Apartment Investment and Management Company
Q2 2018 Earnings Call Transcript

Published: 4 Aug 2018

[Operator:]

Good day, and welcome to the Aimco Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Lisa Cohn, Executive Vice President and General Counsel. Please go ahead.

[Lisa Cohn:]

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 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 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; Wes Powell, Executive Vice President, in charge of Redevelopment, John Bezzant, our Chief Investment Officer; and Paul Beldin, our CFO. A question-and-answer session will follow our prepared remarks. I'll now turn the call over to Terry Considine. Terry?

[Terry Considine:]

Thank you, Lisa, and good morning to all of you on this call. Thank you for your interest in Aimco. Business is good and Aimco had another solid quarter. In property operations, revenue was up. In same store, which is about 2/3 of our portfolio, occupancy was up 40 basis points year-over-year to 96.3% due to customer retention reaching above 54%. As Keith and his team continue to focus on customer selection and satisfaction. Their laser focus on profitability drove a free cash flow margin of 68% and a remarkable net operating income margin approaching 74%. In the remaining 1/3 of our portfolio, which includes our redevelopment and the newly acquired properties, leasing and occupancy were also good, meeting or exceeding underwriting. In redevelopment, Wes and his team have kept our current projects on time, on budget and on track to be highly accretive to net asset value. This line of business has been particularly profitable, creating on average $0.40 to net asset value for every dollar that we've invested over the past five years. We now plan to increase the rate of redevelopment spending beginning with adding the next phase at the Anschutz Medical Campus. In portfolio management, we continue our disciplined capital allocation via paired trades focusing not on short-term earnings but rather long-term value creation as measured by net asset value per share. Some of you may recall our decision in 2011 to exit the Affordable business over time. With the last week's sale of the asset management portfolio and Hunters Point communities, led by John Bezzant and Lynn Stanfield, we have done just what we said we'd do. Simplify Aimco's business model and extract full value for our Affordable assets. Over the same seven years, we have also executed consistently the other elements of our business plan. Substantially improving our continuing businesses, all while maintaining a portfolio diversified by geography and by price point. Since that time, we have sold properties worth $4.2 billion and reinvested a majority of the sales proceeds in higher quality properties with greater expected rent growth and higher free cash flow internal rates of return. Along the way, we more than doubled average monthly revenue per apartment home to approximately $2,100 a month and increased net operating income margin to more than 70%. We reduced leverage by $1.8 billion and built a $2 billion pool of unencumbered properties, providing access to liquidity as opportunities may arise. We more than doubled the net asset value per share to $54. And while doing all of this, we are named one of the top workplaces in Colorado for 6 years straight. Going forward, we expect more of the same and work every day to get better and better. For these many successes and for our promising prospects, I offer great thanks to my Aimco teammates, both here in Denver and across the country. You've worked hard and achieved much. Thank you. And now, for a more detailed report on the second quarter, I'd like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

[Keith Kimmel:]

Thanks, Terry. I'm pleased to report that we had a solid second quarter in operations, with same-store revenues up 3.2% for the quarter. We had a purposeful strategy, driving average daily occupancy, and we finished at 96.3% in the second quarter, 40 basis points better than the second quarter of 2017. This improved occupancy is a result of our key operational strengths. We continue to provide exceptional customer service. Residents gave us better than 4 stars for the 19th consecutive quarter with 4.23 out of 5 stars. These highly satisfied customers live with us significantly longer. Additionally, our focus on resident selection has led to a low turnover of 45.4% for the quarter, 270 basis points better than the second quarter 2017. And finally, we're preleasing more apartment homes. In June, nearly 50% of our apartments were leased before the previous resident moved out. A significant improvement from 30% last June. Moving on from revenue. Expenses were up 3.3%, of which, 60 basis points is due to a 2017 adjustment to our insurance reserves that did not recur. Controllable operating expenses were up 2.6% with declining labor costs, offset by increased repair and maintenance costs as we continue to invest in our communities. The combination of 3.2% revenue growth and 3.3% expense growth led to 3.2% growth in net operating income. Looking at leases which transacted in the quarter, new leases were up 1.9%. Renewal rents had solid increases of 4.8% and same-store blended lease rates were up 3.4%. We saw new lease rates of 4% to 5% in Miami, the Bay Area and San Diego with the most pressure on new lease rates in Seattle and Atlanta. Turning to the second quarter same-store revenue growth. Our top performers, representing more than half of our same-store portfolio, had revenue increases over 4% for the quarter. This includes Boston, the Bay Area, San Diego, Denver and Los Angeles. Our solid performance, which had revenue growth of 1% to 3% were Miami, Chicago, Atlanta and Washington, D.C. New York, Philadelphia and Seattle were all flat to a negative revenue growth for the quarter and in total, these markets represent less than 6% of our same-store revenue. Our substantial nonsame-store portfolio continues to be strong. In Philadelphia, The Sterling is highly occupied with rates in line with our plan. The first three towers of Park Towne are about 90% occupied, and while construction of the fourth and final tower is still underway, we've already moved in more than 120 residents, reached 50% occupancy and preleased 65% of our homes all ahead of schedule. Turning to acquisitions. We're pleased with the progress of our 4 new communities in Philadelphia, thanks to both our veteran Aimco teammates and new team members who have navigated this transition successfully. As we have achieved occupancy above plan and rents in line with underwriting. In Washington, D.C., we continued to be encouraged by the performance at Bent Tree, which is 98% occupied today with new lease rates in excess of underwriting. And as we look at our July same-store results, we see a solid start to the third quarter with the continuation of strong average daily occupancy and new lease rates. Average daily occupancy for July was 96%. New lease rates were up 2.5%. Renewals up 4.1% and blended lease rates were up 3.4%. Finally, August and September, renewal offers went down with 4% to 6% 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 Wes Powell, our Executive Vice President of Redevelopment, Wes?

[Wesley Powell:]

Thank you, Keith. As you just heard, we had a solid quarter in operations. At our redevelopments, some portion of those good results can be attributed to Aimco's focus on actively managing the inventory of renovated apartments, ensuring that we match supply with demand to limit downtime and maximize pricing power. To that end, Keith and his team have leased over 96% of the redeveloped homes that have been delivered year-to-date at rates in line with our projections. On the construction front. Our projects remain on time and on budget. At Park Towne Place in Center City, Philadelphia, we are nearing the end of construction on our fourth and final tower. As Keith noted, our lease up is ahead of schedule, and we remain focused on reaching a stabilized occupancy across all 4 towers. With the completion of Phase 3 development of Park Towne along with The Sterling, also located in Center City, who represent the culmination of over $250 million of net investment including the lease up of over 1,400 homes and the creation of $100 million in asset value. Some of you may remember when we hosted our Investor Day in Philadelphia 3 years ago, to showcase our plans and early work on these properties. We are pleased to have executed on the vision we outlined at that time, and my thanks go out to a host of Aimco teammates for their dedication to the success of these transformative projects. In Boulder, Colorado, construction at Parc Mosaic remains on track, with preleasing schedule to begin during the fourth quarter of this year and initial occupancies expected next summer. Looking ahead, we're excited by both the depth and quality of our redevelopment pipeline. As highlighted in our earnings release, we are pleased to announce our plans to develop a new community located within the Anschutz Medical Campus here in Denver and immediately adjacent to our existing 21 Fitzsimons property. The campus includes the University of Colorado Medical Center, Children's Hospital Colorado, and the recently completed, Rocky Mountain Regional VA Medical Center. This burgeoning 500-acre life science and innovation hub is home to 25,000 jobs today and that number is projected to nearly double over the next dozen years. In 2017, we entered into an option agreement providing us the exclusive right to purchase four land parcels surrounding our 21 Fitzsimons property. These parcels represent the only land zoned for multifamily development on the Anschutz Campus and can accommodate up to 850 apartments at full buildout. This initial phase will include 253 homes, a 225 space parking garage, 4,600 square feet of ground-level retail. We expect to break ground during Q4 pending our closing on the land later this month with delivery scheduled for 2020. Our ownership and operation of the neighboring 21 Fitzsimons property, which contains 600 apartments provided valuable insights into our underwriting and operating efficiencies that will allow for improved operating margins. We project the $87 million investment will result in an NOI yield in the low 6s upon stabilization and produce a free cash flow unlevered IRR greater than 10%. Next, with an update on portfolio management, I'll turn it over to John Bezzant, Aimco's Chief Investment Officer, John?

[John Bezzant:]

Thank you, Wes. We had a busy few months on the transactions' front. As mentioned on our previous call, we closed on the purchase of 4 communities in Philadelphia on May 1. Subsequent activities have completed the paired trade for these communities and Bent Tree in Northern Virginia. We acquired Bent Tree in February 2018 for a total consideration of $160 million. We invested another $308 million on the initial 4 Philadelphia communities. Paid for these investments, we've issued $65 million of OP units at $53 per share to the Philadelphia seller. Assumes $209 million of debt on the Philadelphia communities, sold our asset management business and the Hunters Point communities for gross proceeds of $590 million, and sold Chestnut Hill village, a C+ rated property in suburban Philadelphia for cash of $170 million. These paired trade activities result in a more focused Aimco business, an update to our Philadelphia and D.C. portfolios. Through acquisitions, we anticipate will yield a free cash flow internal rate of return, 400 basis points higher than the dispositions made to fund them. And we generated additional cash for the deleveraging, Paul will discuss in a few minutes. We have two additional Philadelphia area assets under contract with Carl E. Dranoff. The closing of the Camden property is conditioned upon city of Camden approval of the transfer of the existing pilot tax agreement, which has not yet been received. And One Ardmore Place in Ardmore, Pennsylvania, is still under construction and remains on track for acquisition upon its completion in the first half of 2019. We expect to start preleasing on this community before the end of the year. And as Terry noted, the exit of our Affordable business and the reinvestment of its proceeds over the past several years has been transformational for Aimco. The successful execution of this strategy was the result of hard work by individuals too numerous to name, but I would like to take a moment to thank all of those who made it happen. I'm grateful to have been surrounded throughout this process by talented, passionate people, who stayed focused on their job at hand amidst this change. With that, I'd now like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

[Paul Beldin:]

Thanks, John. First, I would like to cover our financial results for the second quarter. AFFO per share of $0.54 was up 6% year-over-year and $0.04 ahead of the midpoint of guidance. $0.01 of the outperformance is due to stronger than anticipated performance in property operations including the contribution from our newly acquired communities. The other $0.03 is due to timing-related items, which we expect to reverse later this year. Next, onto our balance sheet which keeps getting stronger. It has been a time of significant improvement for Aimco's balance sheet with the proceeds from the transactional activities that John discussed, we were able to pay off our entire $250 million term loan, repaid all outstanding amounts borrowed on our line of credit and hold additional cash, which will be used to unencumber 5 communities during the second half of the year, thereby increasing our unencumbered pool to $2.4 billion at year-end. We were also able to preserve our in-place below market debt previously collateralized by Chestnut Hill Village by transferring the $73 million mortgage to another property by substituting the collateral and maintaining this debt at an interest cost of 3% until its maturity in 2024, we are able to save approximately $4 million in future interest costs. As we enter the second half of 2018, we are now turning our attention to 2019 maturities. $250 million, of which, or about 50% are able to be refinanced in the fourth quarter. Based on today's interest rates and spreads, refinancing these loans would lower our weighted average interest rate by about 10 basis points, thereby creating more than $3 million of prospective annual interest savings. Also, on a year-to-date basis, we have repurchased $7.6 million of OP units at a weighted average 20% discount to our published net asset value. Finally, turning to full year guidance. As Keith described, our same-store properties performed well during the first 6 months, exceeding our expectations in average daily occupancy and blended rent growth. We expect 2018 average daily occupancy to be between 96.1% and 96.4%, up at the midpoint from 96.1% in 2017 and better than our guidance at the start of the year. With 70% of our 2018 leasing activity now complete, we expect blended rent growth this year of approximately 3%, up from 2.5% in 2017 and a 50 basis point improvement from our view at the beginning of the year. We expect 2018 customer retention to be 55%, up from 53% in 2017 with a corresponding reduction in fees and other income earned, when our resident moves out and her apartment home is rerented. That lost fee revenue is more than offset by avoided turn cost and vacancy loss and by higher rents achieved on renewal leases as compared to new leases. Taking into account, our year-to-date results and expectations for the balance of the year, we narrowed 2018 same-store revenue guidance to a range of 2.5% to 3%, increasing the low end of the range by 40 basis points and the midpoint by 15 basis points. The net effect of greater-than-anticipated blended rent growth and lower turnover is a 15 basis point increase in expected 2018 revenue growth. The primary variable to 2018 revenue growth is average daily occupancy in the second half of the year. For example, the midpoint of guidance is reached with second half ADO of 96%, a level we feel will be comfortably achieved. And the high end of guidance is accomplished with second half ADO of 96.4%, a 10 basis point improvement from the first half of the year. Given the increase to same-store revenue guidance and no change to the midpoint of our same-store expense guidance, we increased same-store NOI guidance by 20 basis points at the midpoint to 2.2% to 3%. We also updated our expectations for full year FFO and AFFO, narrowing the respective guidance ranges by $0.02, while maintaining the midpoints established at the end of the first quarter. With that, we will now open up the call for questions. [Operator Instructions]. Roco, I'll turn it to you for the next question.

[Operator:]

[Operator Instructions]. And today's first question comes from Juan Sanabria of Bank of America Merrill Lynch.

[Juan Sanabria:]

Maybe just starting off with Paul. You mentioned a couple of timing adjustments that helped out the FFO results for the second quarter versus your expectations. Could you just elaborate on that, what line items kind of moved around in terms of timing?

[Paul Beldin:]

You bet, Juan, I'd be happy to. At the AFFO line, $0.03 of our $0.04 of outperformance to our midpoint was timing related, as you noted. $0.02 of those is related to the timing of our capital replacement spending, where we have some projects that just slipped from an expected completion in the second quarter to the third quarter. And the remaining $0.01 is due to, and this occurs to FFO, is due to timing of our tax benefit and how that's being recognized throughout the year, the cumulative amount is the same for the full year. There are just some that was accelerated into Q2.

[Juan Sanabria:]

Okay, great. And then just on the same-store revenue guide, can you give us any color on, which markets are leading the increase to '18 expectations and which are lagging at this point?

[Keith Kimmel:]

Juan, it's Keith, I'll take it. The markets, I would say, that are leading are the Bay Area, for sure, has been an outperformer from where we had started at the beginning of the year thinking about it. Also, I'd put Los Angeles and Boston in that category. Atlanta has been a little tougher than we thought as an example. But I'd point to the Bay Area, Boston and L.A. as the big ones.

[Juan Sanabria:]

Okay. And do you think the Bay Area occupancy growth is sustainable?

[Keith Kimmel:]

Well, I don't see anything that would make me think otherwise. At the moment, when we went into the beginning of the year, last year end of '17, it was a little sluggish, and so we saw some acceleration and we've seen it be particularly good, as we look at where our portfolio lies in Redwood City, in San Mateo, in San Bruno, the Pacific has some very specific places in the peninsula that are really special. And so there's nothing at the moment that would make me think differently, but I don't want to get ahead of myself.

[Operator:]

And our next question today comes from Austin Wurschmidt of KeyBanc Capital Markets.

[Austin Wurschmidt:]

Just want to touch a little bit on the other income piece, it looked like that was a big driver of the acceleration you saw on same-store revenue growth yet, you're expecting that to be, I guess, a lower contribution to overall revenue growth. So can you just give us some color as to what drove that, and how we should be thinking about it through the back half of the year?

[Paul Beldin:]

Yes, Austin, this is Paul, I'll start then I will see if Keith has anything to add. Year-over-year in the second quarter, other income was up just under $500,000 and that's been driven by 3 primary functions. One, Keith and the team have done an incredible job of continuing to help us maximize our parking revenue as well as our opportunities to generate fee from customers who have pets and so that is a big contributor. And the other contributors is continued as lower bad debt, which is also a testament to Keith and the team, where during the second quarter, our bad debt express as a percentage of revenue, was only 11 basis points. And so we're off to a great start to the year on that and we'll continue to work to do better.

[Austin Wurschmidt:]

And then should we expect that to continue to grow at that pace?

[Paul Beldin:]

At that 5% pace that was up in Q2? No, for the full year, we expect other income to be slightly below the growth of the full year -- full year rental revenue, excuse me, sorry for being unclear.

[Austin Wurschmidt:]

No, that's all right. So you expect blended rates essentially to moderate seasonally from the 3.4% achieved be consistent with what you did in the first half and then kind of a stable occupancy. Is that summarized appropriately?

[Paul Beldin:]

Yes. Just to restate it, we expect that year-to-date, our blended raise rates were -- are 3.1%, they were 3.4% in the second quarter. We expect normal seasonality as we go through the remainder of the year and that would result in full year expected 2018 blended lease rates of 3%. So just 10 bps lower than where we are year-to-date. And then our contribution from other income is a little bit lower than we expected at the beginning of the year. And so then the only really remaining variable is average daily occupancy. And so, as I outlined in my remarks if our ADO for the second half is 96%, we end up at about the midpoint and if it's 96.4%, we're at the high end of the range. And just for reference, we're at 96.3% for the first half.

[Austin Wurschmidt:]

And I appreciate that. And then just bigger picture, as you guys kind of talked about at the beginning of the call, you've done a lot of work refining the portfolio for some time now. And I'm just curious what the next area or segment of the portfolio that strategically or economically could make sense to focus on, either from an incremental investment perspective or perhaps maybe something in that other real estate category. How are you think about the portfolio today?

[Terry Considine:]

Austin, this is Terry. And thank you for the question. As we look forward, we expect more of the same. And we expect our results in the next seven years to reflect the same strategy that drove the outsized returns of the past seven years. One addition to that will be that we expect to ramp-up redevelopment spending, as Wes mentioned in his remarks. From the existing level, which has been about $200 million a year to perhaps $300 million a year.

[Austin Wurschmidt:]

That's helpful, and maybe to put a little finer point on it, is there anything else in the other real estate category that you look at as being noncore and potentially a source to fund redevelopment going forward? Or other investment initiatives?

[Terry Considine:]

Austin, again, thank you. Exactly right. We will go through our portfolio and even though it's much improved over the last several years, 10% of it is in the bottom decile, it's tautological. And we will look for the weaker properties that might yield an attractive cost of capital and see if we can reinvest them in better location with better properties.

[Operator:]

And our next question today comes from Nick Joseph of Citi.

[Nicholas Joseph:]

Terry, I appreciate the report card on the results of the strategic plan since 2011. You mentioned that NAV per share has more than doubled. When you run the analysis, how much of the change is the result of cap rate compression versus capital allocation decisions?

[Terry Considine:]

Nick, I don't have that right at hand, I apologize for that. I think you're certainly correct to point out that we've had a favorable environment, and we'll calculate that and get it right back to you. It will be a contributor but it will be by no means decisive as to the improvement.

[Nicholas Joseph:]

Appreciate that. And then just, for the Medical Campus development, what's the timing on the remaining 600 units or your hold options on the land and then what's the expected total cost?

[Terry Considine:]

Nick, again, I'd like to answer that because I want to throw a bouquet to John Bezzant. John negotiated those options a couple of years ago. And their term is tied to the rate of job growth on campus. And so that we have no pressure or incentive to get ahead of the expected mushrooming of employment on the campus, and as that job goes -- increases, we see an opportunity to build out our footprint there.

[Nicholas Joseph:]

How long do the options last for?

[Paul Beldin:]

10 years.

[Terry Considine:]

10 years.

[Operator:]

And our next question today comes from Rob Stevenson of Janney.

[Robert Stevenson:]

On Page 4 of the earnings supplement, you guys segment out your portfolio into the A, B and C+ buckets. Can you talk about how each of those buckets performed during the second quarter and year-to-date? Is the 50% that's represented by A underperforming any material way, given the competition from new supply?

[Keith Kimmel:]

Rob, it's Keith. We think that the best perimeter that we look at is new lease pricing when we look at how things are performing currently. There's been about 100 basis point spread as we look over this last quarter between As and Bs and Bs were performing. Now with that being said, one of the things I'd point out is that really is market dependent. So as an example, in Los Angeles, our As were outperforming our Bs this last quarter. In contrary to that, Boston, we saw our Bs outperform the As. So it really does become very market specific and it becomes very geographically dependent. And that's really how we've seen it over the past quarter here.

[Robert Stevenson:]

Okay. And then D.C, what level of traction are you guys seeing in that market. I mean, it seems like that things are better than they have been but still not anywhere near as good as they've been in years past before all the supplies started coming in. Are we starting to get towards the end of that? Are you guys seeing greater traction this time of the year this year than you did last year? Or is it just more of the same?

[Keith Kimmel:]

Rob, it's Keith. I'll walk through that. What I'd say is we're seeing some stabilization. Where our portfolio is in suburban Maryland, in suburban Virginia, the Alexandria area. Over multiple quarters over the past 2 years, I've talked about, one might be up and one might be down, and what we've seen in this last quarter is both of them being quite similar. While we're not seeing a rocketing of acceleration, we're seeing some stabilization there. So we're looking forward to the days that we see some really strong growth. At the time, I would say that it seems like it's stabilizing.

[Operator:]

And our next question is from Rich Anderson of Mizuho Securities.

[Richard Anderson:]

Paul, I'll start with you. We started this conversation a little earlier today but can you kind of explain to me the asset management number getting what effectively $6 million more in asset management income, despite the fact that you closed the sale of it in July. It seems like a kind of a chunky number relative to what you did in the past, first half of the year.

[Paul Beldin:]

You bet, Rich. I appreciate the question. And as you correctly point out, our contribution from asset management in the first 6 months of the year was about $16 million. We expect the full year contribution to be $22 million. So there is a pickup in the run rate for our 1 month of ownership. And really the contributing factor that provides the disproportionate impact is a function of how the tax credit business operates. As we operate that business, we had a recorded obligation on our books to deliver future tax credits to the investors, and in connection with the sale that John and Lynn successfully negotiated and closed, we're able to transfer this obligation to deliver these future tax credits at a price below our liability, and so that is going to result in an incremental amount of tax credit income recognized in the third quarter.

[Richard Anderson:]

Okay. Okay, so it's tax credit, using -- you're going to changing the tax credit and asset management line, is that correct?

[Paul Beldin:]

The asset management business is comprised of 2 functions. One, its net operating income that's generated by the underlying properties, that's used to pay the fees from that business. And then secondly, it is the delivery, our obligation and what we have done since we started the business, our delivery of tax credits that we promised to the investors. And those cash credits are earned over the life of the partnerships.

[Richard Anderson:]

Yes, okay, understood. All right. And Terry or some -- maybe broader question. The -- as I've said on a few of your competitor's call, the theme of this quarter has been low turnover, or as you call it, high retention. And I'm curious if you have an epiphany about why suddenly we're seeing such a sort of a dramatic decline in turnover. Is there something about this cycle that's different? Or do you think that this is something that's got shelf life to it?

[Terry Considine:]

Rich, while I gather my thoughts. Let me ask Keith to comment on it, because he's responsible for a lot of our success.

[Keith Kimmel:]

Rich, I wouldn't say that it's -- for us it's anything that's quite that unique. If you think about our calls over many quarter, this is our long-term strategy. We've talked about retaining our residents, having lower-turnover cost. And for us it's been a specific strategy that we think is playing out. That's around customer satisfaction. Our -- we've had our 19th consecutive quarter of better than 4 stars. We know that those folks that are happy with us stay with us longer. Customer selection is a really big part of this, when we're not evicting residents or having people that are moving on unexpectedly. We know that, that creates a better environment at our communities in which people stay longer. And then I would point to our team's execution as we have emphasized this point of maintaining our residents so we have turn cost avoidance, frictional vacancy and things like that. So this is an area we focused on for many years and don't believe that we're going to stop thinking about it that way. Terry?

[Terry Considine:]

Thank you, Keith. Rich, I would add, Keith gives a good explanation of why Aimco does particularly well by that measure. But I think your question was more around the general experience of that and I think there are probably 2 things that come to mind. One is there is a better economy and so there's fewer credit stresses on rental households generally. And secondly, I think you can just see the -- an example of the long-term trend among the public REITs, you get better each quarter. And I think that we're delighted by what we do at Aimco but we're very admiring of what we see our sister REITs do. And I think it's a part of this discipline that these quarterly calls and your helpful questions provide, as we look at opportunities to improve and we work at it. And so I think it's improving in operations, it's the help of the economy and I think it's likely to continue.

[Richard Anderson:]

What percentage of your tenants are single?

[Terry Considine:]

Last time I looked it was a little bit -- about 50%. You mean single-occupied apartments.

[Richard Anderson:]

Single, unmarried, I should say?

[Terry Considine:]

Well, there's an ambiguity there. About half of our apartments are occupied by single -- by only one person. Sometimes they are not married but they may be sharing an apartment with someone else. So however you want -- I'm not sure what your question is there.

[Richard Anderson:]

I don't want to get into that right here on this call.

[Operator:]

And our next question today comes from Dennis McGill of Zelman & Associates.

[Dennis McGill:]

First question just has to do with the 50 basis points of upside to the bounded rent number for the year. I think you said earlier that was essentially led by -- driven by Bay Area, LA and Boston, I was just hoping you can maybe put a little thought behind each of those markets as what you think is driving that upside relative to initial expectation?

[Keith Kimmel:]

Dennis, I'll walk you through it. So the Bay Area, the occupancies have just come back strong. And so as we look at those markets, it's -- it was a stronger occupancy than we thought, and so therefore we've been able to push rates. In Los Angeles, I'd give you a similar story. This last quarter, we were at 96.8% as an average daily occupancy in Los Angeles. Our nonsame-store or those buildings that are in Mid-Wilshire, we were at 97% average daily occupancy. So between those components, those were really big driving factors. In Boston, for us, it's been the suburban properties that have been the ones that have really shown strength and in all 3 of those cases, essentially we were just with strong occupancies rates we've had more strength and maybe we initially thought when we started the year.

[Terry Considine:]

Dennis, I'd like to jump in on that because Keith pointed to some external factors and outcomes. But my view is a lot of it's due to Keith and his team, that they've worked hard and they have continuing success improving customer selection, picking people that are inclined to stay just from their own personal characteristics and then satisfying them in a measured way. And we just see everyday confirmation in our daily business that people are choosing to stay with us longer throughout the country. These are just three areas where he's done a particularly good job.

[Dennis McGill:]

Okay. You also noted earlier on the prelease side, I think the number you said was about 50% of July leases were preleased versus 1/3 a year ago. Is that a shift in strategy or processes on your side? Or is that just a demand-driven metric?

[Keith Kimmel:]

Dennis, I'll start and see if Terry wants to add any. This is a very specific strategy. What we know. At the beginning of the year, we decided that we wanted to put a real emphasis around this, and the focus has been how do we match the customer who walks in, who has a desire and a want for an apartment to matching them with one that is on notice. The reason we put this emphasis here is we know that if we can match those two things together, we limit the amount of downtime between -- and vacancy loss between the time someone moves out and the time somebody moves in. And so it has been a very specific focus that we've incentivized our team around it, and put very specific expectations around how we wanted to do more of this knowing it will ultimately drive to that higher average daily occupancy that you see in the results. Terry would like to anything?

[Terry Considine:]

Sure. This also is an example of tenant selection, customer selection. We want our customers to be people that plan ahead. And we think that they will be more stable and more likely to stay with us longer. And so by seeking out people who can plan ahead of the last minute, and make a commitment to us in a prelease, we are increasing our prospects for having them stay with us on a long-term basis, provided we do a good job of satisfying their needs.

[Dennis McGill:]

Okay. And last question. You said that some of the benefit in the quarterly expense side was declining labor cost. And I just wanted you to clarify where in the business you're seeing that? And whether that means decelerating increases or actual declines? Because it would seem contrary just overseeing in general in the economy and specifically any construction-related labor?

[Keith Kimmel:]

Dennis, I'll take it. So first of all, let's be clear, we're actually being our team members more. What we're finding is ways to be more efficient generally across the board. There's a lot of different ways we think about the business. We have exceptional measurement through our data analytics. We are paying our team members more for those that are -- do exceptional work and find ways to be more efficient in a way that gives us a better result.

[Dennis McGill:]

So fewer -- I guess we should read that fewer hours, higher pay per hour?

[Keith Kimmel:]

Could be fewer hours, yes, it could be fewer hours, it could be things that we find that we could centralize where we used to have 5 people across the country, but we could do it in a central way with these 1 or 2 people, things like that so it's a combination of those items.

[Operator:]

And our next question, it comes from John Pawlowski of Green Street Advisors.

[John Pawlowski:]

I was hoping for some more specifics on Austin's question about noncore real estate. Could you tell us what markets constitute the bottom 10% of the portfolio today?

[Terry Considine:]

John, it's Terry. And thank you for that question. I don't think that today, that we would break it down by market. We would break it down by specific properties with specific circumstances. Sometimes the submarkets, sometimes the what side of the street they are on, sometimes their physical condition, and so it's much more micro than trying to pick a particular market.

[Patti Shwayder:]

John, I think you saw an example of that in your hometown just this last quarter. We sold Chestnut Hill Village. We bought the Dranoff portfolio, both in Philadelphia and it's really a focus of looking asset by asset. What do we think future performance prospects are, where is the greatest cash flow, where is the greatest growth opportunity down the road.

[Paul Beldin:]

And just to amplify -- sorry to cut you off, John, this is Paul.

[John Pawlowski:]

Can you give me the business case, way you continue to own senior living house?

[Terry Considine:]

We make money. At Aimco, we are very economic, and we focus on free cash flow internal rate of return, and we focus on value creation. We have I think today 3 senior living communities. They're all in California and so we have good demand, good results. There's a little bit of a property lockup because of property 13 tax basis. But the basic reason is we make money by owning them.

[John Pawlowski:]

Would it like a long-term buying the whole IRRs and those properties going forward versus an apartment community in the similar neighborhood?

[Terry Considine:]

I haven't made that exact comparison but if you want me to follow-up with you, I'd be glad to.

[Paul Beldin:]

And John, this is Paul. Just a comment on IRRs, on the senior communities, one thing that we do routinely is to stack rank all of our community based on the expected future free cash flow IRRs, and the senior properties that Terry mentioned are probably in the middle of our portfolio, they are not near the bottom 10%.

[Operator:]

And our next question comes from Omotayo Okusanya of Jefferies.

[Omotayo Okusanya:]

I just had a quick question. Most of your peers, again, did increase same-store NOI guidance this quarter and that also led to an increase in the midpoint of their FFO. You had the same phenomenon midpoint of same-store NOI is growing up on midpoint of FFO, but sure guidance is not going up. So I'm just trying to reconcile what the offset is with your numbers? And why that you don't have an increase in the midpoint of the guidance or your FFO guidance as well.

[Paul Beldin:]

You bet, Tayo. Appreciate the question. The offset is related to the asset management business. If you look back at our transcript from the first quarter, or our earnings release, you would have noted that we talked about an expected full year contribution from asset management to be between $22 million and $24 million. Now with the sale completed, we expect that, that is going to be at the low end of the range at $22 million so that's offset.

[Operator:]

And our next question comes from John Kim with BMO Capital Markets.

[John Kim:]

I guess there wouldn't be a multifamily call without a Costa-Hawkins question, so I might as well ask it. So you said in your supplement that you are in markets, purposely chosen markets, that have had -- that have not had stringent rent controls here, not in markets like San Francisco and Santa Monica. My question is how confident are you that cities that you are currently in won't follow suit if proposition kind of passed?

[Terry Considine:]

John, we've got Patti Shwayder, one of our senior colleagues here who is a member of the steering committee on these top 10 campaign. And who's a veteran of many political contests. And so I'm going to ask her to speak to it sort of on a city-by-city basis. If it were to be that Costa-Hawkins were repealed. But what I would add at the beginning, which is something that was touched on in the remarks in our earnings release is that -- I've operated in the state before there was Costa-Hawkins and business was good. The areas where the government becomes the most intrusive and where the risk of rent control is greatest at least historically are areas we've avoided. Going forward, it's of course, unpredictable but it's that experience that leads us to think that on a more balanced view that life will continue after Costa-Hawkins. But, Patti, what would you say about the campaign and where we stand?

[Patti Shwayder:]

Sure and answer your question, how confident are we that these are cities that won't pass rent control, we can look at the last couple of years for an example. Since 2016, there have been 11 cities that have had Costa-Hawkins on the ballot. And we've been successful in defeating it in 9 of them. The 2 where Aimco was involved in, Redwood City in specific, they were defeated substantially, so it's going to be one by one by one, as it has in the past with Costa-Hawkins, without Costa-Hawkins, as Terry said, when you look at the facts and when you look at housing in California and how these ballot initiatives are put forward, we've had some success and I expect that will happen in the future.

[John Kim:]

One of your competitors [indiscernible] discussed stepping up their short-term rental program, and I'm wondering if you could remind us what your views of having this in your portfolio is? And how that compares to your views on Airbnb?

[Terry Considine:]

Those are two questions. And John, we'll raise the limit to answer both of them. The first is that we're not in the short-term rental business. And it's a perfectly good business. It's more -- it's going in the direction of hotel business. It has pluses and minuses, also it has attractive pricing. But also has turnover and transaction cost. Our target is on long-term residential communities with stable neighbors, stable neighborhoods and the benefit of that kind of predictability and continuity. And so we're not at all interested in short-term rentals. The second question is about Airbnb. And the reason that we are litigating with Airbnb is because it's important to Aimco that we pick your neighbor and provide you the safety and comfort of a stable neighborhood. With Airbnb, there is no consideration of who is their customer or what is their behavior. And so our obligation to the 95%, who want ability is in conflict with Airbnb's interference. And I thought that the Airbnb business model was innocently naive. But it now seems to be built on a reckless disregard of our residents and our property rights, noncompliance with law and regulation, a callous lack of concern for Airbnb's own customers whose vacations are very much at risk for being ruined by reason of unknowing participation in Airbnb's unlawful actions and trespass. Well, actually the two views come from the same concern for our long-term customers.

[Operator:]

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

[Terry Considine:]

Well, thank you all very much. I know you've had long weeks and that it's the Friday afternoon, we appreciate your spending some of that with us. At Aimco, we're very upbeat about the future. If we've left you with any questions, please feel free to call Paul or Lynn or Suzie or Connor or any of our team, and we'll try to be as transparent as we can be. Thanks very much. Have a good weekend.

[Operator:]

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.