $0.54 to $0.58 per share and AFFO guidance of $0.43 to $0.47 per share. We have increased both full-year pro forma FFO and AFFO guidance. The increase takes into account both our second quarter outperformance and expectations for improved operating results for the remainder of the year, offset somewhat by the impact of increased dispositions to fund completed and committed investment activities. Details and updates of all of our guidance metrics can be found on page 5 of our earnings release.

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

(Operator Instructions)

Nick Yullico UBS.

If I look at your same-store guidance, specifically on the same-store revenue guidance for the year, it basically implies that you're going to do about the same in the back half of the year as you've done year to date, about 4.5%. You talked a bit about things accelerating, yet it doesn't seem like that points to accelerating. Are you guys just being a bit conservative here as you're looking out at the back half of the year?

Nick, we give a guidance range. So certainly you can see from that range there is a possibility that there will be some further modest acceleration. But of course that (inaudible) also show there's now opportunity for a little deceleration. We've increased guidance now twice this year from when we started. We're hopeful that we will be able to have a similar discussion with you and everyone else next quarter.

But as we see things right now, we think it puts us in a pretty good shape to continue to have good revenue growth that's better than we saw last year and if things keep trending like we saw in July, which was better than July last year, and June, which was better than the June last year, that certainly would give us an opportunity to do slightly better and aim toward the higher end of our guidance range.

Okay. Got it. And then on Lincoln Place, now that you have basically stabilized that asset, can you tell us what the yield you've now achieved on that? I think a year ago you were saying you expected about a 5.25% yield. Maybe if you could talk about it today and how much you have seen rents grow in that submarket in the last year?

Yes, couple things I'll mention there. Importantly, Nick, on Lincoln Place, occupancy has stabilized at this point but revenue has not. We just finished construction here in the first quarter of this year and finished the leaseup in the second quarter of this year.

And as we're doing the math of leaseup, we certainly expect, and it has been our experience with other redevelopments, that we have some great rent bumps as we go to second-, third-, and fourth- generation leases. So I just want to make that clear that from an occupancy standpoint, we are stabilized but certainly not from a revenue standpoint.

With that in mind, Nick, based on today's rents, not trended rents into the future but based on today's rents -- so there's going to be more upside likely than I'm about to tell you, right now we project Lincoln Place at about at about a 5.5%, mid-5%s, stabilized yield. Of course, as we get these greater increases and as we get the stabilization from a revenue standpoint and we get market growth over the next period of time, it will be even better still likely.

In terms of what's happening in the marketplace today, it is a strong market. I'll ask Keith just to comment specifically about what he's seeing in the market, specifically in Venice.

Hello, Nick, it is Keith. One of the things that we are excited about is that as we stabilize the -- or went through the leaseup completion is that we were ahead of our plan. And it happened sooner than we anticipated, which I think is a strong reflection on what's happening in Venice in that particular submarket.

There's a lot of technology that's in that area that Google has been moving in a lot of employees, and Snapchat and others, that are helping us see great acceleration, not just on the occupancy front but also we have confidence on the rate front.

And I think that's now -- just one other question on Lincoln Place, I think that's your largest asset. Is that a candidate eventually for maybe a JV, just to demonstrate the market, the type of pricing you could get on that type of -- strong pricing on that asset?

Nick, it is Terry. It certainly would be a wonderful candidate for a JV. There's a lot of institutional interest in investing with Aimco or in an asset of that quality. We would have to consider various elements of friction including the impact on prop 13 property taxes and whether or not we want to sell such an important core asset.

All right. Thanks.

Thanks, Nick.

Nick Joseph, Citigroup.

Thanks. For the recent acquisitions in leaseup and construction, how do you weigh the risks of these deals versus acquiring stabilized assets.

Nick, this is John. We weigh them against -- we look at leaseup risk together with development risk where we have a little bit of development risk that is guaranteed by the developer on the 270 on Third deal. But we are paying for that over the life of the project.

We really factor that into IRR calculations. So it factors in through leaseup timing and rate and expected rate growth. Our typical underwrite that we use on everything is a forward look using the market growth rates. And we look for a return on an asset like that that would be somewhere in the 50 basis point -- 50 to 75 basis points ahead on a completed asset, ahead of what we would want for one that was stabilized and already done.

Okay. Thanks. Then you've done a good job of improving the portfolio and the free cash flow margins.

And then this quarter you mentioned selling the asset. It was at an [8.3%] NOI cap rate. What percentage of the current conventional portfolio do you think would still trade at above a 7% NOI cap rate today?

Very little. I don't have an exact percentage that I would give you. I would tell you that from an asset standpoint we're down to a handful where our rents that are right around $1,000 a door. I think there are five of them in the portfolio that are just below $1,000.

Generally that rent level is somewhat indicative of the market that the property is in and the cap rate at which it would trade. I don't think you'll see another 8% handle. This was Michigan and it was suburban Grand Rapids. And so I would tell you five or six assets that are -- I'm not even going to pick a 7% handle, because I think a lot of them could sell with a 6% handle, so --

And would those five or six assets be the disposition candidates over the next, call it, 18 months?

They are in our pool. Yes. They are certainly in our pool and there are others that -- with higher rents that are in the pool as well. Ultimately what it comes down to for that disposition driver, part of it is the funding of our development and redevelopment activities as we look into 2016. And part of it is our paired trades and what we see on the paired- trade side.

We continue to look and bid transactions but they've got to make sense as a trade for what we already own. We are fully invested in real estate today and want to continue to be fully invested. If we see a chance to invest in better real estate at better returns, we will make the trade.

Thanks.

Rob Stevenson, Janney.

Good afternoon, guys. Keith, your DC market benefited by about 110 basis points sequential occupancy gain. Can you talk about what you've seen there month over month over the last two or three months? Any real signs of traction still sort of bumping along the bottom? How would you characterize that today?

Rob, thanks for the question. We are definitely in recovery mode. We're feeling better than we have in quite some time. I'll give you a little color on the different markets. Suburban Maryland and suburban Virginia where we are at, we're seeing more strength in suburban Maryland and suburban Virginia, specifically in the Alexandria market.

There's still some inventory to work our way through, but I just -- as a reference point as we think about new lease rates, in April we were hovering a little bit below flat and we've accelerated every month from May at [27] of 2007 all the way to July at [39], as an example. So we are seeing some strength that is starting to happen there. We don't want to get ahead of ourselves, because there is still more work to be done, but we're feeling better.

Okay. And then you guys go through in the earnings release and you have, for a number of quarters now, and sort of talk about what constitutes an A, a B and a C-plus in your portfolio. What's the rough breakdown today in those three buckets of the conventional portfolio?

Sure. Rob, this is John. On the A side, it is right around 45% or 46%. B's are 34% to 35% and C-plus are the remainder.

Thanks, guys.

Dan Oppenheim, Salmon Associates.

Thanks very much. I was wondering if you could talk a little bit about the expenses and expectations for the third quarter? I think as you talked about the guidance for the third quarter NOI growth, certainly seemed strong on the revenue side. Should we expect to see some of the revenues, some of the expenses, come back to a more normal level rather than the slight decline that we saw in the second quarter?

Dan, this is Ernie. What you will see on expenses, it will get -- probably be, in the third quarter, slightly higher than we are running year to date. We have a tougher comp in the fourth quarter and so -- we have a tougher comp in the second half overall.

Expectations are for a higher expense growth in the second half. Most of that's fourth quarter. I think third quarter you'll see a number in the [2-ish] range and you'll see a number higher than that in the fourth quarter as it will be a more difficult comp comparing fourth quarter to fourth quarter year-over-year.

Okay. 10% of the products in Philadelphia, if we (inaudible) on JFK at The Sterling there, in terms of the -- what sort of yield are you thinking about there? Clearly as you're including more units, I would suggest that you are doing better than expected? What type of yield do you think you end up getting on that?

That is one of our -- that project is one of our better projects to date in terms of what we're achieving, not only just what are underwriting expectations, but we are beating underwriting in terms of yield. That one is going to be north of a 6% for us likely, at least what we've seen to date.

And that's one of the main reasons we're confident to put another 103 apartment homes into the pipeline on that one. And if that continues to go well, we have the opportunity to do another eight to 10 floors or so that are remaining and will be an important part of our 2016 contribution to redevelopment.

Great. Thanks.

Rich Anderson at Mizuho Securities.

Thank you and good morning -- or afternoon. I understand the pair-trade concept; it's very clear the way you present it. And I also understand Aimco, probably the portfolio offers more in the way of redevelopment than the public REITs.

But I guess the question is, other people are -- other REITs are expressing a fair amount of concern and hesitation about investing in this market as it gets more and more expensive, both land costs and actual properties. So could you ever see a time when your sales will significantly outpace a commensurate level of acquisitions or redevelopment activity as this sort of environment unfolds?

Rich, this is Terry. First of all, I agree with your analysis. I think many markets assets are fully priced. And this would not be a time when we would be inclined to, quote, buy the market.

In John's work, he is focused more on anomalies, if you will, rather than on buying a particular market -- a particular asset at market pricing. So he looks for circumstances where we think there is something that is missed or where we can add some particular value. Without that, we're not likely to buy assets from others.

In terms of whether or not we would continue to sell and hold the proceeds in cash or use them for further delevering, those are possibilities we consider. Generally our predisposition is to stay fully invested in real estate. That's what we are hired to do and not to be asynchronous, if you will, in selling today with the prospect of investing in a future tomorrow whose circumstances we don't know.

Okay. Great. And then a second question. You made a comment on the market for new supply as it relates to your portfolio. I think many of the REITs also are being hesitant about in some cases starting new development activity.

But I think the United States leads the world in people that are both rich and stupid. So there will be plenty of new supply will come online even in that environment. We're seeing that to some degree. So I'm curious what you think about new supply in your markets and how it might impact Aimco differently than others potentially?

Rich, I'll start and then hand the ball to John, who --

By the way, apologies for all the stupid people listening on the call.

I think you're right to focus on new supply. We're in a time of wonderful rent growth. Wonderful demand growth. Everything we see suggests that it will continue. But we know that the answer over time will be new supply. But it doesn't happen everywhere at the same degree at the same time.

So we track that by submarkets very specifically. We look carefully at what our exposures are. At our Board meeting earlier this week we made a specific submarket-by-submarket report because we want to know that -- what lies ahead. And I would say that the first answer to that is to be highly diversified and not to have all of our eggs in one basket. And of course that has been a cornerstone principle for Aimco.

And second of all is to look for particular locations and geographies such as our property in Marin County, such as our properties in La Jolla, where a new supply will be more reduced. So, John, what would you add to that?

I would just say, Rich, I think both of your questions are really on point to things that we think about a lot. On the supply side of it, as Terry mentioned, we did do a report for our board. We track it down to the submarket level to look at it and look at deliveries over the next two years.

So in this recent report, I don't have it in front of me so my numbers may not be exact, but I'll give you pretty close. In the top 40 submarkets where supply is going to be the highest in relation to existing supply over the next two years, we have something like 3% of our assets invested. It's a very small number.

And when we flip it the other way and look at our top 40 submarkets where we are invested, the supply picture is pretty good there as well. In fact, one of your peers put a report out a month or two ago that we are the least exposed to new supply by his analysis. And we look at it -- and we don't analyze our peers to look at their exposure to supply, but we feel very comfortable with where we sit.

Thank you very much.

Thanks, Rich.

Austin Wurschmidt at KeyBanc.

Thanks for taking the question. Just given the acceleration you guys have seen across the portfolio in new lease rates, have you considered increasing turnover to capture that higher rent growth?

Austin, this is Keith. I will take that question. That can happen from time to time and I'll give you an example of that. When you think about the Bay Area, as an example, where you see rents that are moving on the new lease side at 20%. Those contemplations come into consideration.

With the way we look at it is we take a lot of considerations, everything from turn cost to vacancy, what time of the year, all those different thing that are going on. And this is where our revenue management professionals that work here really lead and guide our way to make those decisions.

Thanks. And just separately, you guys considering any additional ground-up development today? And if you could just rank some of the redevelopment opportunities that you have throughout the portfolio.

This is John. I will take the development question and then hand off to Patty for redevelopment. No is the quick and easy answer. We do look at opportunities to partner with local development partners an new projects.

But they have to pass our underwriting criteria, and on a new build it would be literally from ground up, as opposed to the two that we acquired during the quarter that -- one completed and one under construction. If we were to go to a, if you will, a virgin site, with starting new, our return hurdles would be higher than what we talked about earlier. Right now, we haven't seen any of those that are compelling enough to pull the trigger on.

Patti on redevelopment.

On the redevelopment side, let's look at the US, starting on the left. We have five projects in California that we're looking at redevelopment on. Starting in the Bay Area, we have 707 Leahy, which is a 110-unit garden-style apartment. We're looking at interior and exterior renovations there.

Heading down to LA we have got Palazzo West, Palazzo East and Villas. West is a continuing phase redub there, where we're looking at finishing the remaining 38 penthouse units. And completing floors one through three, which is another 406 units. These will be an expansion of (inaudible) fitness and the spa villas, as a full [can B] with amenities and working on the grounds.

Heading down the Coast to Costa Mesa, 3400 Avenue of the Arts will be another phase, and it's actually finishing a phased construction that started several years ago where we've got 240 units that we're going to complete there.

Heading to the Midwest, Yorktown in Lombard, we're evaluating a phased project development that was built in -- the original project was built in 1972. Had a partial renovation that was done in 2005 and 2007 and this will just be an expansion.

Down to Florida, we have a Yacht Club, which is located on the water in Brickell. It's unobstructed views. We have got a lot of untapped potential at that property so we're evaluating several options.

I guess what would be the top three opportunities out of the ones you listed and the anticipated capital cost and returns on those?

Austin, it's a little bit early for us to provide any guidance that is that specific. I tell you, the top opportunities for us on redevelopment going forward are the continuation of the phased redevelopments that we're doing a5 Park Towne Place and Sterling. So you can certainly anticipate the likelihood of continued spend there.

Of course, we need to finish out One Canal in Boston, where a lot of that work will be done here by the end of 2015, but they'll still be some spend to go in 2016. Beyond that, as we are further along in the planning on those and as we get closer to the start of 2016, we will provide very specific guidance as to what projects may come, what time of year they may come and what the spend will likely be on those, but we don't want to get ahead of ourselves on those.

Okay. Thanks for the time.

Thanks.

Drew Robbin, Robert W. Baird.

Thanks for taking my question. As you look for more acquisition opportunities, and should more come up beyond what you are currently guiding to, should we automatically assume that they will be matched with additional dispositions? Just concerned -- I'm not concerned, but with these deals there seems to be a bit of a yield spread between what you'd be buying and selling and it could come with a degree of FFO dilutions. How do you gauge the growth versus portfolio improvement and the balance there?

Sure. This is John again. Each one of them -- each acquisition we do is paired literally against a sale that we look at multiple metrics on how we compare. The most important one to us is our free cash flow internal rate of return, we want to trade-off obviously in an IRR. And as you note, that could potentially lead to NOI dilution.

Generally speaking, however, when you are buying -- excuse me, selling like this quarter at a sub-$900 rent and buying at a north of $3,000 rent, the multiple there on a free cash flow basis for us, we use a $1,200-a-door CapEx expense number in our free cash flow model. And our free cash flow numbers are really remarkably close. The Michigan deal is a bit of an outlier with the free cash flow cap rate up in the 6%s, but most of them are going to be high 4%s, low 5%s.

And we're finding that on a stabilized basis with a -- or on an acquisition, those that we have pulled the trigger on, we feel comfortable. We can pretty well trade across on a free cash flow basis.

Thank you. That is helpful. And then secondly, I was hoping you would just walk through the expense cuts that kind of drove the decrease in same property operating expenses in the second quarter; kind of walk through the marketing, IT, insurance cost measures and whether on a non-same-store basis, whether any cost items were moved from operating expenses into G&A? The G&A was a little higher bit higher than my estimate, and I was just wondering if there were any moving parts there?

Let me answer the second part of the question first around any movements and then talk about some of the details with Keith's help on what happened in the same store. The answer to the second part of your question was no, there were no changes. What happened with G&A in the second quarter was that because we're tracking wealth to our performance metrics this year, we decided to accrue a little bit more bonus expense, to reflect the fact that we're having a better year this year, so that's why you saw G&A move up.

Now you can see from our guidance, we expect to see G&A be right on what we said at the beginning of the year. So there I don't see any concerns and there were no movements from moving things from operating expenses to G&A. Specific as in the operating expenses, you pointed out a couple of line items where we did well. On insurance we just through continued vigilance and watching things, we're continuing to have improved loss history. So our loss reserves continue to improve.

We've seen our health benefits claims actually have a couple quarters of good guys this year, where last year we had some bad guys. That led to a large decline in insurance, as well as our property renewals which occurred effective March 1, where we had a very favorable property insurance renewal which we will earn into all throughout the year.

Specific to IT, Terry has been giving me a hard time about IT costs going up for the last couple of years, so we finally have been able to turn that around a little bit and be able to see some efficiencies in cost savings through our administrative and software costs there. And so I think that will continue to be a good guy for us for the remainder of the year.

Keith, why don't you just talk a little bit about how [feesat] ties into our marketing excesses coming down.

Sure, Ernie. The marketing costs, some of the savings we saw there really were driven by resident relations credits. Those resident relations credits are generally used where we have -- something maybe didn't go exactly the way we hoped it would. And so we have had a very, very specific focus on customer satisfaction and the improvement of -- and it was in my prepared remarks.

I talked about we're seeing better than four-star ratings from our residents about their experiences and we had less of those in this past quarter than the year before.

Great. Thank you. That is helpful.

Thanks.

Connor Wagner at Greenstreet Advisors.

Hello. First question on the increase in nonrecurring income in the quarter and then for the year, that looks to be about $0.02. Is that the primary driver behind the increase in the FFO guidance?

Part of that increase in nonrecurring happened in the first quarter, Connor, so I didn't bother to update guidance for it at this point. We did get another $0.01 of it here in the second quarter. So as you look at our increase -- so when we increased our guidance $0.02 last quarter, $0.01 of that was nonrecurring. I just didn't update guidance at that point.

The accumulation of those two items, though, is now $0.02. So when we updated our guidance, we had $0.01 good guy in the second quarter from operations; $0.01 from that nonrecurring item you mentioned; and then $0.01 also came from a hodgepodge of other items.

The reason we only increased FFO $0.02 and not for those $0.03 is that, because of our investing activity for the rest of the year. We're going to be selling a few more assets than we had originally given guidance to. John mentioned that we're going to be acquiring 270 on Third, which is being built currently and will be finished here in the fourth quarter of 2015. But we're expecting no income contribution from that community in 2015, but we're selling communities that are generating income to fund that acquisition.

And so that's the $0.01 backwards that we move on FFO.

Great. Thank you. And then you mentioned earlier, Ernie, a bit of a pull-forward in capital replacements before the busy summer leasing season. Do you have any -- can you quantify any impact that that's had either on new lease growth or revenue growth thus far into the second quarter as you go into the third quarter?

Very little, Connor, because our capital replacement spending, we make an assumption around that because it goes through AFFO that we get very little, if any, revenue enhancement from that. It's always good to give a better looking committee than not.

You can see in our guidance that we did also increase our expectation for property upgrades from $45 million to $55 million. Those items, Connor, we would expect to have some kind of NOI upside to. Sometimes it is on the revenue side; quite often it is also on the expense side. It's not just a revenue increase that we get from our capital enhancement projects.

A good example would be our wood flooring. Our wood flooring program helps us on revenue in terms of rent premiums, but more importantly it helps us save on capital dollars, because the wood flooring lasts for 15 years versus carpet, which typically only goes for about two to three. We also save some expenses from that, because it's a lot cheaper to mop a floor than to do a professional carpet cleaning.

So we see those opportunities to enhance our returns. We certainly look for those and we have had some success there in getting those projects accelerated too. So those are the two different buckets in how those can impact.

So does that additional $10 million that you're now guiding to, can you quantify the impact that is going to have this year?

Sure. I'll give you the impact overall,. [Rough/rough], we spend about $50 million a year on those capital enhancements. And based on -- and not all of that is in same-store. Some of that is in non-same-store communities. But [rof rot] that will increase our NOI contribution by about 80 or 90 basis points.

Right now at the midpoint of our guidance, we expect NOI growth to be about 5.5%, between 5% and 6%, and maybe 80 to 90 basis points of that is from our revenue (inaudible) CapEx, which I know is pretty consistent with what others report who are also doing this type of activity in their portfolios.

Great. Thank you very much.

(Operator Instructions)

Wes Golladay from RBC Capital Markets.

Are you seeing much disparity between your A, B and C assets when it comes to rental growth?

Hello, Wes, this is Keith. I will take it. We really like to use new lease price as the best barometer. And if we look over the past several quarters, A's and B's have almost been on top of each other.

With that being said, this past quarter we saw B's take a little bit of an acceleration. They were about 200 basis points better than our A's. And we always keep a close eye on it to see how it progresses.

Then you guys have a lot of redevelopment activity coming up. How do you balance using secure debt versus the flexibility of the unsecured market?

I'm not sure, Wes, I'd tie that necessarily to our redevelopment activity or not our redevelopment activity. I think what is probably most important when you are thinking about doing investing activity is trying to minimize unfunded commitments.

That's one thing that Aimco has done a very nice job under Terry's and Patty's guidance for so many years, where we don't want to get ahead of ourselves regardless of how we would finance things and have too many unfunded commitments ahead of ourselves. So a good example is One Canal where 60% of those costs were going to be funded by a commitment from a property lender.

We have similar -- we do our redevelopment projects in phases. So it allows us to have flexibility that if there was a liquidity event or some kinds of concerns around the capital markets, we could just stop and not committing to an entire project. We wouldn't have any kind of penalties for canceling construction contracts or things like that. Specific to whether we want to be an unsecured borrower or using property debt or using corporate debt, it goes back to managing risk.

And do you want to put the entire entity at stake when you are using corporate debt or do you want to manage it on an asset-by-asset basis? And so we've certainly made a decision. We have the flexibility now to consider other things, now that we have the two investment grades. We have made the decision and been consistent with the decision of sticking to using property debt and managing our risks that way.

And what we've seen is, as I mentioned in our call script, we're seeing costs as good or slightly favorable using the property debt versus using the unsecured. So it hasn't precluded us from having the ability to do what we want to do from (inaudible) perspective, from an investment perspective. We are able to continue to have one of the longest weighted average of maturities in the space, laddering our maturities, having probably the most fixed rate and it's a lease repricing risk exposure. And it's worked well for us. And what we want to do ultimately is continue to bring leverage down a little bit more. But continue to stick to the game plan.

Okay. I'm more concerned about you having to get approval from the lenders and having any restrictions on that, but that doesn't sound like it's an issue for you guys.

No. We work with our lending partners who are real estate experts too, and they are often quite excited about us going in. We certainly want to consult them if there's a redevelopment project that we have in place and there's financing in place there.

As you know, our unencumbered pools are larger now, but that hasn't precluded us from doing, I want to say, close to 100 redevelopment projects over the last eight or nine years and doing the ones that we want to do. So that is certainly a discussion we have with our lenders. They're our partners, but they like the fact that they're going to get better collateral at the end of the day. So it works out well.

Okay. Thanks a lot.

Seeing no further questions, this concludes today's question-and-answer session. I would like to turn the conference back over to Mr. Considine for closing remarks.

Thank you, operator, and thank you all on the call for your interest in Aimco. If you have further questions, please call Elizabeth Olson, Ernie Freedman or me and we will do our best to answer them. Have a good day.

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