Apartment Investment and Management Company
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good afternoon and welcome to the Aimco First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. And I’d now like to turn the conference over to Lisa Cohn. Please go ahead.

[Lisa Cohn:]

Thank you. Good day. During this conference call, the forward-looking statements we make are based on management’s judgment including projections related to 2015 results. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings. Actual results may differ materially from what may be discussed today. Also, we will discuss certain non-GAAP financial measures, such as adjusted funds from operations and funds from operations. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on Aimco’s website. Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, Executive Vice President in-charge of Property Operations; John Bezzant, our Chief Investment Officer; and Ernie Freedman, our Chief Financial Officer. A question-and-answer session will follow our prepared remarks. I will now turn the call to Terry Considine. Terry?

[Terry Considine:]

Thank you, Lisa, and good morning to all of you. Thank you for your interest in Aimco. The Aimco transformation continues and again 2015 was good news to report for each of our five areas of strategic focus; property operations, redevelopment, portfolio management, balance sheet and culture. Here is the bottom line. Our most important metric for economic success is the sum of cash dividends plus increases in net asset value per share. As announced earlier this week our quarterly dividend is up 15% year-over-year. Consensus NAV per share is also up 24% year-over-year. Here is how we are making this progress, in property operations our highest priorities are to select high quality customers provide outstanding customer service, control costs and do all of these consistently. Here are a few facts, first the quality of Aimco customers is better than ever. The median income of residence moving into an Aimco apartment during the first quarter was $80,000 up 13% compared to last year and up 36% compared to just three years ago. Higher household incomes reflect an older and more established customer with a median age of 35. Second, Aimco’s service quality is also at a record high. Over the last two years Aimco customers have provided a 170,000 answers to surveys with satisfaction scores rising steadily. In the first quarter Aimco customers graded us at 4.12 stars out of 5. And Keith and his team are working hard to fill in and earn that fifth star. Third, by attracting and selecting the right customers and providing excellent customer service, we keep turnover low. Aimco customers rent and Aimco apartment for an average of 24 months up from 22 months just three years ago. This helps control cost, because turnover is expensive approximately $2,300 per turn. And over the last three years Aimco turnover has averaged 48% much lower than the pier average of 55%. Lower turnover helps this controllable cost. Defined as property cost before taxes, insurance and utility expense. Here are out compound annual growth rate has been negative over the last six years. This is the result of hard work and numerous small initiatives. Now in the first quarter controllable cost were higher than we would like due to seasonal cost for snowmageddon [ph] some timing issues and some areas where we expect improvement. Over the years Keith and his teams have done a great job in cost control and expect we’ll continue to do so. Let me turn to redevelopment, in the first quarter we completed construction at Lincoln Place and Preserve at Marin. Our cost and timing were within the forecast we revised one year ago and we are achieving rents above underwriting. As to completive redevelopments we expect second generation lease rates to increase substantially as explicit and implicit construction in discounts are recovered. For example, Pacific bay business completed last year average rent increases in the first quarter were up 14% it going to 8% on renewals and 20% on new leases. Patti and her teams are doing an excellent job with the current profit redevelopments and with refilling our redevelopment pipeline for future years. They continue to expect net asset value creations equal to 30% and more of our redevelopment spending. Next, portfolio management is one of our most important responsibilities. It’s how we allocate the shareholder capital and trusted to us. Our goal is to increase portfolio quality, while maintaining geographic and price point diversification. Our discipline is to make pair trades that is to sell Property A to fund Property B. The comparison makes it easy to see whether what we’re doing is busyness or makes income better. Here is the record. During the past three years and first quarter of this year John and his team sold almost $2 billion of properties with rents about $900 a month, and invested the proceeds in the acquisition, redevelopment and development of properties with average rents about $2,400 a month. This increased portfolio average rents by 35% to more than $1,700 in part due to market rent growth, but mostly due to the impact of redevelopment and acquisitions funded by dispositions. Our free cash flow margin increased by 10% through the sale of lower rent properties and reinvestment and higher rent properties. The percentage of our portfolio invested in "A" quality properties increased by almost a half and was funded by reducing by 80%, the percentage of our portfolio invested in "C" quality properties. The percentage of net operating income earned in our target markets increased to 90% and that improvement continues. Portfolio average rents in the first quarter were 13.2% higher year-over-year. We follow this pair trade discipline in all of our investments, large or small. We have a clear and consistent strategy. That is we focus on 12 to 15 target markets, we maintain price point diversification while upgrading the overall quality of our portfolio. We remain within our leverage targets and we invest in properties as risk adjusted, free cash flow, internal rates of return are greater than those of the properties sold to fund the investment. Now when we allocate capital, we have several options. Often or most attractive users are upgrades to properties we already own, whether to capital improvements or through redevelopment. Most of our capital spending falls into this category. We have a second opportunity within properties we already own to increase density that is build new apartment homes with middle or no additional land cost. Yelm Creek is a recent example. A third opportunity is to make property acquisitions. In a competitive market we generally find pricing unattractive except where we can add value through improved operations. Saybrook Pointe in San Jose, it would be an example from last year. Finally, on rare occasion we will undertake new development, where we are unable to access a target market by either accretive redevelopment or acquisition. Examples over the past years include The Palazzo’s in Los Angeles and One Canal in Boston. In each of these, we selected an experienced developer who skin in the game insulated Aimco from development risk. In each of these, we expect higher returns to compensate for the residual risk. This is exactly the model we are following at the La Jolla Cove [ph] in California. We are not in the development business, we will not get into the development business, we do not have and will not build an internal development team. Onto balance sheet, our highest priority is safety. We focus on low leverage, on limiting entity risk, refunding risk, re-pricing risk and construction funding risk. We are committed to low leverage. At the end of the first quarter, our leverage to value was about 35%. We expect that to decline as our re-developments lease up, bringing our leverage closer to 30%. We are measured by leverage to EBITDA, our target is to be less than seven to one and to be lower still at this time in the cycle, say six and half to one or even six to one. Again we expect re-development lease ups, property operations and property debt amortization paid from retained earnings to be the basis for further improvement in this metric. When thinking about leverage, we consider un-funded construction obligations. For example, at our Lincoln Place Redevelopment we obtained a property loan commitment for $190 million to fund construction, before we went forward. We’ve come to appreciate the financial flexibility of a pool of unencumbered properties and at the end of the first quarters, ours had a value of $1.3 billion. It was gratifying and a well deserved compliment to Ernie and his team when during the first quarter the safety of the Aimco balance sheet was recognized by S&P as investment grade. The continuing and substantial progress on these several clearing and consistent priorities is grounded in our intentional emphasis on a collaborative, respectful and performance-oriented culture. We work as a team. We are gratified last month, when the Denver Post again recognized Aimco is one of the top places to work in our state. For me it’s a great pleasure and privilege to work with a high achieving team, not only here in Colorado, but across the entire country. This record of increasing net asset value per share, improving operations, profitable redevelopment, a high quality portfolio, a safe balance sheet and a positive culture together with a positive outlook for more of the same with a backdrop when the Aimco Board of Directors voted earlier this week to increase the quarterly dividend. In short for Aimco, business is quite good. Now for more detail in the first quarter, I would like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

[Keith Kimmel:]

Thanks Terry. We’re up to a solid start in 2015, with first quarter revenues up 4.4% year-over-year and 1.7% sequentially. Our onsite teams executed our plan with enthusiasm and continued commitment to world-class customer service. As a result, we achieved renewal rate increases averaging 4.8% for the quarter with particular strength in the Bay Area, Miami and Boston. Were those leases expired and we’re not renewed, our new leases accelerated throughout the quarter from 30 basis points in January to March as increase of 2.3%. As a result of our team’s hard work, our blended lease rates also improved throughout the quarter from 2.1% in January to 3.5% in March, all while increasing average daily occupancy for the quarter by 20 basis points year-over-year and 30 basis points sequentially. Turn over for the quarter was 48.4%. Of the customers who decided to move out, 23% were for career moves, 17% did not renew due to price, and 13% moved out to purchase homes. There are no significant changes in these move-out reasons versus recent quarters or our long-term averages. We continue to be successful in replacing move-out with better qualified residents at higher rents. The average incomes of those new customers who moved in during the first quarter was $137,000. The median income was $80,000 resulting in a consistent rent-to-income ratio of 21%. Year-over-year the median income of our new residents is up 13% compared to the first quarter of 2014. This result is driven by an improvement in our portfolio and resident base. Looking at our ten largest markets, which make up three quarters of our revenue. The top performers had revenue increases from 6% to nearly 10% for the quarter. This was led by the Bay Area followed by Denver, Miami, San Diego and Los Angeles. Our steady performance for the quarter with midrange growth of over 3% to better than 5% were Boston, Chicago, Orange County and Philadelphia. And rounding out our ten largest markets, we had Washington D.C. which was up 80 basis points. As we look ahead to preliminary April results, blended lease rates were up 4.7%, 90 basis points ahead of April 2014 with new leases up 4.3%, and renewals up 5.2%. April’s average daily occupancy was 96.5%, 30 basis points ahead of last year, and May and June renewal offers went out was 6% to 8% increases. 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?

[John Bezzant:]

Thank you, Keith. During the first quarter Aimco continued the improvement of its portfolio through the application in this pair trade discipline. With the sale of lower rated properties and investment of the proceeds and properties with higher rents and better prospects. We sold conventional properties in Garden Grove, in Cyprus California, Towson Maryland and Suburban Denver. We also sold two affordable properties. These properties had average revenues per apartment home of less than $1,300 and sold with an average free cash flow cap rate of 4.7%. Through redevelopment, development and acquisitions, one in the first quarter and second in April, we invested in properties located in Boston, Venice, California, the Bay Area, Center City, Philadelphia, and Buckhead Area of Atlanta. We expect from these investments stabilized average revenues per apartment home of nearly $2,800 more than twice that of the properties we sold. Stabilized free cash flow cap rates over 5%, and higher projected revenue growth. An important contributed to Aimco’s rapidly improving portfolio is our redevelopment program. During the first quarter, we invested $25 million in redevelopment, and as Terry mentioned, completed construction at Lincoln Place in Venice, California and Preserve at Marin in Corte Madera, California. These were complicated redevelopments we spend multiple years, and we’re pleased to have completed construction at a cost below the expectations we laid out of this time last year, and within the timeline we provided at that time. Today we are over 85% leased up at Lincoln and nearly 75% of Preserve, and Keith and his teams are achieving rents above underwriting at both communities. During the quarter, we continue to redevelopment of our Park Towne Place and Sterling properties both located in Center City, Philadelphia. We are executing both of these redevelopments in phases, providing us with the flexibility to adjust as we go, depending on product acceptance and competing supply. We’ve commenced preleasing of the redevelopment tower at Park Towne Place, and the second phase of apartment homes at the Sterling. How we are in the early days rents are coming in above underwriting in both projects. Construction is nearly completed Aimco’s 2,900 on first redevelopment in Seattle and work is progressing as planned at our Ocean House on prospect redevelopment in Ohio, California. Construction also continues on only redevelopment project, one canal in Boston. During the quarter we invested $18 million in this project and not withstanding some scheduling pressures during the severe winter weather. Still anticipate completion of this project during the second quarter of 2016, and within our original budget. Before I move to our acquisition activity, I would like to point out that as we do once a year, we have updated our revenue projections for the redevelopment and development projects that has been on Supplemental Schedule 10 for more than a year. This annual update takes into consideration market rent growth over the last 12 months and in goes project to-date [indiscernible] great achievement. Revenue expectations were increased at Lincoln Place, Preserve at Marin 2,900 on first and One Canal. For our more recent projects Ocean House, Park Towne Place and Sterling our original estimates remain in place. We have updated our yield projections on these projects and now expect a weighted average NOI yield, excluding future market rent growth of 5.6%. This is a 20 basis point increase from our previous estimate with cap rates remaining flat to down on these markets – in the markets where these assets are located, we believe these investments are driving even greater value creation. On the acquisition’s front, we purchased in the first quarter 94 apartment home community located in Atlanta between Midtown and Buckhead were $38 million. The community was built in 2008 to condominiums specifications and has average revenue per apartment home of over $3,600. Subsequent to quarter end we acquired – I have certificate of occupancy for $63 million our newly developed 115 apartment home community located in the Kendall Square neighborhood of Cambridge, Massachusetts. We have started leasing up the end upon stabilization, expect the average revenue per apartment home to be over $3,500. As we look ahead into the rest of the year, we will continue to follow our fair trade approach to portfolio management. As you will see in our earnings release, we have increased our guidance for property sales from $250 million to $275 million at the midpoint. This guidance increase reflects additional asset sales to fund year-to-date acquisitions. We now expect to generate net proceeds to Aimco of a $150 million to $160 million, a $20 million increase at the midpoint. We continue to look for opportunities to upgrade our portfolio through selective prepared trades, if we find the right investments we will adjust our guidance for property sales accordingly. I would now like to turn the call over to Ernie Freedman, our Chief Financial Officer. Ernie?

[Ernie Freedman:]

Thanks, John. I will start the day with first quarter 2015 results. The FFO of $0.46 per share was $1.10 per share ahead of the high end of our guidance range. And FFO was right at the high end of our guidance ranged $0.52 per share. The FFO [indiscernible] the high end of our guidance range due to the FFO out performance as well as lower capital replacement standing them planned, which we expect to make up during the balance of the year. And then, these results were a couple of offsetting non-recurring items I would like to point out. First, casualty losses were $2.5 million or $1.05 per share higher than we had expected due to the extreme winter conditions in the Northeast. We also incurred $1.7 million or $0.01 per share penalties on the repayment of two property loans that were scheduled to mature next year. The prepayment penalties were less than the interest that would have been paid until their maturity dates. So we proceeds from our January equity offering to retire the debts. These items were offset by $0.01 related to the reversal of the litigation reserve and $0.01 of deferred asset management fees. We came in at the high end of our guidance for same-store operating results with revenues 4.4% higher than first quarter 2014, offset by expense growth of 2.9% leading to NOI growth of 5.2%. We did experience higher than anticipated expense growth during the first quarter as a result of the severe winter weather in the Northeast, but this was more than offset by higher revenue growth. On the balance sheet in January, we raised $357 million through a common equity offering and have used the proceeds to pay off of our line of credit. Redeem our CRA preferred equity and pay off three property loans. 20 of our communities are now unencumbered with an estimated growth asset value of $1.3 billion. We plan to repay additional property loans later this year when they open up for prepayment without penalty. As Terry mentioned S&P upgraded Aimco to investment grade at March. We have net features published guidelines to consider up investment grade and are hopeful we’ll receive good news later this year. Reaching investment grade with an important accomplishment for Aimco and our team. We remain committed to continuing to improve our balance sheet by reducing leverage further and increasing the sides of our unencumbered pool. This reduction will be realized through amortization of property debt [indiscernible] earnings and by increasing earnings as redevelopment and acquisition properties are stabilized. On investment grade rating allows us for future consideration of use unsecured debt Aimco does not anticipate doing so. Moving onto the subject of our common dividend, as Terry mentioned, we announced earlier this week our board of directors approved an increase in our common dividend to an annualized rate of $1.20 per share were a 15% increase from our dividend in 2014. In determining an appropriate dividend payout the board seeks to retain enough cash flow from operations to fund capital replacement spending and the required principle amortization of our property debt. With our continued overall decline in capital replacement spending due to our [indiscernible] portfolio management discipline, and our accelerated deleveraging that occurred earlier this year with our January equity offering, the board recognize the opportunity to increase our dividend. At this higher dividend rate, we are now paying out approximately 65% of our AFFO. Looking ahead in operations, we are increasing our full same-store revenue growth projections to reflect our expectation of stronger results in 2015. We now anticipate same-store revenue growth between 4% and 4.5%. On the expense side, our expectations for the full year remain unchanged at a growth rate of 2.5% to 3%. With these expectations, we now project full year higher NOI growth of 4.5% to 5.5%. For the second quarter, pro forma FFO is projected to be $0.51 to $0.55 per share and AFFO is projected to be $0.42 o $0.46 per share. Year-over-year conventional same-store NOI growth is projected to be 4.25% to 5.25%. Second quarter conventional same-store NOI is projected to be up 1.5% to 2.5% compared to the first quarter. We have increased both full year pro forma FFO and AFFO. Before we take questions I’d like to point out one item in our supplemental schedules. As we do at the beginning of each year, we evaluated each of our properties and our non same-store portfolios to determine whether inclusion in same-store for the upcoming years appropriate. This year we determined at eight of our Manhattan properties meet our same-store definition and these properties are now reflected in our same-store results on scheduled steps. Finally, I would like to let everyone know that we will be hosting in an Investor Day in Philadelphia in early October, which will include towards of our Park Towne Place in Sterling redevelopments. We will also be hosting towards our West Coast redevelopment properties in Lincoln Place, Preserve at Marin and Pacific Bay Vistas that we could sell later, but for more information with specific dates from Elizabeth Coalson in coming weeks. With that we will now open up the call up for questions. Please limit your questions to two per time in the queue. Erne, I will turn it over to you for the first question please.

[Operator:]

[Operator Instructions] Our first question comes from Nick Yulico, UBS.

[Nick Ylico:]

Thanks. I was wondering on the topic of like asset sales. How do you view what’s going on in the market right now. I mean M&A’s picking up pricing our portfolios. Is this pretty strong and yeah I don’t think you guys have shop like a portfolio of larger portfolio of assets in some time. How do you think about maybe taking advantage of the sales market in a bigger way rather than just selling off individual assets and doing a sort of a bigger portfolio sale?

[Terry Considine:]

Nick this is Terry. Thank you very much for your question. It’s a question we ask ourselves and review regularly and the two factors we consider in particular. The first is whether we get a better execution in a portfolio or one by one. And so far we’ve concluded that we maximize proceeds to Aimco by selling individual properties rather than in a larger portfolio transaction. Of course the second very large governor is the reinvestment opportunity. We look at this is not just a question of whether we can make an advantage sale, but whether we can reinvest the proceeds in properties that have higher rents, that they are consistent with our market allocations. And that have higher growth prospects. And that’s the real governor our rate of sales and John’s done a good job, but we encourage him to go and find more. John, do you have anything to indentify?

[John Bezzant:]

No that you’ve got it.

[Nick Ylico:]

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

[John Bezzant:]

That case Arne [ph], that’s a correct observation that we’ve provided in 2015 what we only expect historic tax credits in the project we currently have in place. And we are successful with the first space of Park town and continue doing further phases at Park town, each of those phases [indiscernible] historic tax credit associated with them, those are the credits are available for entire project. And so we are certainly optimistic and we are off to get start at Park town and if we do move forward to phase 2 to phase 3 to phase 4 each of those would have historic tax credits certainly over the next couple of years. Similarly, if we get to the situation where we complete all of sterling in Philadelphia which would be a few more phases to go that will also be eligible for some tax credits. So those two projects specifically we have a line of sight to see that we have some historic tax credit available to us. And not quite at the amount you’ve seen that are in the number this year. So they decrease on and as we look at future redevelopment opportunities certainly any of our projects that are in the eight ranges that potentially put up historic tax credit. So it should be properties that are over 50 years old. We get that consideration is to something that could help with the economics and make sense for what we want to company on an extensible we want it different from construction standpoint.

[Nick Ylico:]

All right. Thanks guys.

[Terry Considine:]

Thanks Nick.

[Operator:]

The next question comes from Nick Joseph with Citi Group.

[Nick Joseph:]

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

[Terry Considine:]

Nick, that’s just a terrific question. Again that something that we think about all the time. A have – and high price points have many good qualities, but they bare with them some risk it’s a risk that price point is the one more subject to competitive new building. And so, the way we think about that is to most for two points for protection. First of all geographic diversification as you know we are more highly diversified geographically than many. And we hope that by doing so that we will be in a recovery mode and in Washington, D.C. by the time that the bay area is over built and vice versa. The second thing is we give a great emphasis to location, location, location, it’s the watchword to real estate, but we look for those not just submarkets, but those special locations which are not as exposed to competitive new building an example of which would be our Preserve at Marin project in Corte Madera, California or prospectively our [indiscernible].

[Nick Joseph:]

Thanks. And then you mentioned a 68% for renewals been sent out in maybe May and June. What spread you expect to see there?

[Keith Kimmel:]

Nick, this is Keith. We typically see about a 100 basis point melt from the asked ultimate degree.

[Nick Joseph:]

Thanks.

[Terry Considine:]

Thank you, Nick.

[Operator:]

Next question comes from Rob Stevenson at Janney.

[Rob Stevenson:]

Hi, good afternoon guys. Terry, I appreciate the additional color on the redevelopment on the existing redevelopment stuff. Can you talk a little bit about what you guys have keyed up to stark this year and what the overall sort of redevelopment file looks like within Aimco currently that sort of would meet your return for [indiscernible] currently?

[Terry Considine:]

Rob, that again a terrific questions on one we’re focused on, but one that is best answered by Patti Fielding who are head of that operation, Patti?

[Patti Fielding:]

Hi, Rob the process we started in 2015, we are from carryover in the 2016 and beyond. We have the opportunity for spend on additional phases of Sterling between $34 million to $44 million and Park Towne between $88 million to $100 million. Both of these projects are in Center City, Philadelphia. This of course assumes that each of the projects continues to progress well. As a reminder, each phase app sterling represents three to five floors of the 29 story high-rise in each phase at Park Towne represents one of the four 19 story towers. Yorktown is a project outside of Chicago that we expect to kick off later this year. And much of this spending will occur beyond 2015. We anticipate the first part of the redevelopment among incorporate the current 15 story tower and a five story midrise building. Yorktown we also have excess land created from an earlier rebuilding of the parking structure. A later phase may incorporate adding density to the size like we did it in [indiscernible]. We anticipate announcing the first phase and its cost and economic later this year. We have opportunity at our lot of properties that we own in a joint venture with JPM. Our focus today has been on the amenities in the Plato West. We have the opportunity to renovate the remaining homes at west as well as at Plato East. And our smaller more boutique property is Villas property. We anticipate announcing this next day is later this year. Finally, we’re really excited about our plans around Yacht Club community in the Miami, neighborhood of Brickell. This is a 357 home high-rise, our plans including investment and enhanced arrival experience, amenities, apartment finishes and the potential addition of a restaurant. This is another project we’ll provide details on later this year. Those projects are likely to be up next. My team is looking hard and another dozen or so opportunities currently that will help to back bill 2016 and 2017. We are looking the projects at New York, suburban Washington D.C., Denver, the Bay area and San Diego. The limited process, not the number of opportunities frankly it’s our appetite for risk. As we look to spend about 2% to 3% of our growth asset value a year.

[Rob Stevenson:]

Okay. And then Erne. Can you talk a little bit about your comments about not looking to do unsecured debt in the future? Mean what drives that decision, is it just pricing, is it additional stuff that you have do in order to do with deal. Can you provide some color there?

[Ernie Freedman:]

No Rob it’s really around risk appetite. We’re just comfortable, we’re not concerned around pricing as we certainly see today that we’re able to get profit debit depending on what the quality of the property, location of the property that certainly competitive with unsecured financing. It’s really around – what we close down for the last 20 years and managing our risk around the balance sheet in that. We like using non-recourse, long-dated, fixed rate amortizing property debt. That said I do like the option of having unsecured in our backlog, it is that something that we would need to pursue. And frankly Rob we haven’t talked to Rating Agencies about that, we’re not looking to do it. So we may certainly have to do something little bit differently we have today. But by having investment great from SMP and hopefully one not too far away. It’s a much easier discussion to have, but we certainly, I don’t want to mislead anyone by getting investment grade and we’re considering something else. So we put a lot of value on optionality [ph]. We like having the option, we like having that available to us – it’s that something considering in the future. But as of today we’re very comfortable with our current strategy and continue to grow on our pool and flexibility and maintaining our low leverage by just employing profit debt and importantly for preferred equity.

[Rob Stevenson:]

Okay, thanks guys.

[Operator:]

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

[Jordan Sadler:]

Thank you. Quick one on the portfolio overall and the current scale in the context of – where this portfolio has been over time. Your questions about additional sales and I’m – as I look across your portfolio and see markets where you’ve got – one or two communities. I’m curious, given your perspective overtime. Are there benefits of scale and what do your thoughts on these smaller markets for Aimco.

[John Bezzant:]

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

[Jordan Sadler:]

Correct.

[John Bezzant:]

Yes. There are some advantages in having a concentration in a particular market. They are not as huge as in other say manufacturing businesses, but there is a very real what I know in management which is said it’s a fewer places to call and it is easier for keeping this team to get there and have their feet on the ground and hands around the problems that we’re looking at. So I think overtime we are likely to either get larger or smaller or larger or exit markets in which we have only one or two properties.

[Jordan Sadler:]

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

[Ernie Freedman:]

Sure, this is Ernie. We have not disclosed specifically yields on individual project. That’s actually something that we will provide at our Investor Day as we get further along in the rent up to be give you more of the real number versus what I say more the hypothetical number based on how think things are going. That said, with the information we disclosed in Schedule 10 in using a reasonable assumption around margin is, you will get pretty close to what yield would be on something like we can place. For the entire redevelopment portfolio, John mentioned that we are projecting a yield overall 5.6% on that current growth. So that’s the answer to your question on Lincoln Place. Jordan, the other question, if you could just remind me, please.

[Jordan Sadler:]

Sure, just is there a hurdle rate in terms of the 2% to 3% redevelopment spend annually you would target?

[Ernie Freedman:]

John, you want talk about how we have tried to do that and repair trade with perspective and we try to target for the premium we expect from redevelopments?

[John Bezzant:]

Sure, as we look at sales and which has been our primary source of capital for redevelopment and other investments that we make, we measure primarily at the free cash flow internal rate of return level. For an investment in an acquisition for example, on operating property, fully operating property, we do looking at a 150 basis points roughly, excuse me, now we are going to start with the baseline of an acquisition in our market, we would look at as our baseline for a yield. For redevelopment we would look at a 150 to 250 basis points above that, for a development we would look in the 200 basis points to 250 basis points above that as targeted yield at inception of the project.

[Jordan Sadler:]

Okay. Thank you.

[Ernie Freedman:]

Thanks John.

[Operator:]

The next question comes from Jana Galan, Bank of America Merrill Lynch.

[Jana Galan:]

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

[Terry Considine:]

John?

[John Bezzant:]

Sure. We look actively in all of the markets that we are in that we are targeted. The National is one of ours that I would tell is kind of on the soft cusp of our target market strategy. We do continue to look at transactions and opportunities there, we’ve obviously not found any. And we do look regularly at disposition opportunities within and outside of the target markets, primarily outside, but within the target markets focused on where we can sell and make a trade, a pair trade to come out of, if you will an older or more suburban asset with lesser prospects into one that we feel has greater prospects that that goes on everyday all across the portfolio.

[Jana Galan:]

Thank you and I was wondering if you could tried a little bit more detail on how Washington performed in the quarter and particularly the trends you’re seeing in April by submarket?

[Keith Kimmel:]

Ron. This is Keith, I will take that. What we are seeing is – we are definitely seeing an improvement from where we stood a year ago, as we think about two markets that we really are in suburban Maryland and suburban Virginia specifically. And in suburban Maryland that would be where we are seeing more strength. In suburban Virginia, specifically with there is some more inventory that we had to work our way through and so we’ve got to work to that. But generally speaking what we’re seeing is some acceleration and definitely improvement from where a year ago?

[Jana Galan:]

And Keith you just want a comment maybe on you’ve seen from January through April with regards to Louisiana connectivity?

[Keith Kimmel:]

Sure, Ernie Yana what Ernie is referring to is we’ve some acceleration, specifically around new lease pricing. From January, February, March and through April we’ve seen is a sequential improvement every month. In January as an example, we are at – seeing negative 5% on new leases, now in April just barely negative 1%. So there has definitely been some improvement, but with that being said, there is more work to be done.

[Jana Galan:]

Thank you, Keith.

[Keith Kimmel:]

Thanks Jana.

[Operator:]

The next question comes from Dan Oppenheim with Zelmam & Associates.

[Dan Oppenheim:]

Thanks very much. Some of you just talk a little bit about Yark position and plan yes may those written contemplated as a Condo and then was converted to rental. Did you buy there was any thought of converting into condos, at some point in the future or you think about this is a as rental going forward?

[Terry Considine:]

Now we really bought it as a rental and looked to operate it as a rental going forward. All of our underwriting is done on a rental basis, we don’t assume a condo exit to justify a purchase.

[Dan Oppenheim:]

Okay and then just overall you talked about increasing assumption for acquisitions as primarily based on the two way lender in Cambridge, not so much optimism that’s even easier to buy over the remainder of the year, correct?

[Ernie Freedman:]

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

[Keith Kimmel:]

And in our original guidance for the year dispositions had some flexibility with its range to be able to fund a very low level acquisitions when you combine it, till John has done through April, that’s why you seen them we move our disposition guidance up a little bit at the mid-point. So discover the funding for both of that acquisition.

[Dan Oppenheim:]

Thanks, very much.

[Keith Kimmel:]

Thank you.

[Operator:]

Our next question comes from Drew Babin at Robert W. Baird.

[Drew Babin:]

Good afternoon.

[Keith Kimmel:]

Hi, Drew.

[Drew Babin:]

First question is just on submarkets within LA, story this year is obviously LA, kind of turning the growth part of your California trailing they take every markets, as the economy gained part of traction. You bring it down by submarket at all or you are seeing kind of just a broad pick-up in the entire market?

[Terry Considine:]

Hey, gentleman, let me start now, kick it over to keys where I tell you that, keeping the teams, I actually thought pretty positive result in LA, as we finished up last year too so. It is good to see that LA is strengthening your seeing across the Board from [indiscernible], but we had pretty good success in acceleration in LA, starting early in 2014 that Keith and I just may talk about somewhat where our communities are and Ernie, what you are saying?

[Terry Considine:]

Let me just if we think about Los Angles, really what we’re seeing the strength is the West side of LA and Mid-Wilshire, our Palazzo Communities and Hillcrest and things of that nature. That’s really what we are seeing the strength that has been building and in addition to that our Hillcrest Community, which is on the Board of Century City in Beverly Hills has also been really accelerating this 2015.

[Drew Babin:]

Okay, that’s helpful. Question for Ernie on 2016 that maturities on, can you talk on about the and sorry if I miss something on this, the set up in terms of 2016, compared to 2015, where could there be a scenario possible where an equity issuance make sense early in the year to prepaid substantial maturities?

[Ernie Freedman:]

Well, we certainly don’t need to do that community continue to gets what we want from a leverage target perspective, and of course options are all is open. So we have been able to do actually over the last period of time, take advantage of adding some leverage to certain assets and taking those assets proceeds to pay-off other loans to keep growing on encumbered pool. We don’t need to as when common equity to do that. One of our larger maturities in 2016, early part of 2016, actually opens for prepayment in 2015, and it’s for one of the best communities that we have in our portfolio. I would expect that that will actually refinanced in 2015 and we will do refinance they expect that properties or communities in a joint venture. So you actually see that the opportunity for us to potentially do something with maturities for 2015 or reasonably more in the back of 2016 not the first half.

[Terry Considine:]

We’re not concentrating issuing equity to pay down debt. So it were in a position where the equities trading at a real advantages price for us to consider it, it’s certainly an option that’s on the table but not one that I will consider in the base case.

[Drew Babin:]

Great, thank you. That’s all helpful.

[Terry Considine:]

Thank you.

[Operator:]

Next question is from [indiscernible] BMO Capital Markets.

[Unidentified Analyst:]

Thank you. It sounds like the S&T upgrade came ahead of your expectations as far s the timing, but I’m still trying to understand why you are not contemplating using offering unsecured team ahead of your expectations as far as the timing, but I’m still trying understand why you’re not concentrating offering unsecured debt offering?

[Unidentified Company Representative:]

I’m sorry guys. The first was about the investment grade and not issuing, not giving unsecured developer.

[Unidentified Analyst:]

Yeah. You mentioned you valued optimality, but I’m trying to wonder why that you go to the process of getting investment rate credit rating, if you’re not going to use it.

[Unidentified Company Representative:]

Well, I guess couple of things I’d say John. One, we’ve met with the ratio agencies for 20 years and not been an unsecured borrower, because that’s just something you do it as a public company. Two we haven’t differently that we would have done anyway, it still just happens that the rating agency seen that what we are doing and say what others are doing. So we been committed for many years to bring leverage down we talked about as early as 2012 and we achieve that target about two years early and then we talk at the end of the 2013 or 2015. We’ve been committed to create a large [indiscernible] to provide profitability for maybe lower lever, let’s say leverage in 30% and 35% range. It doesn’t make sense to encumber maybe about a half of them at 60 and the other half without to get the number like that. So really is there anything different [indiscernible] enjoy going to see the fees quarterly and talking to them. It just they’ve come around and say that we’re doing works. And we are very comfortable with our cost of capital, but more importantly we are very comfortable with the rest associate with how we finance the company, but as the CFO of the organization having more options is better than not. We don’t plan on using it today. It wasn’t a big effort to ask with the investment grade and it’s good to know that if we do change our amount in the future or if the market is in the condition it would make sense for us to change them on that capability.

[Unidentified Analyst:]

So, it’s not a large amount but you have some professional prefer that’s we deal above next year. Is that something that you could contemplating refinancing the mortgage from that.

[Unidentified Company Representative:]

Certainly, we’ve taken out prefers in the past and you’ve referring to, I believe our Class B came out in 2011 would be redeemable. If we feel at that time that that’s a cost of capital doesn’t make sense and we could replace it. We are certainly give consideration to doing a new preferred equity offering it had cheaper price, significantly cheaper price more that today 7%. And/or replacing that with the longer-term debt, but we like John, just make sure it clear. We like having a weighted average maturity that that’s much longer versus much shorter and I think as you know, compared to our peers one longest and we lever that professional preferred equity is just that as perpetual. That doesn’t come to, so forever equity in the 6% to 7% range is a pretty good spot and certainly will be a better stock person, the future having one if not two investment grades. And so we will keep that as an option for us as well.

[Unidentified Analyst:]

Okay, and then I had a follow-up on the disposition guidance. Did it’s increased because you expect better pricing on disposition or is it composition change or you’re throwing more assets. What is the primary reason?

[Unidentified Company Representative:]

Purely to have the cash available to pay for the two properties that the communities that John acquired during the first quarter and being part in the second quarter. Our original guidance contemplated that John will have some flexibility to just require a small property and now that he has completed the two at a combined purchase price, a little over $100 million. We just want to balance our sources and users. So it’s just around balancing that out from activity that’s happened today, then we’ll developing the development activity as anticipated for the remainder of the year.

[Unidentified Analyst:]

So they are different assets that you’re looking or so.

[Unidentified Company Representative:]

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

[Unidentified Analyst:]

Okay, got it. Thank you.

[Unidentified Company Representative:]

Thanks.

[Operator:]

Next question is from Dave Bragg with Green Street Advisors.

[Dave Bragg:]

Hi, good afternoon.

[Unidentified Company Representative:]

Hi, Dave.

[Dave Bragg:]

First question for you it relates to the just the disclosure on CapEx. It looks like you account for a $1,000 unit and your AFFO calculation about $1,200 in your free cash flow why the difference between the two?

[Ernie Freedman:]

Sure, one is I would say it’s more economic and one is the accounting rules that we’ve established many years ago Dave around accounting for capital replacement. The capital improvement spending, got and getting too much detail on how we do that, we will try to understand we acquired an asset how much of the asset has been used up to that point and if we’re replacing that asset which is buy or make an improvement to it. I know we’ve talked about that over years with folks on how we do that. In reality we think the economics around what happens if capital replacement is, it’s closer $1,200 and frankly maybe even a little bit higher. And so we want to use a consistent number and a consistent measure that doesn’t it’s not impacted by timing from quarter-to-quarter or year-to-year on larger capital plans. And so when John puts together both our projected IRs what we own today, as well as any underwriting that he is doing with Paddy on redevelopment projects on acquisitions. We want to use that consistent $1,200 and that’s what we’ve chosen to keep it there.

[Dave Bragg:]

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

[Ernie Freedman:]

Dave as you know in the past we’ve shied away from giving specific cap rates, but we hope I giving the rents and buy showing a reasonable margin assumption that you can make. You can triangulate and get pretty close somewhat cap rates would be. If I tell you from a free cash flow IR perspective, we expect both of these acquisitions John do you 100 basis points plus over what we had the properties that we sold anything you want to comment there?

[Unidentified Company Representative:]

Yes, and I think we even my comments our total investments we think are through read out acquisitions everything else, free cash flow, cap rates in excess of 5% of stabilization. I can call out on the Cambridge deal that we just bought closed late last week, it’s empty. It’s a brand new building just completed and so today the cap rate is zero, I will give you that. And that we expected it will stabilize above the 47 free cash flow cap rate on the sales that we made to fund it.

[Dave Bragg:]

And stabilize for you all, what does that mean, what timeframe there on both Atlanta and the Cambridge deal?

[Unidentified Company Representative:]

Atlanta is stabilized today at those rents over $3600, the Cambridge deal stabilization for us is lease up, which is modeled based on what we think the period would be on any given asset on that particular one. We would anticipate it being leased up later this year. And then really one cycle of turn that whether we get stabilize. As Terry noted in his comments on our redevelopments for example, we see there are implicit or explicit construction period discounts or concessions that are done during lease up while construction is going on around it. And we expect it in the normal lease up on the newly acquired building like Axiom that there will be some level of concessions to give the building leased up in a season. And then we expect that after a year or two we burn those off and recapture them. So stabilization in our model on a new building like Axiom would be in your three.

[Unidentified Company Representative:]

And Dave importantly we talk about the stabilized deals, we have done a good market rent growth, as we consider those and we gave our redevelopment yields, there as friends today not in the future in which as John just described in a property like Cambridge that stabilized yield that he is talking about certainly [indiscernible] in 24 months out, because when he described, but he is not including market rent growth that may occur between now and then. So that would only be it, market continues to grow in Cambridge, there will just be an addition to that number.

[Dave Bragg:]

Okay, thanks for that, one last question you provide specific disposition guidance we can see that we are not then you explained that because you did more acquisitions than expected in the first quarter. But did you also say that your expectations for acquisitions is your – have continued to increase over the balance of the year, what shall we think about as a right number for acquisitions in 2015 to go at this poor number?

[Unidentified Company Representative:]

Dave I will tell you that we are out in the hunt every day. We don’t have anything under contract today to buy. But we bid actively and aggressively every week, we put otherwise that on deals around the country. And we don’t land very many of them, our numbers last year and in gross, gross terms we looked at about 400 deals. We under wrote and offered on a little over 200 deals and we bought six. And so, as we look at this year we anticipate – we’re going to retain that same momentum that we have on the bidding side and we’ll buy something. We bought these two deals that we’ve disclosed today. And we’ll buy some more over the course of the year, but I honestly can’t tell you because the market is so competitive out there and that I don’t know whether I’m going to land one out of a 100 or one out of the 1000.

[Dave Bragg:]

Thank you.

[Terry Considine:]

And Dave, I guess one last comment to make on that is that we were not looking to crazily or wildly grow the info portfolio. We talk about the fact that we would expect to sell about 5% to 10% of our properties on a yearly basis to fund reinvestment. And our current disposition guidance right now, we are at about 3% and for two to last three years we didn’t do much more than that. We did maybe 4% to 5% last year, we did do more, and we did about 7%. So our current disposition guidance has laid out funds everything that we’ve laid out for you. The two acquisitions that John has done as well as our plan spending on redevelopment and then the development project for one canal for the rest of the year. John has staffed to see if we can find better communities for us to be invest in what have today. And we – [indiscernible] health successful, but there is likely that it won’t be, but there is also a possibility that it will be and you will see as we go out for the year. Some more dispositions hired in guidance level that fund potentially accretive acquisitions but not wildly grow the info portfolio but to see if we can get a chain on this continued mark as John has lead us on in terms of improved portfolio quality.

[Dave Bragg:]

Okay. Thank you.

[Unidentified Company Representative:]

Thanks Dave.

[Operator:]

The next question comes from Richard Anderson with BMO.

[Rich Anderson:]

Thanks. I guess my first question potentially awkward question but there always the most one. Terry, assuming – Terry you’re going to work and tell you a 150 years old and no one will be surprised by that, and it would look at kind of good plat [ph] fundamentals in the multifamily space, you know what I mean, the chatter both real and potentially imagined, from your perspective what happens first, succession or sale?

[Terry Considine:]

At income?

[Rich Anderson:]

Yeah.

[Terry Considine:]

Or?

[Rich Anderson:]

Meaning you relinquish your roll or the company gets sold?

[Terry Considine:]

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

[Rich Anderson:]

So the answer is in a succession unless you’ve got a magic portion. That we are not aware, is that right?

[Terry Considine:]

Some of these information is proprietary.

[Rich Anderson:]

Okay, and then just really basic question for Ernie, Schedule One is missing the weighted average shares, I am wondering where that is?

[Ernie Freedman:]

I will check on that and we will get that out to Rich, if they got neglected this time I want make sure it is available for everyone.

[Rich Anderson:]

Okay.

[Ernie Freedman:]

I appreciate when that – will get that up.

[Rich Anderson:]

Okay, great. Thank you.

[Operator:]

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

[Michael Salinsky:]

Good afternoon, guys. I just wanted to backset to Dave’s question there, because you touch recycling and acquisitioned. As you continue with the recycling of the portfolio still in the bottom 10%, moving that money back into redevelopment, but in the acquisition, at what point you get to the point where you really can’t shrink portfolio much larger without losing efficiencies or scale in markets?

[Ernie Freedman:]

Well, I’ll start with there, Mike. I think as we look at it, there is still plenty of runway. I want to point out that we are buying part of the reason for the acquisitions’ activity is that we are acquiring and keeping the size of the enterprise as the same or even bigger. And then it what was from asset value standpoint, and that’s our goal. From a unit count standpoint, I would look at the process as one of the distillation more than anything else. And that as we look at these 12 to 15 target markets, within them our unit accounts may in fact shrink, but our goal is to have the dollars reallocated and to grow within that when that growth would be true, we hope higher revenue growth in assets that we select in selling out of lower revenue growth markets and higher margins and just the opportunities that we see as we distill by choice, the portfolio into these 12 to 15 target markets. And I maybe should follow on what the silence of my own answering at the bit more. I don’t know is there is a magic number that we look at say this is too small. We are really looking at it literally paired trade asset by asset, once it value to us on a free cash flow or internal rate of return basis and can we do better.

[Keith Kimme:]

What I might add John, Mike, you study this and thought about this before some Mike said. The company is [indiscernible] by gross asset value grown. Its capitals increasingly concentrated in fewer units, but those units are ones that are efficiently operated and may even benefit by increased focus of having a smaller footprint. And I think the impact on the portfolio quality has been quite substantial and I think it will continue to be quite substantial. I think we’ll be quite pleased to look back in three years to see that the three years past was prolong to continue portfolio update.

[Michael Salinsky:]

No, that’s helpful [indiscernible] my second question here just in terms of the focus on free cash IRR or NAV. And then you look the different CapEx needs of A’s versus B’s, I mean, if you look at your acquisitions over the last couple of years – over the last two years predominantly a properties you redeveloping something you’re moving this up base can you continue – as you look at the portfolio today. I mean, is it inherently going to increase more on the A side. How do you balance out the diversification of A or B’s and C’s versus the free cash flow IRR growth potential of an A?

[Terry Considine:]

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

[Keith Kimme:]

I would add to Mike that the – just to get into the nitty-gritty on the [indiscernible] deal example in Atlanta. Very high end finishes, wood floors these kind of things that are a higher turn cost. Our free cash flow internal rate to return that we calculate for that acquisition incorporates a higher cost for turns on that property to reflect the fact that it’s go worth appliances and higher end finishes and these are the things going on. And then also includes that $1,200 door capital replacement reserve as thus every deal that we buy. So right, we think that the free cash flow internal rate to return through both expense modeling turn cost and the capital replacement budget accurately reflects the additional cost that we put into refer asset grade. Thanks Mike.

[Terry Considine:]

Thanks Mike.

[Operator:]

Mr. Considine would you like to make any closing remarks?

[Terry Considine:]

Yes, thank you very much and thanks for all of you on the call. I appreciate your interest in Aimco. For many of you Ernie, Lisa Cohn and I look forward to see you in New York next month for [indiscernible] week. In the mean time please call Elizabeth or Ernie or me if you have any question. Thank you and have a good weekend.

[Operator:]

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