Apartment Investment and Management Company
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good afternoon and welcome to the Aimco Second Quarter 2015 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 FFO and AFFO. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on Aimco’s website. Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, Executive Vice President in-charge of Property Operations; John Bezzant, our Chief Investment Officer; and Ernie Freedman, our Chief Financial Officer. A question-and-answer session will follow our prepared remarks. I will now turn the call to Terry Considine. Terry?

[Terry Considine:]

Thank you, Lisa, and good morning to all of you. Thank you for your interest in Aimco. During the recently completed second quarter Aimco continued on plan. Before my colleagues report in the particulars I’d like to point out a highlight. In property operations business is better year-over-year and the rate of improvement has accelerated. Rent growth and average daily occupancy are both higher and operating expenses are down in second quarter and are up only little more than 1% year-to-date. Keith and his team beat the high end of second quarter same-store NOI guidance by 145 basis points and this made for a good quarter and a solid book of business for the balance of this year and for next year to. In redevelopment are ongoing redevelopment projects are on time on budget and creating value about equal to $0.30 for every dollar invested. Patti and her team are doing a great job reaching several milestones in second quarter including completion of construction on 2900 on First in Seattle. Approval of the next phase of the redevelopment of the Sterling in Center City Philadelphia, 97% occupancy at Lincoln Place in Venice California and rent increases averaging 21% at Pacific Bay business as we move past the initial Lisa. In portfolio management second quarter revenue per apartment home was $1760 up 14% year-over-year. John and his team continue to sell our lowest rated properties and reinvest the proceeds and properties with higher rents and better prospects. And of course when we make investments we follow a pair trade discipline, explicitly comparing what we buy to what we sell. We invest only work portfolio quality is enhanced and the projected free cash flow internal rate of return is greater than net of the property being sold. And on the balance sheet it was gratifying in a well-deserved complement Ernie, Patti and the entire finance team when Fitch upgraded his rating of Aimco to investment grade. For these good results offer sincere thanks to my Aimco teammate both here in Denver as well as across the country to privilege and a pleasure to work with you. And now for more detailed report of second quarter operations I would like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

[Keith Kimmel:]

Thanks Terry. I am pleased to report with a solid quarter and operations with revenues up 4.5% year-over-year and 1.2% sequentially and acceleration from a result in the second quarter of 2014. Expenses were down 10 basis points year-over-year with NOI at 6.7% for the quarter both an improvement over prior year results. Our residents continue to increase our marketing customer satisfaction. They give us better than a four-star rating for the quarter and we continue to see improvement year-over-year. As result when renewal rent increase 5.1% for the quarter we saw particular strength in Miami, the Bay Area and Boston. Renewal rents in these market increased 6% to 7% compared to the expiring lease rates. For those leases expired and were not renewed our new lease pricing markedly accelerated throughout the quarter from 4.5% in April to 6.1% in May to June's increase of 6.4%. This resulted in a quarterly increase in new lease rates of 5.7% a 100 basis points better than last year. New lease rates were particularly strong in Denver and San Diego with increases between 9% and 11%. The Bay Area had the single greatest result in new lease premiums at 20%. As a result of our team’s hard work across the country, we achieved blended lease rate increases of 5.4% for the quarter, 50 basis points better than Q2 of 2014 all while increasing average daily occupancy for the quarter by 10 basis points year-over-year and 50 basis points sequentially. Turnover, for the quarter was 50.6% of the customers who decided to move out 25% were for career moves, 17% did not renewed due to price and 16% moved out to purchase homes. There are no significant changes in these moveout reasons versus recent quarters or a long-term averages Our resident quality continues to improve the average incomes of those new customers we moved in during the second quarter was a 148,000 with a median income of 90,000 year-over-year the median income of our new residence was up 20% compared to the second quarter of 2014 due to an increase in household incomes and portfolio quality. Looking at our 10 largest markets, which make up more than three quarters of our revenue the top performers had revenue increases from nearly 6% to almost 11% for the quarter, this was led by the Bay Area followed by Denver, Los Angeles and Miami. Our steady performance for the quarter with midrange growth of more than 4% to better than 5% were San Diego, Boston Chicago and Orange County. And rounding out our 10 largest markets we had Philadelphia and Washington D.C., which were up 1.8% and 1.2% respectively. Building upon our solid second quarter results the momentum continued in July, blended lease rates were up 6.1%, 50 basis points ahead of July of 2014. New leases were up 6.5% and renewables were up 5.7% July's average daily occupancy was on plan at 95.5% and August and September renewal offers went out with 5% to 8% increases. And with great thanks to our teams here in the field and here in Denver to your commitment to Aimco success. I’ll turn the call over to John Bezzant, our Chief Investment Officer. John?

[John Bezzant:]

Thank you, Keith and good morning all. During the second quarter we invested a total of $158 million on our portfolio to redevelopment, development and in two acquisitions. We invested in properties located in Boston, Cambridge, Seattle, Center City Philadelphia and La Jolla California. We expect from these investments stabilized average revenues per apartment more than $2900 three times that of the properties we sold to fund the investments and with higher projected rates of growth. Breaking down these activities we invested $45 million in redevelopment during the quarter the majority of which was related to our projects at Park Towne place in the sterling both located in Center City of Philadelphia. We are executing both of these redevelopments in phases providing us with the flexibility to adjust as we go depending on product acceptance and competing supply. At Park Towne Place our current project includes a significant upgrade to the amenity spaces and redevelopment of the apartment homes in one of the four towers. We commenced leasing during the quarter as the initial homes were delivered and 40 of the 65 completed homes are now occupied at rents consistent with our underwriting. At the Sterling 80% of the 156 completed apartment homes are occupied and rents are coming in above our underwriting. With strong results project to date Aimco approved a plan during the second quarter to redevelop an additional 103 apartment homes at the Sterling at a cost of $14 million. Work is also progressing as planned at our Ocean House on Prospect community in Ohio California and our first new move-ins occurred earlier this month. Rental rate achievement to date is above underwriting during the last 12 months we have completed the construction and lease up of three redevelopment communities Pacific Bay Vistas is located in the Bay Area, Lincoln Place in Venice California and 2900 on first in Seattle. Pacific Bay Vistas which was leased up in the third quarter last year is 95% occupied today and second generation leases are being executed at rates averaging 21% above the expiring rates. Lincoln Place which Terry mentioned was leased up in the second quarter is 97% occupied today, 2,900 on first which was completed and leased up during the second quarter is also is 95% occupied today. And as previously reported, we completed the construction of the Preserve at Marin at the end of the first quarter and that community is 90% occupied today. Overall, our redevelopment projects are enjoying good lease space and achieving rents at or above expectations. On the development front during the quarter we invested $22 million in our One Canal Street development in Boston. The construction is proceeding well and is now over 60% complete. We expect lease up to begin early next spring. On acquisitions, we invested $91 million in two communities in the burgeoning technology and life sciences hub around Kendall Square in Cambridge, Massachusetts. We also committed an additional $15 million to complete the development of one of these communities. In April, we acquired for $63 million Axiom Apartment Homes, a newly developed 115 apartment home community. We have had strong leasing success at this property with 24% of the apartment homes currently occupied at rents above underwriting. Upon stabilization, we expect the average revenue per apartment home to be over $3500. In June, we acquired 270 on Third and 91 apartment home community currently under construction just a few blocks away from Axiom. Our total projected investment in 270 on Third is $45 million which includes the $28 million acquisition price a maximum of $15 million in costs to complete the development, which costs are guaranteed by the developer and $2 million of other improvements and capitalized costs. On stabilization, revenues per apartment home are expected to average $2600. These acquisitions are a continuation of our long-standing plans to upgrade the quality and location of our Boston portfolio, which is historically been concentrated in the suburbs. Pair trade discipline, we will continue to look for opportunities to zone Boston and elsewhere. The investment activity I just described as planned and paid for within our pair trade framework were proceeds from the sale of lower rated properties are reinvested through redevelopment and limited development and acquisition activities in properties with higher rents and operating margins and better growth prospects. Consistent with this methodology, during the second quarter we sold our last conventional property in the state of Michigan with average revenues per apartment home of $876. And one of affordable property in suburban Chicago with average revenues per apartment home of $956. Looking ahead as you’ll see in our earnings release we've increased our guidance for property sales to $425 million at the midpoint, which reflects additional asset sales to fund the acquisitions I just mentioned. We now expect to generate net proceeds to Aimco of $215 million to $225 million this year. You will also see in our earnings release that we have provided guidance for acquisitions of $129 million which reflects our year-to-date activity. Having said that, we continue to look for opportunities to upgrade our portfolio through selective pair trades and if we find the right investments we will adjust our guidance accordingly. I’d now like to turn the call over to Ernest Freedman, our Chief Financial Officer. Ernie?

[Ernie Freedman:]

Thanks, John. Starting with the second quarter 2015 results AFFO of $0.46 per share was at the high end of our guidance range and FFO of $0.56 per share exceeded the high end of our guidance range by one penny. Within these results, we exceeded the high end of same-store guidance with revenues 4.5% higher than second quarter 2014 in expenses 10 basis points lower leading to NOI growth of 6.7%. This out performance added a penny to second quarter bottom line with year-over-year NOI growth improved over 2014 by 80 basis points in revenue growth accelerated 40 basis points and sequential revenue growth accelerated over 2014 by 10 basis points. Non-recurring income also added one penny to the quarter’s out performance. At the AFFO line these items were slightly offset by higher capital replacement spending during the quarter as we had the opportunity to accelerate some second half projects ahead of leasing season. On the balance sheet as we announced previously Fitch upgraded Aimco to investment grade in June notwithstanding the achievement of investment grade by S&P earlier this year and now Fitch. We remain committed to continuing to improve our balance sheet by reducing leverage further and increasing the size of our unencumbered pool. Today, our unencumbered pool includes 23 communities valued at $1.5 billion. On investment grade rating allows for future consideration of the use of corporate debt the Aimco does not anticipate doing so. Property debt markets continue to be deep and liquid, life companies and banks are aggressively pursuing opportunities to put capital to work in the multifamily space. Particularly for high quality assets and are more competitive than the GSE's as an example when we refinanced a $170 million loan for Palazzo property in West Los Angeles during the quarter we received 15 bids and ultimately closed the 10-year loan with a life company at a rate of 3.5%. As we look ahead to the balance of the year in operations we've increased our full-year same-store revenue growth projection to reflect our results to date and the strength we see for the balance of the year. We now anticipate same-store revenue growth between 4.25 and 4.75%. On the expense side we are reducing our expense growth projections to a range of 2% to 2.5%. With these expectations we now project full year NOI growth of 5% to 6%. For the third quarter we are projecting NOI to increase 4.5% to 5.5% compared to the third quarter of last year into decreased 25 basis to 125 basis points compared to this most recently completed quarter. After earnings we have established third quarter pro forma FFO guidance of $0.54 to $0.58 per share and AFFO guidance of $0.43 to $0.47 per share. We’ve increased both full-year pro forma FFO and AFFO guidance. The increase takes into account both our second quarter out performance and expectations for improved operating results for the remainder of the year. Offset somewhat by the impact of increased dispositions to fund completed and committed investment activities. Details and updates of all of our guidance metrics can be found on Page 5 of our earnings release. With that, we will now open up the call for questions. Please limit your questions to two per time in the queue. Operator, I will turn it over to you for the first question please.

[Operator:]

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

[Nick Yulico:]

Thanks. If I look at your same-store guidance specifically on the at the same-store revenue guidance for the year basically you know implies you could do about the same in the back half years you’re gone year-to-date about 4.5%. So you talk a bit about things accelerating it seems like that points to accelerating I mean you guys just being a bit conservative here as you look out the back half for the year?

[Terry Considine:]

Nick, we give a guidance range certainly see from that range there is a possibility that there will be some further modest acceleration that of course show there is an opportunity for the deceleration. We increased guidance now twice this year from when we started were hopeful that will be able to have a similar discussion with you and everyone else next quarter, but as we see things right now we think puts us in a pretty good shape to consider continue to have good revenue growth that's better than we saw last year. And if the things keep trending like we saw on July which was better than July last year and June which is there June last year that certainly would give us an opportunities slightly better in aim towards the higher end of our guidance range.

[Nick Yulico:]

Okay got it and then on Lincoln Place now that you know basically stabilize that asset. Can you tell us what the yield you’ve now achieved on that I think a year ago you're saying you expect about 5.25 yields? Maybe if you could talk about where it is today and how much you seen rents grow and that sub market in the last year?

[Terry Considine:]

Yes couple things I will mention there importantly Nick on Lincoln Place occupancies stabilize at this point revenue is not. We just finished construction here in the first quarter of this year and finished the lease up in the second quarter of this year and is we’re doing the math at lease up we expected in our experience with other redevelopment so we have some great rent bombs as we go to second, third, and fourth generation leases. As I saw make that clear that from an occupancy standpoint we are stabilized but certainly not from the revenue standpoint. So that in mind Nick based on today's rents not trended rents into the future. Based on today's rents so there is going to be more upside likely than I'm about to tell you. Right now what we project Lincoln Place at about 5.5 you know mid-5s stabilized yield and of course as we get these greater increases and get the stabilization from revenue standpoint and we get market growth over the next period of time will be even better still likely. And in terms of what’s happening in the marketplace stay at the strong market I will ask Keith just to comment specifically about what you seen in the market specifically in Venice.

[Keith Kimmel:]

I Nick its Keith, one of the things that we're excited about is that as we stabilize the went through the lease up our completion is that we were head of our plan and it would happen sooner than we anticipated which I think is a strong reflection on what’s happening in Venice in that particular submarket, there's a lot of technology that is in that area that Google has been moving in a lot of the employees in Snapchat and others that are helping us see great acceleration not just on the occupancy front. But also we have confidence on the rate front.

[Nick Yulico:]

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

[Terry Considine:]

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

[Nick Yulico:]

All right. Thanks, guys.

[Terry Considine:]

Thanks, Nick.

[Operator:]

Our next question is from Nick Joseph with Citigroup.

[Nicholas Joseph:]

Thanks for the recent acquisitions and lease up in construction how do you weigh the risks of these deals versus acquiring stabilized assets?

[John Bezzant:]

Nick, its John you know we weigh them against we look at lease up risk together with development risk where we have a little bit of development risk that is guaranteed by the developer on the 270 on third deal, that we are paying for that over the life of the project. But really factor that into our IRR calculations and so that it factors in through lease up timing and rate and expected rate growth are typical underwrite that we use on everything as a forward look using the market growth rates. And we look for a return on an asset like that that would be somewhere in the 50 basis point, 50 to 75 basis points ahead up on a completed asset ahead of what we would want for one that was stabilized and already done.

[Nicholas Joseph:]

Okay thanks. And then you’ve done a good job of improving the portfolio and the free cash flow margins. I mean this court you mentioned selling the asset and was that in 83 NOI cap rate, what percentage of the current conventional portfolio do you think would still trade at about a 7 NOI cap rate today?

[John Bezzant:]

Very little, I don’t have an exact percentage that I would give you I would tell you that from an asset standpoint we’re down to a handful that our rents that are right around a thousand dollars a door. I think there are five of them in the portfolio that are just below thousand dollars. Generally that rent level is somewhat indicative of the markets of the property is in and the cap rate at which it would trade I don't think you'll see another eight handle this was a - this was Michigan and it was suburban Grand Rapids. And so I would tell you five or six assets that are I am not even going to speak to seven handle, because I think lot of them could sell in with a six assets.

[Nicholas Joseph:]

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

[John Bezzant:]

They are in our pool. Yes, they are certainly in our pool and there are others that were higher rates that are in the pool as well you know but ultimately what it comes down to for that disposition driver part of it is the funding of our development redevelopment activities as we look into 2016 and part of it is our pair trades and what we see on the pair trade side. We continue to look and did transactions but they got to make sense as they trade for what we already own. We are fully invested in real estate today and want to continue to be fully invested if we see a chance invest in better real estate at better returns make the trade.

[Nicholas Joseph:]

Thanks.

[Operator:]

Your next question is from Rob Stevenson at Janney.

[Robert Stevenson:]

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

[Keith Kimmel:]

Rob thanks for the question. I mean we are definitely in recovery mode I mean we’re feeling better than we have quite some time. I will give you a little color on the different markets suburban Maryland and suburban Virginia we’re at. We are seeing more strength in suburban Maryland and suburban Virginia specifically in the Alexandria markets, there is still some inventory that work our way through. But I just as a reference point as we think about new lease rates you know in April we’re hovering a little bit below flat and we've accelerated every month from May 27 all the way to July at 39 as an example, so we are seeing some strength are starting to happen there, we need to get ahead of ourselves because there are still more work to be done, but we are feeling better.

[Robert Stevenson:]

Okay. And then you guys go through in our earnings release I guess a number of quarters now and sort of talk about what constitutes A, B and C plus in your portfolio. Once the rough breakdown today in those three buckets of the conventional portfolio?

[John Bezzant:]

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

[Robert Stevenson:]

Thanks guys.

[Terry Considine:]

Thanks.

[Operator:]

The next question is from Dan Oppenheim, Zelmam & Associates.

[Dan Oppenheim:]

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

[Ernie Freedman:]

Dan, this is Ernie. Yes, you’ll see expenses it will get probably in the third quarter slightly higher than we are running year-to-date, we’ve a tougher comp in the fourth quarter and so we’ve a tougher comp in the second half overall. The expectations are for higher expense growth in the second half. Most of that is fourth quarter and I think in the third quarter you’ll a number in the 2-ish range and you’ll see a number higher than that in the fourth quarter and though they have more difficult comp comparing to fourth quarter to fourth quarter year-over-year.

[Dan Oppenheim:]

Okay. And then I guess in terms of the products in Philadelphia if we – on JFK the Sterling there in terms of the – what sort of yield are you thinking about there clearly as you are including more units or it’s just that you're doing better than expected what type of yield think you end up getting on that?

[Terry Considine:]

That project is one of our better projects to date in terms of what we are achieving not only just what our underwriting expectations are we betting underwriting in terms of yield and it would be north of a 6% for us likely at least what we’ve seen to date and that’s one of the main reason we're confident to put another 103 apartment homes into the pipeline on that one. And if that continues to go we’ve the opportunity to do another eight to 10 floors or so the remaining and will be an important part of our 2016 contribution to redevelopment.

[Dan Oppenheim:]

Great, thanks.

[Ernie Freedman:]

Thanks Dan.

[Operator:]

Your next question is from Rich Anderson at Mizuho Securities.

[Richard Anderson:]

Thank you and good morning, or afternoon. So I understand that pair trade concept is very clear the way you presented and I also understanding Aimco probably the portfolio offers more in a way redevelopments and other of the public REITs, but I guess the question is other people or other REITs are expressing a fair amount of concern and hesitation about investing in this market as it gets more and more expensive both land costs and actual properties. So could you ever see a time where your sales will significantly outpace at commensurate level of acquisition or redevelopment activity as this sort of environment unfolds?

[Terry Considine:]

Rich, this is Terry. First of all I agree with your analysis I think that the market – many market assets are fully priced and this would not be a time when we would be inclined or quote by the market and in John's work he is focused more on anomalies if you will rather than on buying a particular market, particular asset at market pricing and so he looks for circumstances where we think there's something that's missed or where we can add some particular value. Without that we’re not likely to buy assets from others. In terms of whether or not we would continue to sell and hold the proceeds and cash or use them for further de-levering those are the possibilities we consider. Generally, our predisposition is to stay fully invested in real estate that’s what we’re hired to do and not to be asynchronous if you will in selling today with the prospect of investing in a future tomorrow that through circumstances we don't know.

[Richard Anderson:]

Okay, great. And then second question maybe a comment on the market for new supply as it relates to your portfolio I think many of the REITs also are being hesitant about in some cases starting new development activity, but I think the United States leads the world and people that are both rich and stupid. And so there will be plenty of new supply that will come online even in that environment were seeing that to some degree. So I'm curious what you think about new supply in your markets and how it might impact Aimco differently than others potentially?

[Terry Considine:]

Rich I will start and then hand about John who…

[Richard Anderson:]

By the way apologies for all the stupid people listen on the call.

[Terry Considine:]

I think you're right to focus of new supply. We’re in a time of wonderful rent growth, wonderful demand growth everything we see suggest little will continue but we know that the answer over time will be new supply and but it doesn't happen everywhere at the same degree at the same time. And so we track that by submarkets very specifically we look carefully at what our exposures are at our board meeting earlier this week we made a specific submarket by submarket report. Because we want to know that what lies ahead. And I would say that the first answer that is to be the highly diversified and not have all our eggs in one basket and of course that's been a cornerstone principal Aimco and second for all us to look for particular locations and geographies such as our property in Marine County such as our properties in La Jolla where a new supply will be more reduced. So I don't John what would you added to that.

[John Bezzant:]

Yes, I would just say Rich I think both your questions are really on point to things that we think about a lot and on the supply side of it as Terry mentioned we did do a report for board in the 40 – we track it down to the submarket level to look at it and look at deliveries over the next two years. And so on in this recent report don't have in front of me so my numbers may not be exactly I will give pretty close. In the top 40 submarkets were demand supply is going to be the highest in relation to existing supply over the next two years. We have something like 3% of our assets invested it's a very small number. And when I flip it the other way and look at our top 40 markets where submarkets were we are invested. The supply pictures is pretty good there as well in fact 20 appears put a report out month or two ago. That we are the least exposed to new supply by his analysis. And we look at it - we don't analyze our peers to look at their exposure to supply but we so very comfortable where we said.

[Richard Anderson:]

Thank you very much.

[Terry Considine:]

Thanks Rich.

[Operator:]

Our next question is from Austin Wurschmidt at KeyBanc.

[Austin Wurschmidt:]

Hey, thanks for the taking the question. Just given the acceleration you guys have seen across the portfolio and new lease rates. Are you consider increasing turnover to capture that higher rent growth.

[Keith Kimmel:]

Austin this is Keith. I’ll take that question. Back in often from time-to-time and I will give an example that when you think about the Bay Areas an example where you see rents are moving at on the new lease side at 20% those contemplations come into consideration you with the way we look at us as we take a lot of considerations everything return cost of vacancy what time of the year all those different things are going on and this is where our revenue management professionals are work here really leading guide her way to make those decisions.

[Austin Wurschmidt:]

Thanks and then just separately you guys considering any additional ground-up development today and then if you could just rank some of the redevelopment opportunities that you haven't throughout the portfolio?

[John Bezzant:]

So it is John. I’ll take the development question and then hand of to Patti for redevelopment. No is the quick and easy answer we do look at opportunities to partner with local development partners on new projects and but they have to pass or underwriting criteria and on a newbuild that would be literally from ground up as opposed to the – the two that you require during the quarter that one completed and one under construction. If we were to go to a if you will a virgin side to starting your return hurdles would be higher than what we talked about earlier. And right now we haven't seen any of those that are compelling enough to pull the trigger on. Patti on redevelopment.

[Patti Fielding:]

On the redevelopment side look at the U.S. starting in the west we have five projects on California that were looking at redevelopment on. Starting the Bay Area we have 707 Leahy, which is a 110 unit garden-style apartment. We are looking at interior and exterior renovations there. Heading down to LA we’ve got Palazzo West, Palazzo East in Villas. West is continuing phase read out there, where we are looking at finish in the remaining 38 penthouse units and completing for its 133 which is another 406 units. East will be an expansion of the fitness and spa Villas is the full, can be with amenities and working on the grounds. I'm heading down the coast to Costa Mesa, 3400 Avenue of the Arts, will be another phase and it’s actually finishing a phase construction of it started several years ago, where we got 240 units, that we are going to see there. Heading to the Midwest Yorktown in Lombard we’re evaluating a base project development that was built in, the original project it was built in 1972 and the partial renovation of its done in 2005 and 2007 and this will just be an expansion. And down to Florida we’ve Yacht Club which is located on the water in Brickell, it’s unobstructed views. We got a lot of untapped potential at that property. So we’re evaluating several options.

[Austin Wurschmidt:]

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

[John Bezzant:]

Yes, it’s a little bit early for us to providing guidance with that specific, I tell you the top opportunities for us on redevelopment going forward are continuation of the phase 3 developments that we’re doing in Park Towne Place and Sterling, so you can certainly anticipate a likelihood of continued spend there. Of course we need to finish off One Canal in Boston were a lot of that work will be done here by the end of 2015. But there is still be some spend to go in 2016. Beyond that as we are further along in the planning on those and as we get closer to the start of 2015, we’ll provide very specific guidance as to what projects may come what time of year they may come and what the spend will likely beyond those, but don’t want to get ahead of ourselves on those.

[Austin Wurschmidt:]

Okay, thanks for the time.

[John Bezzant:]

Thanks, Austin

[Operator:]

Your next question is from Drew Babin, Robert W. Baird.

[Drew Babin:]

My question. As you look through more acquisition opportunities and should more come up beyond what you are currently guiding to, should we automatically assume that will be matched with additional dispositions, just concerned, just my concern, but you know with these deals there seems to be bit of a yield spread between what you be buying and selling and it could come with the degree of FFO dilution. So how do you gauge, the growth versus portfolio improvement and the balance there?

[John Bezzant:]

Sure, Drew, this is John again. Yes, each one of them you know each acquisition we do is paid literally against a sale, there we look at multiple metrics on how we compare that the most important one to us is our free cash internal rate of return we want to trade up obviously in an IRR. And as you note that could potentially lead to NOI dilution. Generally speaking however when you're buying or excuse me selling like this quarter at a sub $900 rent and buying at a north of $3,000 rent the multiple there to free cash flow basis for us, we use a $1,200 a door CapEx expense number in our free cash model and our free cash numbers are really remarkably close – using the deals are bit of an outlier with the free cash flow cap rate up in the sixes. But most of them are going to be high fours, low fives and we’re finding that on a stabilized basis with on an acquisition those that we have pulled the trigger on. We feel comfortable, we pretty well trade across on a free cash flow basis.

[Drew Babin:]

Thank you, that’s helpful. And secondly you have something you just walk through the expense cuts that kind of drove the decrease in same property operating expense in the second quarter kind of walk through the marketing IT, insurance cost measures and whether on a non same-store basis whether any cost items were moved from operating expenses in the G&A. G&A was a little bit higher than that I was just wondering if anything keep the ready moving parts there?

[John Bezzant:]

Yes, I only answer the second part of the question first round any movements and then talk about some of the deals with Keith’s help on what happen in the same-store. Answer to your second part of the question, no there were no changes what happened with G&A in the second quarter that because we are tracking well to our performance metrics this year, we decide accrual to more bonus expense to reflect the fact that we are having better year this year. So that’s why G&A move up and as you can see from our guidance we expect G&A to be right on what we said at the beginning of the year. And so there I don't see any concerns and there were no movements from moving things from operating expenses to G&A. Specifically with in the operating expense as you pointed out couple of line items we did well. On insurance we just continued vigilance and watching things, we continue to have improved loss history and so our loss reserves continue to improve. We see in our health benefit claims actually have a couple of quarters a good guys this year where last year we had some bad guys and so that led to a large decline in insurance as well as our property renewal that which occurred effective March 1 were we have a very favorable property insurance renewal which we’ll run into all throughout the year. Specific to IT, Terry for giving me a hard time, but IT cost going up for the last couple of years so we finally being able to turn that around a little bit and be able to see some efficiency and cost savings to our administrative and software cost there and so I think that would be a good guy for us for the remainder of the year. Keith, wanted to just talk a little about [indiscernible] into our marketing expenses coming down.

[Keith Kimmel:]

Yes, sure Ernie. The marketing costs some of the things we saw there really were driven by resident relations credit, those resident relations credits are generally used where we have something maybe didn't go exactly the way we hope it would. And so we’ve had a very, very specific focus on customer satisfaction and the improvement of – and it was in my prepared remarks I talked about we’re seeing better than four-star ratings from our residents about their experiences and we had less of those in this past quarter than year before.

[Drew Babin:]

Great, thank you. That’s helpful.

[Terry Considine:]

Thank you.

[Operator:]

Your next question is from Conor Wagner at Green Street Advisors.

[Conor Wagner:]

Hello.

[Ernie Freedman:]

Hey, Conor.

[Conor Wagner:]

Ernie, first question on the increase in nonrecurring income in the quarter and then for the year that looks to be about two sense is that the primary driver behind the increase in the FFO guidance?

[Ernie Freedman:]

The part of that increase in nonrecurring happened in the first quarter Conor, so I didn’t bothered to update guidance at this point we do get another a penny here in the second quarter so as you look at our increase we increased our guidance to send the last quarter, that was nonrecurring I just didn’t update guidance at that point. The accumulation of those two items are now $0.02 so we updated our guidance we had $0.01 good guy in the second quarter from operations $0.01 from that the nonrecurring item you mentioned and then $0.01 also came from just a hodgepodge to other items. The reason we only increased FFO $0.02 and not for those $0.03 that because of our investing activity for the rest of the year. We’re going to be selling a few more assets than we had originally given guidance to. John mentioned that going to 270 on Third which is being built currently and will be finished here in the fourth quarter of 2015, but we’re expecting no income contribution from that community on 2015, but we are selling communities that are generating income to fund that acquisition and then set the penny backwards that we move on FFO.

[Conor Wagner:]

Great, thank you. And then you mentioned earlier Ernie a bit of a pull forwarding capital replacements before the busy summer leasing season and do you have any – can you quantify any impact that have either a new lease growth or revenue growth thus far into the second quarter and as you go into the third quarter.

[Ernie Freedman:]

Very little, it’s our capital replacement spending we make an assumption around that because it goes through AFFO that we get very little if any revenue enhancement from that. It's always good to get a better looking communities and not. You can see in our guidance that we didn't also increase our expectation for property upgrades from $45 million to $55 million. Those items we would expect to have some kind of NOI upside to sometimes it’s on the revenue side quite often it’s also on the expense side so it’s not just a revenue increase that we get from our capital enhancement project. Good example would be our wood flooring, our wood flooring program helps us on revenue in terms of rent premiums and more importantly to help to save on capital dollars because the wood flooring last 15 years versus carpet which typically only goes for about 2 to 3. We also save some expenses from that because it's lot cheaper to mop a floor than to do a professional carpet cleaning. And so when we see those opportunities to enhance our returns, we would certainly look for those and we’ve had some success there in getting those products accelerated to. So those are the two different buckets and how those can impact.

[Conor Wagner:]

That additional $10 million that you now guiding to can you quantify the impact that’s going to have this year?

[Ernie Freedman:]

Sure, I’ll give you the impact overall Conor, so roughly spend about $50 million a year on those capital enhancements and based on and not all that’s in same-store, some of that is in non-same-store communities, but that will increase our NOI contributions by about 80 or 90 basis points. And so right now the midpoint of our guidance we expect NOI growth to be about 5.5% between 5% and 6% and maybe 80 to 90 basis points of that is from our revenue and CapEx which I know has been pretty consistent with what others report. We are also doing this type activity in their portfolios.

[Conor Wagner:]

Great, thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from Wes Golladay at RBC Capital Markets.

[Wes Golladay:]

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

[Keith Kimmel:]

Wes, this is Keith, I will take it. We really like to use new lease price as the best barometer. And if we look over the past several quarters A's and B's have almost been on top of each other. With that being said this past quarter we saw B’s taking a little bit of an acceleration they were about 200 basis points better than our A’s and we always keep a close eye on it, to see how it progresses.

[Wes Golladay:]

Okay then you guys have a lot of redevelopment activity on coming up. How do you balance using secured debt versus the flexibility of the unsecured market?

[Keith Kimmel:]

Well, I am not sure, Wes I tied unnecessarily to our redevelopment activity are not a redevelopment activity. I think what’s probably most important, when you're thinking about doing investing activity is trying to minimize unfunded commitments. And that’s one thing that Aimco has done a very nice job under Terry’s and Patti’s guidance for so many years, where we don’t want a get ahead of ourselves regardless to how we would finance things, and have too many unfunded commitments ahead of ourselves. And so a good example is One Canal were 60% of those costs are were going to be funded by commitment from a property lender. We have a similar, we do our redevelopment projects in phases. So losses have flexibility that there was a liquidity event or some kind of concerns around the capital markets we could just stop and not committing to an entire project. We don't have any kind of penalties for canceling construction contracts or things like that. Specific to where we want to be in an unsecured borrower or using property debt or using corporate debt it goes back to managing risk. And do you want to put the entire entity at stake when you’re using corporate debt or do you want to manage it on an asset-by-asset basis. And so we’ve certainly made a decision, we have the flexibility now to consider other things and now we have the two investment grades, we’ve made the decision and then consistent with the decision sticking to using property debt management [indiscernible] and we've seen as I mentioned in our call scripts, we are seeing cost as good or slightly favorable using the property debt versus using the unsecured. So it hasn’t precluded us from having the ability to – you want to do from a write-down perspective from an investment perspective we’re able to continue to have one long as weighted average maturities in the space, flattery our maturities, having probably the most fixed rate and so lease re-pricing risk exposure and it worked well for us and we want to ultimately continue to bring leverage down a little bit more, but continue to stick to the gain.

[Wes Golladay:]

Okay, you are more concern about get approval from the lenders and having any restriction on that, but that doesn't sound like it’s an issue for you guys?

[Terry Considine:]

We work with our lending partners and experts too very often quite excited about us going in. We certainly want to consult them if there is a redevelopment projects we have in place in their financing place there. As you know unencumbered pulls larger now, but that doesn't precluded us from doing I want to day close to a 100 redevelopment projects over the last eight or nine years and doing the one's we want to do. So that’s – it certainly a discussion we have with our lenders. There are partners, but they like the fact that they are going to get it be a better collateral at the end of the day and so it works that well.

[Wes Golladay:]

Okay, thanks a lot.

[Terry Considine:]

You bet. End of Q&A

[Operator:]

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

[Terry Considine:]

Thank you operator, and thank you all in the call for your interest in Aimco. If you have further questions please call Lisa Cohn, Ernie Freedman or me and we’ll do our best to answer that. Have a good day.

[Operator:]

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