Apartment Investment and Management Co (AIV) 2015 Q3 法說會逐字稿

Good afternoon and welcome to the Aimco third-quarter 2015 earnings release and 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 and 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 Paul Beldin, 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, and good morning to all of you. Thank you for your interest in Aimco. And special thanks to those of you who joined us a few weeks ago at our Investor Day in Philadelphia. As we reported then, the apartment business is quite good.

Our third-quarter results confirm that we are on track in our execution of the long-term and explicit strategies that we've discussed before and that we reviewed in detail while together in Philadelphia. Before my colleagues report on the particulars of the third quarter, I'd like to point out a few highlights.

In Property Operations, rent growth during the third-quarter leasing season continued to be strong and in fact accelerated over the prior year, setting us up for a strong close to 2015 and an excellent foundation for next year. Keith and his team continue to keep a close eye on operating expenses, which were up by less than 2% year over year.

In Redevelopment, as we discussed in detail at our Investor Day, ongoing redevelopments are on time, on budget, and expected to create value equal to $0.32 for every $1 invested. Patty and her team achieved several milestones in third quarter.

Here are three. Our redevelopment at Preserve at Marin in Corte Madera, California, reached 97% occupancy. Our redevelopment at Pacific Bay Vistas in San Bruno, California, enjoyed another quarter of 20% plus rent increases. And third, based on success at Park Towne Place in Center City, Philadelphia, in the redevelopment of the South Tower, we have now begun the redevelopment of the East Tower.

Next, in Portfolio Management, third-quarter revenue per apartment home was more than $1,800 a month, up 10% year over year. The rate of increase reflects market rent growth but owes even more to our long-term discipline of making paired trades, where we sell lower-rated properties to fund the purchase or redevelopment of properties with better locations, higher rents, greater expected rent growth, and higher projected free cash flow internal rates of return.

I'd like to take a minute to discuss our commitment to buy a Northern California property that was reported in our third-quarter release. I acknowledge that the seller's requirement of confidentiality makes it difficult for you to review. What I can say is that this acquisition is exactly consistent with our longstanding paired trade discipline.

The Bay Area is a market where we have long said that we are under allocated and looking for opportunities for further investment. The property we've agreed to buy is well located and of a high quality. We expect it to be attractive to the high-income consumer that we have explicitly targeted and that its market rents will be more than $3,800 a month.

While we do not consider the price a distressed price, we do believe that it is an attractive price. Due to our willingness to make a commitment prior to completion, just as we did at Vivo in Cambridge, and to accept lease-up risk, we project a free cash flow internal rate of return of 7.91%, which we think incorporates an appropriate risk premium, considering that we have no entitlement risk and no construction risk.

Our underwriting was consistent with our explicit discipline using the average of market forecasters' long-term rent growth and conservative operating expenses. We project an NOI yield at stabilization of 4.88%, assuming average rent growth after closing of 3.6% for the remainder of our 10-year model. We think that stabilized assets of this quality priced today at NOI cap rates well below 4% and this creates value creation of $100 million at stabilization unlevered.

In particular, our investment decision is neutral about the apartment market in general, because we're buying and selling at the same time, using exactly the same methodology. Of course, the paired trade will be leverage neutral. The equity component will be funded by sale of two properties, one that is 42 years old and one that is 17 years old, located in slower growing markets, with average revenue under $1,500 a month and expected free cash flow internal rates of return of 6.6%, if we were to hold them for the same 10-year period.

We are confident that shareholders will prefer our acquisition property to our disposition properties, because the paired trade improves our real estate quality, our portfolio allocation in the Bay Area, our free cash flow, and our growth rate.

Let me also address three other specific questions that I've been asked this morning. First, this acquisition has been moving through our underwriting and documentation process since early last summer. Second, our view of the Northern California market is that it is volatile, a point that we explicitly made at our Investor Day. We also believe that it will slow, some time from its recent remarkable growth rate.

That said, the Northern California economy is perhaps the most dynamic in the world and rent growth there continues to be the best in the country. While we are by no means making a call on Northern California rent growth, we underwrote the proposed acquisition assuming rent growth no better than the long-term compounded annual growth rate of 3.6%, which is a markedly lower number than recent rates of growth. Third, the disposition properties have been in the market and are in various stages of documentation and closing.

Next, on the balance sheet, we continue to prioritize safety, liquidity and flexibility. We expect leverage will continue to decline and project our coverage ratios will improve even further as redevelopment and acquisition properties are leased up.

Most importantly, the Aimco team is cohesive and focused on the collaborative execution of our plans that emphasize customer satisfaction, cost control, and value creation through redevelopment. For these good results, I offer 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 third-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 4.3% year over year. Expenses were up 1.9% year over year, with NOI up 5.4% for the quarter, all an improvement over third quarter 2014.

Our residents continue to increase our marks in customer satisfaction. They gave 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 6% for the quarter, some 40 basis points higher than third quarter 2014. These results were progressively better in each subsequent month of the quarter.

We saw particular strength in the Bay Area, Denver and Atlanta. Renewal rents in these markets increased 7% to 11% compared to the expiring leases. Where those leases expired and were not renewed, our new lease pricing accelerated during the final months of leasing season, peaking at 7.7% in August. Each individual month in the quarter outperformed the same month from 2014. This resulted in a quarterly increase in new lease rates of 6.6%, 20 basis points better than prior year.

New lease rates were particularly strong in Denver, Seattle, Austin and Los Angeles, with increases between 11% and 15%. As good as those numbers are, the Bay Area had the single greatest result in new lease premiums, at 19%. As a result of our team's hard work across the country, we achieved blended lease rate increases of 6.3% for the quarter, 30 basis points better than Q3 2014.

Turnover for the quarter was 46.7%, up 100 basis points versus prior year. Of the customers who decided to move out, 22% were for career moves, 21% did not renew due to price, and 14% moved out to purchase homes. There are no significant changes in these move-out 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 third quarter was $142,000, with a median income of $95,000. Year over year, the median income of our new residents was up 12% compared to the third quarter of 2014, due to an increase in household incomes and portfolio quality.

As mapped out at Aimco's Investor Day, our 12 target markets, which represent 90% of same-store NOI, had top-line revenue growth up 4.5% in Q3. The top performers had revenue increases from nearly 6% to 10% for the quarter. This was lead by the Bay Area, followed by Seattle, Denver, New York and San Diego. Our steady performers, which had revenue growth of 3.5% to better than 5%, were Boston, Greater Los Angeles, Atlanta and Miami. And finally, with revenue growth of almost 2% to nearly 3%, we round out our target markets with Chicago, Philadelphia and Washington, DC.

As we start the fourth quarter, the acceleration continues on trend, with October results better than last year. Blended lease rates are up 4.6%, 90 basis points ahead of October 2014, with new leases up 3.6% and renewals up 5.7%. October's average daily occupancy was 95.4%, and November and December renewal offers went out with 5% to 7% increases.

And 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 third quarter, we invested a total of $70 million in our portfolio through redevelopment and development activities. We invested in properties located in Boston, Cambridge, Center City, Philadelphia, and La Jolla, California. We expect from these investments stabilized average revenues per apartment home of more than $3,000, continuing the substantial improvement in our portfolio.

Breaking down these activities, we invested $30 million in redevelopment during the quarter, most of it at Park Towne Place and at Sterling, both located in Center City, Philadelphia. Many of you had the opportunity to see these communities during our Investor Day last month. As we discussed then, 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 are having good success at both communities, with absorption on pace with our plan and rents above our underwriting.

Through October, we've completed 180 of the apartment homes in the South Tower of Park Towne Place and 83% were leased. Rents on the leased apartments are ahead of our underwriting. Costs and construction deliveries are on plan and we expect to complete redevelopment of the South Tower and the amenities in the first quarter of 2016.

With these positive results to date, Aimco approved a plan during the third quarter to redevelop the East Tower at Park Towne Place for an additional net investment of $37 million. During construction, we plan to combine some apartment homes in this building so that the tower, at completion, will include 245 apartment homes. In order to facilitate the extensive construction activity, we began deleasing the East Tower last month.

At the end of October, 91% of the 216 completed apartment homes at the Sterling were leased, again at rents on those leased apartments above underwriting. In October, we completed construction on time and on budget at our Ocean House on Prospect community in La Jolla, California. 41 of the 53 apartment homes at this community are leased, part leased, with rental rate achievement above underwriting. Overall, our redevelopments are enjoying good lease base and achieving rents at or above expectations.

During the quarter, we also invested $40 million in two developments, one in Cambridge and one in Boston. At our Cambridge community, Vivo, which we acquired with construction in progress last quarter, construction of the apartment homes is now complete and we started the lease up in October. Early activity has been promising.

At our One Canal development in Boston, construction is proceeding well. We have commenced our pre-leasing activities there and look forward to first occupancy early next year.

As we discussed at our Investor Day, Aimco has made significant upgrades to its portfolio over the last few years through a series of paired trades. This quarter, we did not complete any sales or acquisitions, but did, as Terry mentioned, enter into a contract to acquire an under-construction community in Northern California for $320 million. We anticipate this acquisition will close upon the completion of construction next summer.

This acquisition, which will increase by a third our investment in the Bay Area, will be executed with the same paired trade discipline we've undertaken with our previous transactions. A portion of the acquisition price will be funded through a leverage neutral property loan, with the equity portion funded primarily with proceeds from the sale of a 17-year-old Phoenix asset that is scheduled to close this quarter and a 42-year-old asset in Alexandria, Virginia, where we anticipate closing in the first quarter of 2016. These properties have average revenues per unit of $1,459 and the negotiated pricing represents an average NOI cap rate of 4.95%.

While the seller has specifically precluded us from disclosing property-specific information around the acquisition, Terry has provided some of the key assumptions around our underwriting of it. We believe our underwriting reflects appropriately conservative assumptions for the future of this property and with the paired trade, provides a clear opportunity to move investment dollars from aging properties with lower long-term prospects to one with a much brighter future.

And I might add, we look forward to the day when we cannot only identify the property, but give you the opportunity to see it. We believe you will agree that it is a great trade and a positive add to our portfolio. And with that, I'd like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Thanks, John. Starting with third-quarter 2015 results, AFFO of $0.48 per share was $0.01 ahead of the high end of our guidance range, and FFO of $0.57 per share exceeded the midpoint of our guidance range by $0.01. The primary driver of FFO outperformance was stronger-than-expected conventional operating results, including same-store net operating income growth of 40 basis points above the midpoint of our guidance range. At the AFFO line, the $0.03 outperformance was driven by the $0.01 FFO outperformance and $0.02 due to timing of capital spend, which is now expected to be incurred during the fourth quarter.

On the balance sheet, we continue to focus on reducing the amount of our leverage, as well as its cost. Our target is to maintain total leverage to EBITDA at a level below 7 times. For the third quarter, leverage was 7.1 times. Leverage was elevated above target at quarter end due to the timing of planned property sales. At year's end, we expect total leverage to EBITDA to be 6.8 times.

The property debt market remains deep and liquid, with the best rates being offered by life companies, savings banks, and community banks. While we did not close any property loans during the third quarter, we did close two non-recourse fixed-rate loans related to our Mezzo community in Atlanta and our Chestnut Hall community in Philadelphia.

These loans, totaling $64 million, have 10-year terms, a weighted average interest rate of 3.73% and a 30-year amortization period. Also included is a flexible step-down prepayment penalty during the last five years at 1% and a 60-day opt out at the end of year seven, with no prepayment penalty.

In addition, we rate locked a property loan on our second-quarter acquisition in Cambridge, Axiom. This $35 million, 10-year, fixed-rate, non-recourse loan, also with a 30-year amortization period, was rate locked at 3.7%.

Finally, on the balance sheet, we are also close to finalizing the debt terms on the Northern California property acquisition. We expect the loan to price similarly to the three loans I just described as adjusted by changes in Treasury rates. Patty and her team are doing an excellent job managing our property debt activities and keeping our costs down.

For the third consecutive quarter, at the midpoint, we are raising pro forma FFO, AFFO and conventional same-store sale NOI growth guidance. We have increased the full-year pro forma FFO and AFFO guidance to take into account our third-quarter outperformance.

We have established fourth-quarter pro forma FFO guidance of $0.56 to $0.60 per share and AFFO guidance of $0.47 to $0.51 per share. For conventional same-store operations, for the year, we expect revenue growth of 4.4% to 4.6%, expense growth of 2.1% to 2.3%, resulting in full-year NOI growth of 5.4% to 5.8%. For the fourth quarter, we are projecting NOI to increase 4% to 4.5% compared to fourth quarter of last year and to increase 2.5% to 3% sequentially.

We will provide full 2016 guidance as part of our fourth-quarter earnings call, once we've completed our budget process. However, as a sneak preview, we do expect 2016 same-store revenue growth to be on par with, if not slightly better than, 2015's, which is shaping up to be a very good year. I look forward to sharing the details of our guidance with you in February.

Before we take questions, I'd like to point out a change we've made in our reporting this quarter. Specifically, we have conformed the market level disclosures in our reporting of same-store and total conventional portfolio metrics on our supplemental schedules 6 and 7 to be consistent with our presentation of the 12 target markets at our Investor Day last month. You'll find additional information on these schedules describing the changes in more detail.

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

Thank you.

(Operator Instructions)

Our first question will come from Jana Galan of Bank of America Merrill Lynch.

Thank you. This question is for Keith. I was curious if you could comment on other revenues and fees, like parking, storage, pets, in the quarter, as the same-store revenue looked a little light considering the blended lease rates you've been achieving for the past year and a half?

Sure, Jana, this is Paul. I'll start with that and then kick it over to Keith for some of the more particulars. What I would say in regards to other revenue is that it grew about 2.8% for the quarter, which was lower than our overall rental rate growth. And that was really in line with our expectations.

As far as the major components, our utility reimbursements increased slightly by only about 3%. If you look at our past history, that growth rate in prior years had been much higher, but this year it's in line with our expectations, and fee income grew about 5%. Keith, do you want to add some color on any of the particulars there?

Paul and Jana, I would just add that while there has been a little bit of a deceleration from where we were a year ago, that we still see opportunities, as we've been putting some very particular focus on parking and storage and a variety of other components within the communities that we are able to present special opportunities for our residents to have a unique living experience.

Thank you. And then maybe just on Washington, DC, your portfolio is one of the best performers among peers for the third quarter. I was just wondering if you could comment on any trends you saw in DC?

Sure, Jana, this is Keith. I'll take it. We're definitely feeling better than we have in quite some time, as we think about DC. For us, really two different markets, suburban Maryland and suburban Virginia is where we're located. Suburban Maryland has been the outperformer in the two.

As we look at suburban Virginia, particularly in Alexandria, there's still more supply to be absorbed. But as we think about it, we would say that we're seeing acceleration, we're optimistic about it. And as we look into 2016, we think that it's on par, if not better, going forward.

Thank you.

The next question will come from Nick Joseph of Citigroup.

Thanks. Did I hear correctly that both the cap rate on the Northern California deal and the expected pair trade sales are both about 4.9%?

Yes, this is John, Nick. Yes, you're correct. We anticipate a stabilized on the acquisition at about 4.88%, and on the sales we're at 4.95%.

And those are both forward NOI cap rates?

Those are NOI cap rates, correct.

Okay. And then you mentioned that Northern California has been historically volatile, so I'd like to get your thoughts on adding exposure to that region at this point in the cycle, both from an operations, as well as an asset pricing perspective, just given how strong that market's been.

Sure. I think two things. One, obviously, we have talked about the volatility of that market. And we talked about it as recently as a month ago, with everybody in Philadelphia. That said, we also look at it as a good, solid, absolute growth market, long term. And so it's one where we want to have a presence, we want to have a presence in high-quality product, we want to be in high-quality submarkets.

And so as we look at the paired trade coming out of lower-quality product and lower-quality submarkets, we feel good about the long-term investment decision. And we, in our underwriting, are looking at a 10-year model, so you get some of the benefit of, if you will, the smoothing of the volatility through that 10 years.

As Terry noted in his remarks, our underwriting does not assume that we have to have double-digit rent growth for an extended period of time, for any period of time, during that 10-year hold on that acquisition asset.

We are using the rent growth rates that are provided by REIS and AXIOMetrics, who are looking at supply, who are looking at job growth, who are looking at all of the econometric trend in that submarket and put out a prediction for what revenue growth will be there.

And in the five years, four years immediately following acquisition, when the construction is complete next year, that growth rate is in the low 3s. And so we don't feel like it's out on a limb to consider that over an extended period of time, a 5- or a 10-year window, you'd see revenue growth in that market in the 3s.

And what does that unlevered IRR assume for exit cap rate?

I don't have it right in front of me, but I believe it's a 5%. But I don't have it right in front of me right now. I apologize, Nick. I can get that to you later, if you'd like it.

Thanks. And just last question. Appreciate the 2016 same-store revenue growth comments. What's the loss to lease with the portfolio today?

Nick, this is Paul. Our loss to lease currently is a bit below 8%, about in the 7.5% range. And one comment to clarify that, as we look at loss to lease, we measure that with our in-book bases of business at that particular point in time compared to market rates. So there is volatility to that, depending upon where you are within the leasing season.

Thanks.

Next we have a question from Nick Yulico of UBS.

Thanks. For the Northern California acquisition, the Bay Area one you talked about, was hoping to get maybe a feel for how many units there are in the project and maybe a little bit more about where it is within the Bay Area? I'm assuming it's probably not in San Francisco itself?

Yes, Nick, I will tell you definitively it is not in the City of San Francisco. Unfortunately, unit count and some of the other specific identifying factors, the seller has asked us very specifically not to disclose those. They have other projects in the area, other things going on that between contractor relationships, city relationships and other things, they've asked us to be sensitive to their request that we not provide identifying indicators on the property. I'd love to be able to tell you what it is, but we can't.

Okay. And then, Terry, just going back to this acquisition and how you and the Board are thinking about the Company, this is the largest acquisition you guys have done, it looks like, since you bought Casden back in 2002, which is an entire portfolio. This is a single asset you're buying. It's about 3% to 4% of your enterprise value.

I get that you're switching out the old and buying new, yet the earnings impact here seems pretty minimal, maybe it's even dilutive in the near term to your FFO and we can debate AFFO. But I'm struggling why this makes sense, this trade. Why not just sell assets and buy back your stock or pay a special dividend, and how did you guys think about that whole process?

Well, Nick, thank you for the question. First of all, we, the Board and I and the management team, have thought about that and do think about that. And I'll just tell you exactly how we do.

It's exactly what we've described, both at Investor Day and in innumerable meetings over the last several years that we are first of all focused on upgrading our portfolio to serve customers with better jobs, better incomes and better growth prospects. And we think that's what drives long-term portfolio quality.

And you can see that in the numbers that Keith reported in his remarks that today we're at median rents of almost $100,000, which is astonishing to me. And we're at average rents today of about $1,800, which again is a marked change.

So the Board and I focus first on trying to improve the quality of our customer and the quality of our real estate. With that, we have also, we think, and according to third-party forecasters, significantly improved the growth rate of revenue and also expected free cash flow internal rates of return.

And I think speaking for the Board, I think we feel that John has done a wonderful job in leading that effort and to point out it's not particularly by buying the market. That is simplistic as to what John has done. What he's done instead is to find particular circumstances, generally where the seller has some unusual need that makes it just a little bit less liquid, a little bit less efficient than would be true in a fully marketed deal.

And so in the issue at hand, it's that we're prepared to commit during construction, just as we did at Vivo in Kendall Square, and that we're prepared to underwrite the lease-up risk. In return for that, we get a little bit of break in pricing.

So the Board thinks that when all is said and done that what we'll have is, and what we have already achieved, is a very significantly improved portfolio with higher-quality customers, higher average rents, higher expected growth, higher expected free cash flow internal rates of return. I'd note that the effect of this trade is to increase our California exposure to just under 40%, which is about where we'd like it, and our Bay Area exposure to about 12%. So again, those are allocations that we've described to the market before, and I don't think there's any surprise by people thinking that that's just what we want to do.

The question about special dividends and stock buybacks, I'd like to speak to, too. First of all, it's something we've done in the past. We've paid special dividends and we've made stock buybacks, and we're familiar with both of those. And we've discussed it at length, both on the Board and also with shareholders.

We have a lot of occasion to meet with our shareholders and to ask them their opinion. And as you know, if you ask two people their opinions, you'll get three answers. So there's not unanimity. But the broad consensus of our shareholders and our Board is that we're employed to own and operate and redevelop apartment properties, and they want us to focus on that and not on trying to time the market. So that's what we've done.

Okay. Thanks for that Terry. And then just one last question. Paul, do you mind just maybe giving us a bit of a preview of how to think about your tax credit income as you're heading into next year, since I know you have some of that burning off and it can be a bit of a volatile impact on your FFO perhaps next year? Thank you.

Yes, you bet, Nick. As it relates to our tax credit income, as you pointed out, there's certainly some volatility to it. And during 2015, we've been recognizing income related to our Park Towne Place projects. And as we have looked at the second phase, when we're moving on to the next tower, we will earn some additional credits next year related to that.

The number is somewhat still in flux, but the amount will roughly probably be between $8 million and $10 million or so. And so as we start spending actual dollars on that, that is when we'll start to be able to get better definition around the exact timing and recognition pattern. But if you think about it for the full year of 2016, it will be in that range.

Thanks a lot.

The next question is from Austin Wurschmidt of KeyBanc Capital Markets.

Hello. It's Jordan Sadler here with Austin. First, I guess just following up on California, sorry to beat a dead horse here. Is there a way that you can describe the nature of the seller or the exiting capital, if you will, without giving too much away?

Sure. This is John. The seller is a developer, an active developer in multiple markets around the country. They raise development equity for their deals. Some deals they retain and hold in their own portfolio; others they flip out and sell, similar to a merchant-builder type of a situation.

This happened to be a situation where it is a group that we have done business with in the past, and they had an opportunity here where they had a capital partner that was ready to get out of the deal upon completion of construction, and we were able to strike a deal. Does that answer the question?

Yes, that's pretty good, actually. And then as it relates to the IRR that we talked about, is there, in your rent growth assumption -- because we've talked about the volatility in California and it's tremendously unpredictable and this is quite a strong upturn, you're taking possession in presumably nine months.

Once you take possession, you said there's a low 3% number over the following four years that you're assuming in terms of rent growth. Is there a meaningful downturn embedded in that?

No, but let me explain to you why. So if you look at the third-party data providers -- and again, as I said earlier, we use REIS and AXIOMetrics -- they rarely forecast a downturn, a negative growth number. They also rarely forecast double-digit growth. In fact, I don't think they ever forecast double-digit growth.

And so if you were to go back and look at the last three or four years in that submarket in the Bay Area as a whole, I don't think there was ever a year where they forecasted double-digit rent growth, particularly out two or three years in front of it. What generally happens with their revenue projections is they tail off and they revert to a mean of around 3.5% over a period of time. And that is the pattern that we see there.

So if I were to take the submarket growth rates for the submarket where this property is located, it drops into the low 3%s for the five-year period from today that they forecast out, and it's below 3.5%. The long-term growth rate, which is a 20-year growth rate of actual growth in that submarket for the last 20 years, is 3.77%. And so our average over the -- our model starts now. It started back in the summer when we underwrote and did the property.

So the first year is effectively run before we buy the property. So there's nine years left in the model, and that's where that 3.61% that we talked about earlier comes in, with an average rate through the life of that remaining nine years of the model.

Okay. That's helpful. In your experience and ours, if we look back over the last 15 years, there have been high peaks and low valleys in suburban San Francisco or the Bay Area apartments, and I was thinking downturns could probably be more severe, just as peaks have been higher.

You are absolutely right that there are high peaks and low valleys in that submarket, in the Bay Area in general. And you can look back to the dot-com bust, you can look back to 2008 and see big swings, double-digit swings. But the 20-year growth rate for that market smoothes some of that out.

And I just want to remind everybody that we are underwriting for a long-term portfolio hold, that we are looking at a long-term allocation, a long-term commitment to a good submarket with a high 3.77% 20-year growth rate, that takes into account both of those dips that we talked about, but also both of the upstrokes that we've seen in the last 15 years out there.

That's helpful. The last one I have for you is just from an accounting or earnings perspective. When this comes online, it sounds like it's a suburban property, so not high rise. But how would this should come on line economically, is it $320 million at a zero NOI effectively, or will there be some capitalization allowed? I'm just trying to figure that out.

Assume that it comes in $320 million next summer at a zero and earns in quickly. Obviously, we will do pre-leasing. We have rights under the agreement to begin pre-leasing early next year. And we would hope to have some pre-leasing done when the building is turned over to us. But it will be turned over to us in whole and some move-ins would commence after completion of construction. But it would be in the whole building.

Okay. Thank you.

The next question is from Rob Stevenson of Janney.

Good afternoon, guys. Keith, can you talk about when you're sitting here today, what markets do you feel like that they're likely to be stronger in the next 12 months than they've been over the last 12 months in terms of rental rate growth?

Rob, it's Keith. Let me walk through it. As we look around the country, I'd point to Washington as one of them. We've seen some very strong acceleration this year, a little better than we had anticipated, and we think that, that could continue.

I would look to the Bay Area as another opportunity as it's, when we talk about, in my prepared remarks, 19% on the new lease side this past quarter. It's continued to show acceleration. And I'd also point to Los Angeles as an opportunity.

Okay. And then when I look at the year-to-date expense growth is 1.4%, the guidance at the midpoint is 2.2% on the same-store side, how much pressure are you seeing into the back half of this year on real estate taxes and personnel and other major buckets of the expense load that's likely to push 2016 same-store expense up into the 3%, 3.5% range, when you think about it?

Rob, this is Paul. I'll start off by commenting on the fourth-quarter impact. You are correct in noticing that our year-to-date expense control is quite good. And our implied guidance indicates a fairly significant expense growth here in Q4. And that's really being driven by two items that were actually benefits to our expense numbers in 2014.

Last year in the fourth quarter, we had a favorable tax appeal that significantly reduced real estate taxes in the quarter, and then we also had some adjustments to our loss reserves related to our insurance activities that reduced our insurance costs on a year over year in Q4 2014. So if you were to normalize for those two factors, our expected expense growth, rather than the 4% or so that's implied in our guidance, would actually be closer to 2%, which is in line with what we've seen so far this year.

And then as it relates to 2016, as we are still in the planning process, we're working through the detailed property budgets, we're not prepared to give any sort of indicative range or percentage or anything like that at this point. But I will assure that you we will continue to do our best to control expenses and continue to lead the pack when it comes to that regard.

Rob, this is Terry. I was just going to add specifically as to taxes, you'll recall I've mentioned our allocation in California will be just under 40%. And so in that important part of our portfolio, we'll be capped at the lesser of CPI or 2%.

Okay. And then what is, in the 2015 guidance, what is the -- can you remind us what the same-store -- in the same-store guidance -- what the increase in real estate taxes and personnel costs are imputed in that 2.2% full-year guidance?

Yes, within that full-year guidance, that would imply a year-over-year real estate tax increase of in the 4% range.

Okay. And then on personnel?

Personnel, I'm sorry about that, Rob. Keith and I were comparing notes there. We don't have that in front of us. We can give you a call back to close the loop with you on that.

Okay, guys. Thanks. Appreciate it.

The next question is from Dan Oppenheim of Zelman and Associates.

Hello. This is Pete Peikidis here with Dan Oppenheim. Just had a few questions here. In terms of leasing activity, what were new leases and renewals achieved in October and what they went out for, for renewals in November and December?

Dan, it's Keith. I'll take it. New leases in October went out at 3.6%, renewals were 5.7%, for a blend of 4.6%. And I'd just point out that, that was 90 basis points better than we were a year ago. And the renewals went out at 5% to 7% for November and December.

Great. Thanks. And in terms of what you're seeing in Miami, it seems revenue was a little light there compared to the rest of the target markets. Can you just speak to what you're seeing there?

Dan, Keith again. I'll take that one. What we're seeing in Miami is there's new supply that's next to one of our buildings that's in the process of lease up and it's put a little pressure on that community. And so that's really what the difference is.

But as we look at it, where our communities are located in South Beach and the Brickell area, we think that they're the best located communities in Miami, and it's just a blip as they're getting it to work.

Okay. Great. Thanks.

The next question comes from John Kim of BMO Capital.

Thank you. Diversification has been a major part of your strategy, but where you're spending your capital is unquestionably higher in product, California-centric. Are you still married to your diversification strategy, at this point, and does it make sense to exit markets more aggressively at this point in the cycle?

What was the last part of that, John?

Does it make more sense to exit markets, like some of your competitors have done?

John, this is Terry. And I don't want to necessarily speak to our competitors, but we have an unchanged commitment to being both diversified both by price point and by geographic market. And in pursuit of that, as I mentioned earlier, we've targeted higher-income customers. And we have exited a great many markets and today are focused on 12, which you'll recall we discussed at some length at Investor Day.

And we continue to look for a balance among those 12. And we said that for a long period of time that we would like to be allocated roughly in proportion to market capitalization in each local market, but without being unduly committed to one and without being mechanical about pursuing market allocation, as opposed to being opportunistic and where we found the best opportunities.

And so just to walk through them, we have been under allocated to New York City, which for us is Manhattan. We've been under allocated to the Bay Area and we've been under allocated to Seattle. And we've called that out repeatedly, and we continue to look for opportunities to address that. I think John's work on this most recent acquisition does a lot to address our under allocation to the Bay Area. But we continue to look in Seattle, if we had an opportunity for attractive pricing, we would invest there, and again, in Manhattan.

In other markets we felt that our allocation was appropriate but that we wanted to improve the quality of the portfolio and improve the locations. And we've called out many times that, that was true in Boston, which we are addressing, both through our investment at One Canal Street and our two properties at Kendall Square, and also in Washington, DC, which is where there's work to be done.

So we are 100% committed to being broadly diversified across geographic markets and across price points. And so what I think is correct is that we have become more A-oriented and we are aggressively looking for B product, as well. And we have bought Bs in the recent past, at Eastpointe in Boulder last year and at Saybrook in San Jose last year, and we have a healthy appetite for B properties and we'd like to maintain that balance.

Sure. But I'm just looking at your market exposure and your exposure to markets like Atlanta and Chicago, and I'm wondering how many investors are buying your stock because of those exposures?

I don't know. But I don't know that an investor would make a decision on that exact point. But what I do know is that many of them who invest with Aimco know that we have a preference for diversification and that we have expressly said that we are not focused on being concentrated in one, two, three, four or five markets. Those can be winning strategies, but they also include concentration risks that we have chosen to avoid.

Okay. On your same-store revenue growth for next year, how much of that is driven by the recent developments that are hitting the same-store pool next year?

Sure, John. As we look at what's going to happen with our same-store pool, we are going to be moving in four properties into the pool that were acquired in 2014, that's the Eastpointe and Saybrook properties that Terry just mentioned, and additionally, we'll be moving in 21 Fitzsimons, which is in the Denver area, and then lastly, Tremont in Atlanta. And we also will be adding the two redevelopments that have stabilized during the period, and that's PBB and 2900 on 1st. And anything that might come out of that pool will be largely dependent upon our sales expectations.

So Lincoln Place and Preserve at Marin, they were completed the first quarter but they're not going to hit your same-store pool next year?

That's correct, John. Because those properties are still going through the process of NOI stabilization, where we don't have yet stabilized rents at those properties, we are planning on excluding those until we get a fair comparative year-over-year look at them.

Okay. And then finally, on the announced acquisition, I just wanted double check that the acquisition price is fixed and there's no ratchet feature for the seller, and also Aimco is doing the leasing for the asset?

Yes. So the acquisition price is fixed, with one caveat, that if we choose to make modifications to the building, we can make some modifications to it at our cost. And we will be doing the leasing on the building.

Great. Thank you.

Our next question is from Conor Wagner of Green Street Advisors.

Good afternoon. John, could you give me some more detail on the 4.9% stabilized NOI cap rate? What year is that in and where do the rents that are underlying that cap rate, where are they versus where rents would be on a similar product today?

I don't have the model right here in front of me, Conor, but I will walk you through it to the best of my ability, and then if we need to take it off line, I'm happy to do so. So that 4.9% is in the first stabilized years, Paul just mentioned, and we look at stabilization on properties and when they come in, we look at two things.

One of them is an occupancy stabilization, which for us is 95%. But then it also got a rent or an NOI stabilization, which is really the earn-in of what we think is a stabilized rent. And so for us, in this model, that is four years from when we underwrote back in the summer of this year, so it would really be three years after acquisition.

As to the component of that, yes, it is rents that are in place today, effectively comps at rents today, grown by this 3.5% range revenue growth that we talked about earlier. And so in large part, those rents we would expect to be about 10% higher, a little bit over 10% with the compounding, in the stabilized year than they are today.

Okay. So then basically 2019 and the $3,800, that's that stabilized rent in three years from acquisition, correct?

I'm sorry --?

The $3,800 in rent, is that where you think rents are today or is that $3,800 the --?

That's where we think rents are at acquisition next year.

Okay, at acquisition next year. Okay. And then we grow that out by three years to get to the 4.9%?

Yes.

Okay. Great. Thank you. Appreciate that. And then --

Third year after the acquisition. (multiple speakers) So, 2016, 2017, 2019.

Great. Thank you. And then, Terry, you talked about the ability to create $100 million of value on this project. How do you look at that versus what's happened in the stock today? I think we can probably attribute most of it to concern over the acquisition, given that your operating results were largely expected after the Investor Day.

Conor, I think that the value creation through the acquisition is one that you can calculate looking at current cap rates in that market and current, and what John has just told you on the underwriting. And so I think that $100 million is, call it, a 30% value creation on an unlevered basis compares favorably to other uses of corporate capital.

As to the stock performance today, it's a point in time. It's hard to know what the market will conclude. One thing we've tried to do in this call is to be as transparent as we can to emphasize that this is exactly consistent with what we've told the Street, that we've followed very conservative underwriting, that we expect this will continue the long-term improvement in portfolio quality, growth rates, free cash flow, internal rates of return. And we think that over time, the market has rewarded us for that.

Okay. Thank you, Terry.

Thank you, Conor.

Our next question is from Drew Babin of Robert W. Baird.

Thanks for taking my question. It's been well documented that cap rates have compressed quite a bit in the suburbs, probably more so than CBD locations as of late, the EQR transaction, obviously pulling to that.

Given that you're diversified and you're in many, many markets across the country, I was hoping you could talk about which suburban markets have seen the most cap rate compression based on transactions that have happened in the market. And just give us some color based on your experience there, and also markets where it hasn't really played out as simply as that.

Drew, this is John. I'll take a stab at it. I would tell you that in general terms, the true tertiary markets, small cities in the Midwest or in the South or those kind of places, compression as compared to what starting point, I guess becomes part of the question, right? I'm not going to call for individual markets how much compression there has been.

It's out there. There's been some bleed over, but it's certainly not as strong as what it is in the so-called secondary markets. There was a time five years ago where Denver was considered a secondary market in a lot of peoples' minds. Where today, we might consider it an institutional market. I think a lot of people would consider it an institutional market. And so the cap rate compression in Denver has been very strong and stronger than it would have been in, say, Kansas City or Omaha.

As we look today at, generally speaking, secondary markets, and I will qualify that as for us outside of our target markets, I think cap rates have been pretty consistent for the last 2 1/2, 3 years, really since that little August hiccup in rates around QE2 and things going on back in, I think it was August of 2011, if I remember right. We got a little hiccup there.

And then from that point in time, cap rates have come down maybe 50 to 100 basis points over the succeeding 1 1/2, 2 years, and then they've held pretty flat.

And from our perspective, as we look at the trades that we've made, a lot of what we've done has been out of these tertiary markets. The two that we talked about just earlier as the trades for our acquisition, these are sub 5% cap rates. One of them is in Phoenix, one of them is in Alexandria.

And I'll leave it to you whether you want to call those a secondary submarkets or primaries. I'd think Alexandria is a primary market, Phoenix, depending on how people want to call it. The cap rate on the Phoenix deal is actually lower than the cap rate on the Alexandria deal.

I guess just to be clear, my question was more guided towards, call it, suburban markets of major markets that you're in, versus markets that you're exiting. There's definitely been cap rate compression in infill suburbs in many of your markets, and that's a little more where I was going with that.

But moving on, at the Investor Day in Philly, you talked about staying within a certain band in terms of the magnitude of your overall match-funding activity. With $320 million of acquisition/development activity already spoken about for 2016 and the additional redevelopment of Park Towne Place, is that the bulk of what we should expect for 2016 in terms of match-funding activity or could the overall level be higher?

John again, and then I'll let Paul step in, if he would like to. So from a sales perspective, we have outlined the base capital need. But we're still going through our budget process, and so we will make that call based on capital needs for redevelopment, development activities, what our financing strategies are for next year. And ultimately, we will have a laid out plan for next year.

I can tell you that we are in the market right now, today, and it's not secret. You can go to the Aimco Dispositions website and see what we've got out in the market today. But we have properties out in the market today that will largely meet our identified capital needs for next year.

And then it will come to a paired trade discussion around if we find other opportunities that make compelling trades. Then there may be an opportunity there to continue to work through some of our sales on the secondary locations and acquisitions into something we would consider to be better.

Drew, just to supplement that a little bit for John, we'll lay out our exact plans in connection with the fourth-quarter call when it comes to guidance for 2016. But our approach for 2016 will be very similar to what it's been for the past couple years, where we will put forth our guidance based upon what we know for acquisitions and dispositions at that point in time, with the expectation that any transaction that we might do that's not contemplated in that will be match funded on a paired-trade basis, where we are improving the quality of the portfolio and increasing the free cash flow internal rate of return.

Okay. Thank you.

Next we have a question from Wes Golladay of RBC Capital.

Hello, everyone. Quick question about the acquisitions. You mentioned you were looking at this large acquisition for awhile. I'm just wondering if you were looking at any more acquisitions over the $200 million to $250 million mark?

No -- John again here. No, on a definitive single-asset basis, no. But we are looking at acquisitions all the time, and those range from operating properties, in both the A and B price-point categories, to under development properties that are going on, similar to what we did in Cambridge earlier in the year and this transaction that we're talking about here.

And what we're looking for, as Terry mentioned earlier, is anomalies and crevasses in the pricing where we see that there's an opportunity, either because of the seller's situation, because of the ability to take some lease-up risk or do other things that are within reasonable bounds. We're not going to go out and buy billions of dollars worth of lease-up properties and throw them all into the portfolio at one time. And I'll definitively state that.

But we do look, a lot, at various transactions. And some of you have heard in the past, as we've talked about at either investor conferences or other places, in 2014, we screened over 400 deals, we underwrote over 200 deals and we bought 6. And so I don't want to mislead that we're not looking at deals. We are. We look at deals a lot. But the number that we execute on is very, very small.

Okay. And then turning to the current environment, I think you mentioned 21% of the people did not renew due to price. Any noticeable markets there that stand out to you, and how are your targeted markets doing versus the ones you view as non-core?

Wes, this is Keith. When we look at the 21% due to price, we've ranged anywhere between 19% and 21% for, call it, the past 10 quarters or so, so nothing that is materially different there. 21% is a little bit up from where it was last quarter at 20%, but nothing that's really changed.

Okay. Thanks a lot.

Our next question is a follow-up from Nick Joseph of Citigroup.

Hello. It's Michael Bilerman here with Nick. Terry, just on the asset you're acquiring, is there a construction loan in place and how much is that and will you be assuming it?

Michael, this is Paul. I'll take that. Whether or not there's a construction loan in place on the project during construction, I'm not aware of. I'll look to John to supplement that. But what I will tell you is that the financing that we are looking at, it's going to be our own financing that's being put in place subsequent to the construction. We have marketed the piece of debt to a number of institutions, we have had great interest and we're very close to locking that down.

And I would add, there is a construction loan in place. We have no exposure nor guarantees around that construction loan. That's entirely the seller's issue.

And of that, what is the sizing of the construction loan?

Of their construction loan, I have no idea.

And the size of your targeted loan, and is that going to be, I assume it's a floater, but just what's the sizing of that?

Yes, the loan that we are going to put in place is going to be a 10-year piece of paper, consistent with the majority of the other loans that we have in our portfolio. It will be fixed rate. And we are still in the process of sizing it, but we are going to size it likely at a level well below 50%.

And then do you have, on top of the $320 million, is there closing costs or any other costs above and beyond the $320 million?

Yes, there are. There will be, between marketing set up, closing costs, all those kind of things, there will be some additional costs above the $320 million. We estimate those at less than $2 million.

Less than $2 million. And then as we think about your -- I want to make sure we got the math right -- so effectively on a current rent basis today, or this summer when you underwrote it, you were looking at something in the low 4s at 95% occupancy that you're growing 3.5% a year to 2019, upon which it will be 4.9%. So does that include, at that point, any CapEx reserve at all in that number?

Absolutely. So the IRR number that I quote you is a free cash flow internal rate of return. That 7.91% assumes $1,200 a door of CapEx, which is what we apply consistently on our sales and our acquisitions.

But I'm saying the 4.9%, is that a --?

Oh, I'm sorry. I misunderstood the question, Michael. In terms of the cap rate, that is an NOI cap rate. So that is a pre-cap reserve cap rate.

Pre-cap reserve cap rate. All right. So then effectively, if these guys were developing this to, let's say, a targeted 6%, there's probably at least could be up $100 million profit in it for them?

I think that's probably a reasonable assumption.

Okay. Thank you.

And while we're still on your time, Michael, or on Nick's time, the cap rate, that exit cap rate is 4.78%.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Terry Considine for any closing remarks.

Well, Operator, first of all, thank you for your help today. And for all of you on the call, thank you for your interest in Aimco. Many of us will be together in Las Vegas in a few weeks at the NAREIT convention and we look forward to seeing you there.

If you have any questions in the interim, please feel free to call Elizabeth Coalson, Paul Beldin, or me, and we'll do our best to answer them. Thank you very much.

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