Apartment Investment and Management Co (AIV) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the Aimco fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Lisa Cohn. Please go ahead.

Thank you, and good day.

During this conference call, the forward-looking statements we make are based on Management's judgment including projections related to 2017 and 2018 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.

We will also discuss certain non-GAAP financial measures such as AFFO and FFO. These are designed and are reconciled to the most comparable GAAP measures in the supplemental information part of the full earnings release published on Aimco's website.

Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, Head 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'll now turn the call over to Terry Considine. Terry?

Thank you, Lisa, and good morning to all of you on this call. I appreciate your interest in Aimco.

And, 2016 was a good year for Aimco by many metrics, as my colleagues will discuss in detail, property operations were solid, portfolio quality was improved, our balance sheet was strengthened, and our business was profitable. Adjusted funds from operation, our measure for current return was up 5%. And economic income per share, defined as cash dividends plus the change in net asset value, our measure for total return, provided a 15% return on our starting net asset value.

In short, 2016 results reflected the steady execution of the Aimco strategy, which has produced consistent improvements to our business. For this I thank my teammates and say to them well done.

Looking forward, 2017 seems likely to be a more difficult year for the apartment business. Economic growth is projected to be positive but still slow. Political turbulence increases the risk of economic dislocation.

The supply of new apartments continues to increase, and there are many markets where new lease rent increases have slowed or turned to negative. Inflation, and in number of locations minimum wage legislation, increased costs and compressed margins.

These factors make us cautious, but none of this is new. At Aimco, where we have been preparing for the past many years for this completely normal and predictable phase in local building cycles, we have emphasized customer selection and quality.

Our average new customer's financially stable, has an annual income approaching six figures, and has ample financial wherewithal to pay rent, including reasonable increases. We have high measured and publicly reported customer satisfaction, and relatively high customer retention rates. We have made regular investments in the physical condition of our properties.

Our portfolio's broadly diversified by markets and by price points, roughly 50% As and 50% Bs and Cs. And we have a safe balance sheet with abundant liquidity and a business plan not especially dependent on access to capital markets, nor very much affected by fluctuations in interest rates or share prices. That said, about one-quarter of our capital is invested in Markets at A price points, in sub-markets where competitive new supply is more than 2% of existing stock.

We expect these properties to face increased competitive pressure on new lease rates. We also expect the lease-up of some of our redevelopment properties will be made more difficult because of competing new supply.

Happily, we see numerous opportunities for offsetting improvements elsewhere in our business. For example, by operating efficiencies, or by slowing the redevelopment pace. Most importantly, we have a high achieving team with the experience and commitment required to navigate whatever stormy waters be ahead.

For this I offer sincere thanks to my Aimco teammates, both here in Denver and across the country. It's a privilege and a pleasure to work with you.

And now, for a more detailed report on fourth-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 fourth-quarter in operations, with revenues up 4.4%, expenses down 80 basis points, and net operating income up 6.6. Turnover for the quarter was 51% equal to that of the fourth quarter in 2015.

Move-out reasons for the quarter are unchanged versus recent results or our long term averages. And our residents gave us better than a four-star rating in customer satisfaction for the 13th consecutive quarter.

Looking at rates, which transacted in the quarter, blended lease rates were up 1%, with renewal rents having solid increases of 4.8%. We saw particular strength in Atlanta, Seattle, and Boston. Renewal rents in these markets increased 6% to 7% compared to the expiring leases.

Where those leases expired and were not renewed, our new leases were 1.9% below the prior lease, as we intentionally traded rate for occupancy while navigating choppy waters in a few markets. This strategy resulted in a 40 basis point improvement in average daily occupancy for the portfolio. The trade was worth an additional $500,000 in revenue growth for the quarter.

We particularly focused this strategy in Chicago, the Bay Area, and Miami, with year-over-year average daily occupancy increases averaging 100 basis points per market, while rates were 5% down on average. The balance of the portfolio averaged down about 0.5 point in new lease pricing for the quarter.

Turning to the fourth-quarter revenue growth, our 12 target markets were up 4.5% for the quarter. The top performers had revenue increases from more than 6% to 16% for the quarter. This was lead by Seattle, followed by the Bay Area, Denver, San Diego, and Boston.

Our strong performers, which had revenue growth of more than 4% to nearly 5% were Philadelphia, Los Angeles, and Atlanta. Our steady Markets with roughly 3% to 3.5% revenue growth were Washington DC, New York, and Chicago. And finally, with revenue growth of almost 2% we had Miami.

Looking to our 2017 revenue growth, our expectations for this year in our 12 target Markets could be broken into three tiers. At the top of the list, with forecasted growth better than 4%, we have Seattle, Boston, and San Diego.

The mid-range markets with forecasted growth of 3% or better, we have Atlanta, Denver, Los Angeles, Chicago, New York, and Washington DC. Rounding out our 12 target markets with growth between 2% and 3%, we have Miami, the Bay Area, and Philadelphia.

Finally, in looking at our early first-quarter 2017 results, preliminary January blended lease rates are up 2.3%, with renewals up 5%, 20 basis points better than last month. New leases improved versus December to down 30 basis points year-over-year, and when comparing our new lease performance of As versus Bs, our As are down 2.3% for the month with Bs up nearly 1% for January.

January's average daily occupancy was 96%, flat to prior year and February and March renewal offers went out with 4% to 6% increases, similar to those sent for January.

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

Thank you, Keith. And good morning, all. During the fourth quarter we sold four properties. For the year, we sold eight properties, with about 3,300 apartment homes, for gross proceeds to Aimco of $529 million.

On average, the property sold in 2016 had a free cash flow cap rate of 4.9%, and had we held these properties for the next 10 years, we would have expected them to generate a free cash flow internal rate of return of about 6.6%. The proceeds from these sales were reinvested in the redevelopment and development projects, acquisitions, and property upgrades at a weighted-average, free cash flow internal rate of return about 300 basis points higher than the property sold to fund them.

We invested $183 million in redevelopment and development during 2016. Most of this investment was in our phase projects in Philadelphia, Park Towne Place and The Sterling.

At Park Towne Place, we completed construction in the South and East Towers. In October, we began construction on the North Tower. As of year-end, 81% of the completed apartment homes were occupied.

We also continued the final phase of our redevelopment of the Sterling, where 92% of the completed apartment homes were occupied at year-end. We expect to complete work at The Sterling later this quarter, on time and on budget.

During 2016, we started redevelopments at four communities, Bay Parc Plaza in Miami, Saybrook Pointe in San Jose, California, Yorktown in suburban Chicago, and the second phase of redevelopment at The Palazzo at Park La Brea, in West Los Angeles. Details of these projects can be found on supplemental Schedule 10 to our fourth-quarter earnings release.

In 2016, we achieved NOI stabilization at three redeveloped communities in coastal California. Lincoln Place in Venice, Ocean House on Prospect in La Jolla, and Preserve at Marin in Corte Madera. Combined, redevelopment of these communities resulted in value creation of approximately $170 million, a 30% premium on Aimco's investment in the projects.

We also completed development of our One Canal community in the Bullfinch triangle area of Boston. Thanks to excellent execution by Keith and his team, 86% of the apartment homes at One Canal were occupied at year-end, a pace that is several months ahead of our underwriting.

And, finally as to 2016 activity, we closed on the $320 million acquisition of Indigo, located in Redwood City, California, last August. Keith and his team have exceeded expectations for the lease-up of this community as well. At year-end, 77% of the apartment homes were occupied, also several months ahead of our underwritten pace.

Across our major lease-up properties, Park Towne Place, The Sterling, One Canal and Indigo, we ended January with limited remaining lease-up exposure. Of the more than 1,700 completed apartment homes only 267, or about 15%, are vacant. And our rents at these properties continue to track our underwriting.

Looking ahead to 2017, our capital investment outlook for the year remains focused on value creation within our portfolio. We plan to invest $170 million to $290 million in redevelopment and property upgrades over the course of the year, with the upper end of the range dependent upon continued success in achieving targeted rental increases.

We expect to complete the One Canal lease-up this quarter, and for Indigo to follow in the second quarter. And while we are not contemplating any acquisitions at this time, we continue to look for turns to make accretive paired trades that would improve the quality of our portfolio.

With that, I would now like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Thank you, John. Today, I'd like to spend a few moments on our 2016 results, after which I'll provide some details around the 2017 outlook and 2018 forecast, that we published yesterday with our earnings release.

First, 2016, in Operations, Keith and his team delivered solid full-year results. 2016 same-store revenue grew at 4.7%, expense growth withheld to 1.4%, which drove same-store NOI growth of 6.2%, 45 basis points above the mid-point of our beginning-of-year guidance.

Additionally, as John just discussed, the team achieved excellent results at our lease-up communities adding $2 million more to 2016 net operating income than originally expected. These successes contributed to year-over-year FFO growth of 4% and AFFO growth of 5%, each ahead of our beginning of year expectations.

As to the balance sheet, year-end leverage to EBITDA was 6.7 times, consistent with our beginning of year guidance. And during 2016, we lowered our weighted-average cost of debt capital, by closing $394 million of fixed-rate amortizing property loans, that have a weighted average term to maturity of 9.4 years and a blended interest rate of 3.19%.

We also took advantage of the favorable interest rate environment, and put refunding plans in place for $89 million of our 2017 property debt maturities. We expect to refund the remaining $171 million of 2017 maturities, consisting of seven loans with a weighted-average loan to value of 33% in ordinary course.

Finally, in December, we restructured our bank line, extending its maturity to January 2022, and lowering our borrowing costs. At year-end, our $600 million line was largely undrawn and we held an unencumbered pool of communities valued at $1.6 billion.

In short, 2016 was a good year for Aimco. Given these positive results, and our expectations for 2017, our Board of Directors approved a 9% increase in our quarterly dividend, to $0.36 per share.

As we look ahead, prospects for the Aimco business remain good. Concurrent with yesterday's release, we provided guidance for 2017 and a financial forecast for 2018. It is important to remember that the 2018 forecast is the financial model based on third-party opinions. Our 2018 guidance and actual results are likely to be somewhat different.

Today, when we look back at our year-ago forecast for 2017, we see many consistencies, but also four important differences that are reflected in our 2017 guidance. First, lower same-store NOI growth. Second, increased contributions from 2016 lease-ups. Third, a slower pace for certain redevelopments based on caution about markets. And fourth, increased capital replacement spending.

When comparing 2016 actual results and our 2017 guidance, the important differences are; same-store, we anticipate same-store revenue growth between 3.25% and 4.25% reflecting an expectation of slower lease rate growth in 2017 compared to 2016. We anticipate expenses to increase by 2.5% to 3%, a faster increase than in 2016.

These increases drive our expectations that 2017 net operating income growth will be between 3.5% and 5%. We anticipate the increased 2017 NOI contribution from the lease-up of Indigo, One Canal and Vivo to be $0.13 per share, up $0.12 year-over-year.

We expect the contribution from non-core earnings to decline by $0.10 to $0.12 per share, compared to 2016 as we continue our gradual exit from the low-income housing tax-credit business, and as we complete certain redevelopments that have generated historic tax credits.

Finally, we expect reduced off-site costs that come with our simpler business model. As the complexity and scale of our business change, we expect these costs, which include property Management, Investment Management and G&A to decline by $0.02 from 2016 to 2017. As a result, and at the mid-points of the ranges of our guidance, we expect 2017 funds from operations and adjusted funds from operations to be $2.44 and $2.12 per share respectively.

Now, as to our model for 2018, based on third-party projections, we are forecasting increasing AFFO to a range of $2.17 to $2.31 per share, driven primarily by the same four factors influencing 2017's results. First, same-store NOI growth of 3.5% to 5%, similar to what we expect for 2017. Second, the stabilization of our 2016 lease-up properties which are forecasted to contribute an incremental $0.03 per share to 2018's results.

Third, a further decline in non-core earnings of up to $0.11 per share. And fourth, further reduction of off site-costs by about one penny. I reiterate that this is just a model, and we will provide formal guidance at this time next year.

So to summarize, we see over the next two years, that the steady execution of our strategy will result in continued operating income growth; and improved portfolio with higher average rents and wider free cash flow margins; a simpler business with higher quality earnings, lower leverage, reduced off-site costs; and increased FFO and AFFO per share, all accomplished without the need to access equity capital markets.

With that we will now open 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 comes from Juan Sanabria, of Bank of America.

Hi. Good morning, guys. Thanks for the time. I was just hoping you could to speak to assumptions around 2017 new and renewal rates, particularly given the deceleration we saw in the fourth quarter to defend occupancy, or to keep, or to gain occupancy. So any light you can shed on that would be fantastic.

Juan, I'd be happy to. And as we thought about our expectations for 2017, we really thought about the range of potential outcomes. And so, as we set our guidance range for revenue, which is 3.25% at the low-end, and 4.25% at the high-end. That's really framed by three factors, as you all know. First, it's the impact of our earn-in from 2016 leasing activities, and so that will generate a 1.9% revenue growth in 2017.

The second factor is occupancy, and so we have modeled, as we thought about the range of potential outcomes, to be flat at the low- and mid-points of our guidance range, and in order to hit the high-end of the guidance range, we'd probably have to have an incremental pick-up in occupancy year-over-year.

And then finally, to address the specific question, you asked on our expectations for 2017 lease rates, we expect a range of potential outcomes on a blended basis to be between about 2.7% at the low-end of our guidance range and at the high-end, our blended lease rate would have to be about 4%, which would be consistent with what we saw in 2016.

Would the spread be compressing as the year goes (technical difficulties ) decreasing fees in-between new and renewals. Is that the expectation?

Juan, I think our expectation is based upon the ability to set both and renewal rates on an asset-by-asset basis, where it's really tough to generalize overall what we might do. Obviously, we'll see the overall impact as we report our numbers, but at this point as we're approaching the year, we're going to take this asset-by-asset basis.

Okay. And then, just last one for me, if you don't mind. Any color you can give on the trajectory of that same-store revenue growth throughout 2017? Is there a trough in the second half, and a pick-up -- or trough near the mid-point and then a pick-up into the second half? Or is it kind of a steady deceleration? Any color that you could provide would be fantastic.

Juan there's so much volatility quarter-over-quarter driven by factors that I would have a difficult time projecting at this point. But, I think our expectations really just for the year as we see the year developing we'll provide additional color.

Thank you.

The next question comes from Nick Joseph, at Citi.

Thanks. Terry, as part of the two-year outlook, you put down nor NAV at $52, and just looking at the street consensus numbers, it's around $46. So I'm wondering, what, in your opinion, is the street missing in terms of value versus your internal view of value?

Nick, thank you very much for the question. I think the team has published a very detailed analysis and calculation of our net asset value per share. It's posted as you know on our web page.

There are many analysts who have similar net asset values per share, and we think their's are more accurate. And for those who have different ones, I think they should compare them to our publication and form their own opinions as to which is right.

Is there anything, when you look across those analysts, that you think maybe aren't getting full value that is being missed right now?

You know how modeling goes. Each analytical team has its own assumptions, and some of those are objective and those should be agreed across all models and some of those are subjective and they are entitled to their opinion.

Okay, and then so just taking your NAV of $52, stock traded about 15% discount today. You've talked on this call about the balance sheet, limited capital commitments, you have a reasonable dividend pay-out ratio, so what are your thoughts on share buybacks today?

It's something we keep in our toolkit, and can consider when and under what circumstances it might be appropriate. But our focus at Aimco is on operations, and not, what some see as financial engineering. And our focus in 2017 will be to better operators in challenging markets. To be better redevelopers, again in challenging markets, and to manage a safe balance sheet, and just focus on the execution of our long term plan.

Thanks.

And next we have a question from Jordan Sadler, of KeyBanc.

Hi. It's Austin Wurschmidt, here with Jordan. Terry, at the beginning you kind of talked a little bit about redevelopment, and some of the risks that you see broadly speaking. What would you have to see really for you to slow the redevelopment pace? Or what would give you pause as far as the redevelopment program?

Austin, I'm very enthusiastic about our redevelopment program. It's lead by a very capable executive in Patti Fielding, a long-term Aimco-ite. She's got terrific lieutenants across the country. They have an emphasis on high-quality and distinctive design, that has been rewarded by customer acceptance. And so broadly, I'm quite enthusiastic about what we're doing in redevelopment.

One of the things I like in addition to that, is that redevelopment is safer than new development because you can stop. If the market, at any particular time in any particular location, is not meeting our expectations, we can tweak it, improve our product, or even just default to the base-case of the occupied unit before redevelopment.

So, as we look at turbulent markets, where there is competitive new supply, we very much like the safety feature that we can slowdown, or even stop, if we aren't getting the returns we expect. And, of course, we can increase elsewhere if we are getting returns there and have that opportunity.

Appreciate the comments, there. And then, just kind of focusing on the Bay Parc Plaza deal, you started this quarter. Miami has been a weaker market than some of the others, and you've referenced it as facing heavier supply this year.

So, what gave you the confidence to move forward with the first phase at that project? And then also, how are you thinking about the timing on the second phase, which I believe is more focused on the units itself?

Austin, it's just a same song, different verse. We look at the particular property, and the particular context, and the particular ideas to upgrade that property.

Again, we have a talented team addressing it. And they've outlined various improvements, in the first phase to the common areas, in the second phase to inside the units. And we will closely track the spending and closely track the market acceptance and returns. If we achieve what we expect or better, we will go full-speed ahead. If for any reason we're disappointed, we will make adjustments or even stop.

Does the capital spend assume any additional starts this year? And then just separately, remind us again what the target returns are in redevelopment?

Paul can help you with the numbers, but we have a wide range for redevelopment spending in our forecast, to reflect, just, the uncertainties we see looking forward.

Austin, specifically around our starts, we have an expectation that we'll start between three and five of the larger scale projects. Projects that will be listed on schedule 10 in our supplemental. And then as always, our expected returns are typically around, at least a 9% free cash flow internal rate of return.

Great thanks for taking the question.

The next question comes from Nick Yulico of UBS.

Thanks. First one is on the tax credit income in the 2018 forecast. What is -- what would drive that number higher? Is it starting some new projects where you got some additional historic tax credit benefits? I'm just trying to understand exactly how much variability there could end up being in the your 2018 tax credit number.

Sure Nick. Just to make sure that I'm responding to your question. You're asking about the potential variability in the historic tax credit benefits?

Yes, for 2018. You gave the 2016. Paul, just that entire non-core earnings of 2016 to 2022. What's the sensitivity to that being higher, potentially?

Sure let me walk threw the various elements. First, starting on the first-line item in our non-core earnings category. That's the amortization of our deferred tax credit income, as you know, that that's just the burn off of our legacy, low income housing tax credit business, where we haven't had a new syndication in that business for a number of years.

So, this is just the bleed-off of projects we've largely completed, and under GAAP that we're required to amortize, roughly over the delivery period of the associated credits to the investors. And so you see that declining from $18 million in 2016, to about $6 million in 2018.

The next line item is our non-recurring Investment Management revenues. As we've talked about at length, that's a piece of our business that is declined, and really is all but done at this point. We don't have an expectation for any of those types of transactions in either 2017 or 2018.

Next, our historic tax credit benefits, and where in 2016 we benefited by about $14 million of those benefits. And that was generated through the redevelopment activity, by Patti and her teams, primarily at Sterling and at Park Towne Place.

And so, what we expect in 2017 is to earn historic tax credits as we complete the third tower at Park Towne Place, that John mentioned earlier today. And then the variability in 2018 is driven by the decision to start the fourth tower at Park Towne Place. So, if we do start that later this year, we would start to recognize historic tax credit benefits for that project in 2018.

And so, then the final piece of variability in that line item, is really driven by whatever the potential new starts might be in the future. And to the extent those have the opportunity to earn historic tax credits, we'll certainly take advantage of that.

So okay, so that's helpful. Just to be clear, so the range on the historic tax credit benefits -- does the range reflect the possibility of starting the new projects, or no? Or the new project where you could get more tax credit income?

The range for 2018 only reflects the opportunity associated with the fourth tower at Park Towne Place.

Okay, that's helpful, thanks. And then, Terry, I guess just a bigger picture question, on dispositions. You have been selling, generally, some older assets. What is the thinking on perhaps selling?

Are we taking maybe a stake in some of your redevelopments you've done, the Venice project or others, which you could sell at a much lower cap rate than where you've been selling assets? Which could perhaps help a little bit in the earnings accretion of your redevelopment program, which seems like the redevelopment program right now is more of a NAV focused value creation.

Nick, thank you, very much for the question. You're correct. We're mostly focused on net asset value creation per share. We call the combination of that with cash dividends economic income. That's our basic long term or total return measure. And we're less focused on trying to generate earnings in a particular period.

We look at our cost of capital, but we also look at its impact on our portfolio quality. And we think that in most cases, it would be short-term advantageous but long term disadvantageous to raise capital at a low cost but at the sacrifice or dilution of our holdings -- of our highest quality assets.

There are times and prices where we've done so. You'll recall that at Palazzo, for example, we sold 47% interest to an institutional partner, a decade ago and they've been a good partner and we've regarded that as a good transaction. So, it's something that's inside our toolkit, but it's one that we would approach cautiously because we're quite focused on the quality of our portfolio.

Okay. So, it sounds like we should think about the redevelopments that you've done, where you cite the $300 million of value creation, that that's just going to stay -- those projects are going to stay entirely on the balance sheet? And you aren't going to look to harvest some of that value creation to recycle capital or return it to shareholders? Is that the way to think about it?

I think so. I think what I would say in general, is, that looking forward we expect more of the same. The business environment will fluctuate, but we feel we have a good plan and a good team to execute in 2017 and 2018 what we've done for the past many years. And we'll focus on, in terms of capital recycling, we're more likely to sell off the bottom, we find attractive cost of capital there.

John mentioned in his remarks that our expected return on the assets we sold in 2016 was 6.6%, and that provides a cost of capital that supports a 300 basis point spread to its investment. We think that's a good return, and that's what we will continue to focus on.

Thanks, Terry.

You bet.

The next question comes from John Kim, of BMO Capital Markets.

Thank you. Just a question on the methodology of your outlook. It seems like last time, you were relying more on the recent Axiometrics' forecasts, and this time around, they are more of an internal forecast of where you think rents are going to be. But I'm just wondering which markets you saw a big differentiation between your forecast and the third-party providers.

Hey John, this is Paul. Our process for preparing the 2018 forecast was, I'd say substantially identical to what we did for 2017. And that is, for our expectations of new lease rates, we relied on third-party data providers, average of recent Axiodata at our sub-market level. For renewal leases, we assumed increases of 4.5%. That assumption is consistent with what we used in 2017.

And then the only variable that we diverged, is on our expense assumptions and where last year in our model, we assumed that it would grow at the projection of inflation, as provided by economy.com, we still did that for 2018, but then we took 15 basis points off that. Because the expectation was a growth rate of about 2.9%, and so looking back at our history, its been a long, long time since we had a growth rate that high. And so, we thought that might be overstating the potential for expense growth in 2018.

And then as far as 2018, you're using recent Axiometrics as far as rental growth? And if so, just wondering which markets do you think will improve in 2018 versus 2017?

John, this was a high level analysis that we put together in aggregate. And so, what we think is the important take-away, is that at least looking at the data provided by the third-party providers, they are expecting market rent growth of about 3% at our sub-markets in 2018.

Okay. Got it. Just one follow-up. Philadelphia was one of your stronger markets last year and you're projecting it to be a weaker market in 2017. Is that the market forecast, or is that what you think you're actually going to achieve in your portfolio?

John, this is Keith. It's a bit of just some caution, knowing there's a lot of new supply coming into Center City, and some of the impacts that we've seen coming through with that.

And John, (multiple speakers) for 2017, when we talk about our expectations for 2017, that's our guidance. Those are expectations are built upon both our bottom-up build of our budgets and our evaluation, as considered by third-party data providers. Whereas, information that's provided for 2018 is purely mathematical based upon third-party data providers.

Got it. Thank you.

The next question will come from Rob Stevenson of Janney.

Hi. Good afternoon, guys. Paul, how front-end loaded is your disposition guidance for 2017? Is it basically that, plus the slowdown in same-store that's accounting for the $0.03 at the mid-point drop from fourth-quarter FFO to first-quarter?

Thank you for the question, Rob. Our expectations for dispositions next year, is actually very much back-end loaded. And, so in our earnings release we provided a walk of our 2016 FFO to 2017 FFO. And in that walk, we showed $0.09 loss in FFO from the impact of property sales. And $0.08 of that $0.09, is due to dilution from our sales in 2016, and $0.01 is due to expected dilution for our 2017 sales.

And so, the quarter-over-quarter mid-point projected decline from fourth-quarter FFO to the first-quarter mid-point, is really being driven by -- it's seasonality factors, if you think about it. It is the impact of coming off a fourth quarter, where typically we have lower turn-costs, because we have fairly low lease expirations -- lease expirations are lower in the first quarter, as well, but still higher than the fourth quarter, generally.

But more impactful, is the impact of utility costs, both in the general sense in that our utility costs are lower in the fourth quarter than in the first. But specifically, in 2017, it's a bigger impact because we expect in 2017 a return to normalized weather and there for normalized utility costs in Q1.

Okay. And then, what are you guys assuming for 2017 for recurring but non-revenue producing CapEx per unit for the portfolio?

Recurring but non-revenue producing?

Yes, the [ABO].

We expect to spend about $1100 per unit, on our capital replacement spending which falls into that category.

Okay. And then, are there any material changes in the same-store portfolio as we head into 2017? Any particular markets impacting?

Yes, just so everybody is on the same page, when we set our 2017 same-store expectations it's based upon our portfolio at the end of the year. And so, as we look out into 2017 we are adding to the same-store population, Lincoln Place, Ocean House, Preserve at Marin, the three stabilized redevelopments that John mentioned, as well as Mezzo, which was an acquisition we made in 2015 in Atlanta.

We also expect to remove, say, three, to four, to five properties, due to the redevelopment, and one potential conventional property due to sale. And so, if you look at those eight properties in aggregate, we expect about a 20 basis point impact to our same-store growth rate.

Okay thanks guys appreciate it.

And next we have a question from Rich Anderson, of Mizuho.

Hey, thanks. Good morning, out there. So, just looking at the 2018 guidance. The same-store is sort of as you mentioned a mirror image of 2017, but the difference in the guidance is -- and if you said you talked about this already, I apologize, but higher dispositions. And it makes me think you're showing your cards a little bit there, in the sense that if it's a better time to sell, then maybe cap rates are compressing. And it's a little bit of a better time in 2018 versus 2017. Are you kind of chomping at the bit to say 2018 could actually be a better year than 2017 but just not willing to say it yet?

Rich, this is Paul. I'll start by talking about the dollars involved on the dispositions, and maybe I'll turn it over to Terry to comment on, potentially, the environment. In the third-quarter call, we talked about the fact that we're increasing our 2016 disposition guidance, to get a little bit of a head start on our needs for 2017. And, John and the team were very successful in accomplishing that. So if you were to normalize our expected dispositions by pulling the year-end -- a portion of the year-end 2016 sales, put those back into 2017, as we originally expected a year ago, there would be no change from our expectations for sales in 2017 versus 2018.

Okay.

Rich, what I'd add to that -- this is Terry -- is that if you think about our paired-trade discipline, it has the effect of neutralizing our opinions about what one-time will be better or worse, because that assumption will be embedded in our sales activity but also our investment activity.

So we're not particularly trying to be market timers. We raise our capital by selling lower-rated assets, at an attractive cost, reinvesting them at higher-quality assets, at a higher return.

Okay. I'll stop trying to be a psychologist. (laughter) And then, just sort of general question, don't know if you'll be able to answer it off the cuff. But, do you have any sense of what your portfolio depends -- what amount of your portfolio depends on H1B or student visas, or any kind of legal immigration? Is that something that you track, and have some sort of knowledge on?

I do in general, but not always in particular. But immigration is a very important contributor, in my opinion, to the country and it's certainly to the rental apartment business. And we have a number of properties where we have, and welcome, high-quality customers who are immigrants.

And do you have any opinion about whether that's a good thing to have that kind of dependency on it, in this day and age?

Well I think broadly, as I say, can be a good quality customer.

Sure, no question about that.

(multiple speakers) high educations, good jobs and so forth. If you're discussing what are the potential impacts of the Trump administration, those are not yet known, but it will be a fact that we'll deal with.

Okay. Fair enough. Thank you.

The next question comes from Drew Babin of Robert W Baird.

Good morning. Quick question for Paul on the refinancing activity in the fourth quarter. It looks like the secured debt that was raised was done when the 10 year was, call it, 180 basis points. In terms of your debt cost assumptions for 2017, do they just mirror the movement in the 10 year since then? Or has anything happened with spread?

Thanks, Drew, for the question. For the refinancing activity we completed in the fourth quarter, those were deals that we rate locked in the October time frame, and so, if I'm thinking back to rates at that time, we were probably at the 180 to 220 type of -- 200 type of point.

As we think about our expectations for 2017, the indications we have seen, as we've been talking with our partners in the secured debt world, is that spreads have remained about the same. There's always a little bit of a range depending on the location and quality of the asset, and the need for our partner to allocate capital to that particular market. And so, I think, broadly, we would say that our spreads for 2017 are expected to be between the about the 130 and 150 range.

Okay that's helpful and then operations question. Would you consider 96% to maybe be an occupancy high watermark? Or might there be benefits pushing that a little bit further, depending on how the year unfolds? How are you thinking about that?

Drew. It's Keith. I'll walk through that. There's definitely the opportunities to go both ways on that. And, so, what we will do is, we will manage it market-by-market. And so, if we are in a market that we're seeing acceleration in new lease rates and getting stronger, we may be more comfortable that the occupancy could dip a little bit in trade for higher new rents.

In markets that we're seeing deceleration, or we're seeing more pressures, we may make a decision that says, listen, let's moderate a little bit on the renewal side, let's retain customers, and that may ultimately, in turn, turn into a higher ADO. So, we won't manage it globally as a macro decision but we'll manage it building-by-building and market-by-market.

Great. That's helpful, thank you.

Next we have a question from Dennis McGill of Zelman & Associates.

Hi. Thanks for taking the question. First question, I just want to tie together a couple of comments on the 2017 outlook, and then how it relates to 2018.

On the one hand, you're dependent on the third-party providers for 2018, which I understand, but it sounds like they were too optimistic for 2017. And then, you talked to the difficulty in understanding the phasing of 2017, just given the volatility in the market.

So as you thought about putting out an 2018 outlook, it seems like a difficult time to do that based on the volatility that you're seeing in the marketplace, and the volatility of the forecast from the third party. So, how should we interpret your views today as far as how the exit point of 2017 looks into 2018 if you had to take a fresh look for yourself irregardless of the third-party data providers?

Dennis this is Terry. And our exit point at the end of 2017 will be in our 2017 guidance. That reflects our judgment, our opinion. 2018 is based on third-party providers, who, at least right now, have been seen as perhaps too optimistic.

I've read your material with interest, and I recognize your concern about caution about what lies ahead and I don't think it's clear that you're wrong. You may well be right.

But what I would ask you to consider is that we aren't passive takers of what the market provides. We're not ants on a log drifting downstream. We are an active hands-on Management team, and we believe that we can absorb what variance there may be in the market, and continue to produce the kind of returns we've discussed.

That's fair, appreciate it. And then second thought around the NAV calculation. If you take that $52, and you think about sort of on a cash yield, I think the math is somewhere around 4%, maybe a little bit lighter if you include all CapEx. And, I understand that's a different way of looking at it, but in a rising interest rate environment you think about that versus alternatives. How would you phrase us to think about that differently, versus what seems like what would be a tight cash on cash yield spread?

I think that, what's implicit -- or what's explicit in a net asset value calculation, is the price at which properties would trade in the broad real estate market. And those prices can certainly change. Some of the factors that will increase factors going forward, might be rising incomes. Some of the factors that might depress valuations going forward might be changes in the risk free rate.

Those are obviously factors that can go in both directions. And so we aren't trying to say that net asset value is a guaranteed number which will never change. That's not at all the case. We're trying to connect it to the value of the private real estate markets. Is that responsive?

Yep. No, I think that makes sense. I appreciate it. Thanks, Terry.

The next question comes from Conor Wagner, of Green Street Advisors.

Thank you. On Lincoln Place, I know that's going to enter the same-store pool this year, and it is a big contributor in Los Angeles. How has rent growth been trending there? And how do you foresee it contributing in 2017?

Hey, Conor, this is Paul. Just to add a little bit more color on the impact of Lincoln Place coming into the same-store pool. As we look at our prospects for Lincoln Place, in particular, relative to the LA market as a whole, and translating that impact to the entire portfolio, we're not getting neither a lift nor a detriment from the addition of Lincoln Place to the same-store pool.

Great, thank you. And then, John, have you seen any change in the transaction market in recent months? And how did the sale of the four assets in the fourth quarter go? Were they retraded at all, or was there any pull back from the buyers or the buyer pool?

No. I think all four of those deals -- the four properties that closed were really two transactions. Three were adjoining properties in Atlanta, that we operated as a single property and went to a single buyer. Those transactions were cut, kind of mid-year, and we did not see retrade activity of any significant sort on either one of them.

The fourth asset there was one in suburban Philadelphia. In terms of the market overall, I would say -- you were at NMAC last week. I think there's caution there.

I think the bid pools -- and in our discussions with brokers out there last week, bid pools are a little thinner. I think they are particularly thinner at the A price point. There is still a lot of interest and a lot of capital out there chasing deals, but a lot of that capital is focused on value add and the B, C price point today.

So then, based on that, John, do you think you'd have an opportunity to execute a pair trade at a tighter spread, given that you're trying to sell that value add, and buy more of the A property?

Well I'd qualify, one, the assumption you want to buy more A property. Let's start there.

Higher-rent property, perhaps.

So, an essential element in the paired trade, is certainly higher rent. And as we have been very successful over the last several years in selling out of the bottom of our portfolio, our bottom 10% rents have moved up. And so, it's tough to find a property in our portfolio today that's got rents under $1100 a month.

So the trade-up math there, in our free cash flow analysis -- and that's the primary metric in that fair trade analysis, is the free cash flow generated on both sides of the trade, the sell and the buy. That math gets tighter -- or that math gets harder, the tighter that spread is.

So I would close the loop, maybe, by saying that we are not particularly interested buying top-of-the-market in terms of top price point, today. We are very cautious, as we look at trade opportunities, and I think that's manifest in the fact that other than closing Indigo, that we tied up a year and a half ago, we haven't done a new acquisition deal in 18 months, or more.

And so, we're cautious, and I think that that is somewhat reflected in the general market as a whole.

Great. Thank you, very much.

The next comes from Buck Horne, of Raymond James.

Good morning. My question was actually pretty similar to the one just before that. But maybe just rephrasing it, so you're about 50% A, and 50% B and C, now. Looking ahead two years, is that pretty much the mix you envision the portfolio being going forward? Or do you think you'd want to skew it still migrating closer to the A price points over time?

I think as we look at it today, we're pretty comfortable in that 50/50 mix. If anything, we see a little more opportunity right now, on the B side for revenue growth, in the coming year as we've laid out in our guidance.

There may be a little drift down from the A price point, but our focus is really going to be on B, C product as we look at potential acquisitions. And you'll see some drift that comes from redevelopments as they earn-in, and other things that push our average rate up. You're going to see that continue to move.

And as you look at concession activity or just competitive behavior from lease up properties right now, where are you seeing maybe just the most acute pressure from concessions? And what's the potential, or where do you think there is the most potential that it could evolve into something that's maybe a little bit more irrational behavior from developers?

I'll start and maybe Keith, or somebody else, would like to jump in. Those big four lease-ups, the easy ones let's go to Indigo, which is in downtown Redwood City, with a limited amount of new supply around it. There is some, that South San Mateo market is getting new supply, but it's not downtown San Francisco.

And so, we are not seeing the concession activity, and in fact, yesterday, we were on one of our lease-up and revenue calls relating to Indigo. It's primary competitor property is putting out renewal notices at $500 to $800 increases to their residents. And so we feel pretty comfortable about our rate and our lease-up pace there.

At One Canal we continue to see good pace there. It's winter, and so pace has certainly slowed from the summer last year, but we're over 90% leased. And we're right on track with our underwriting and feel very good about One Canal.

Yes, there is some new supply. There's a new Avalon Tower just a few blocks away that's in lease-up. But we have not seen major pushes there in terms of additional concessions or anything else at One Canal. If anything they are tighter today than they were before.

And the Philadelphia properties, we're going to watch Park Towne, and be cautious about it, and go from there as we look at that fourth tower. But we've got a third tower coming on, and the first two have gone great.

Thank you.

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

Well, thank you all for your interest in Aimco. If we've left you with a question or two, feel comfortable contacting me or Paul Beldin, our Chief Financial Officer; or Lynn Stanfield, Head of Investor Relations in FP&A; or her trusted right hand, Elizabeth Coalson.

We would be glad to answer them as best we can. And for those of you that will be headed to Florida in about six weeks, we look forward to seeing you there. Thank you so much.

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