Apartment Investment and Management Company
Q1 2011 Earnings Call Transcript

Published: 29 Apr 2011

[Operator:]

Good afternoon. Welcome to the First Quarter 2011 Apartment Investment and Management Company Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference call over to Lisa Cohn, Executive Vice President and General Counsel. Please proceed.

[Lisa Cohn:]

Thank you, Jamie. Good morning, and good afternoon. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2011 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 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. Participants on today's call will be Terry Considine, our Chairman and CEO, who will provide opening remarks; and Ernie Freedman, our CFO, who will review first quarter results, our balance sheet and guidance. Also in the room today are John Bezzant, EVP of Transaction; Miles Cortez, Chief Administrative Officer; Keith Kimmel, who runs Property Operations; and Dan Matula, who runs Redevelopment and Construction Services. We are available to answer questions at the conclusion of our prepared remarks. I will now turn the call to Terry Considine. Terry?

[Terry Considine:]

Thank you, Lisa, and thanks to all of you on this call for your interest in Aimco. We're off to a good start in 2011. In a few minutes, Ernie will review the details, but before he reports on the quarter, I'd like to touch on 4 longer-term issues. First, customer demand is good, and we expect it to remain so. We enjoy high occupancies and rising rents. Our rent increases during the first quarter were lower than some of our peers, but so too were our vacancy loss and term costs. We regularly review the trade-off between higher rents and vacancy loss and term costs. And we'll continue to look for the right balance. Second, we're focused on our operating cost structure. We do not expect to see costs drop year-over-year to the extent they did this quarter, but we do expect to control any increase by regular review of what work is done where and by whom and with what tools. Third, we're equally focused on our offsite costs, including G&A, where we see steady improvement as we continue to simplify the Aimco business. Fourth, we like our balance sheet for its long duration, limited recourse to Aimco credit and fixed rates. We see opportunities to improve it and expect to do so even if we incur current costs, for example in prepayment penalties, or in accepting higher fixed rates that are above our current floating rate. We had a solid first quarter. And these excellent results were produced by my hard working, professional and collaborative teammates, and I want to be sure that all credit and my thanks is paid to them. Now, for the first quarter. Ernie?

[Ernest Freedman:]

Thanks, Terry. On today's call, I will cover the following subjects

[Operator:]

[Operator Instructions] Our first question comes from Eric Wolfe from Citi.

[Eric Wolfe:]

I think the last time we talked, you said you were pushing renewals in May and June over 5%. Just wondering whether that momentum has continued and if you saw that, I guess the -- I think you said 3.5% renewals in April continue to march up in May and June?

[Keith Kimmel:]

Eric, this is Keith Kimmel. I'll answer that question for you. We are continuing to have asking rents of that 5 to 6 point that you had referred to. And what we're seeing is, is that while we'll have some of those rents that will -- or those asking prices that will be higher than that point and some that will be lower, is that some -- it's causing some move outs. And you'll see that it's indicated in our new lease price point that has also been ticking up a little bit more aggressively than our renewal rates.

[Eric Wolfe:]

Yes, so that's helpful. And then on the ATM. You've obviously become a bit more active in recent quarters. I'm just wondering if it's reasonable for us to expect the same level of issuance going forward? And how you think about your equity needs this year relative to, I guess, the guidance that you gave on investment activity?

[Terry Considine:]

Eric, I want to be cautious about predicting what we're going to being doing in the future on equity activities. But we have talked about that we're going to do significantly more merger and tender activities in 2011. And we're going to accomplish a few of those this year. And we did talk previously about wanting to match fund those. In addition the ATM is available to us for other accretive uses around things that we need to do with the balance sheet. So without getting ahead of ourselves, I would say just refer back to our guidance previously, and what we're going to do with partnership, merger and tender activity. And that will be one of the options for us to be able to match fund that investment activity.

[Eric Wolfe:]

I guess the question is, what does match fund mean? Does that mean on like a, sort of leverage-neutral basis? Or is it like 70

[Terry Considine:]

Sure. Well it's specific with the merger and tender activity, Eric. Because we were buying equity interest that have -- both already have assets and debt associated with them. What we'd do is be raising capital to pay for the equity component. So in that case, the equity would be used for 100%.

[Operator:]

Our next question comes from Rich Anderson from BMO Capital Markets.

[Richard Anderson:]

Terry, the question first to you is, you've kind of been one -- you've been an outlier a little bit, relative to your peers about a more conservative mindset. Am I gauging that maybe you're pulling back on that a little bit and are inclined to allow yourself to get a little bit more optimistic than maybe you were in the past kind of conference calls season?

[Terry Considine:]

Rich, I'm highly focused on this call on our internal results and markets, and the apartment market's pretty good. And so, I do have concerns about how we're going to work out of the budget and the deficit and items like that. But you're at least as knowledgeable, probably more so than I, about those macro events. And it's the micro about which I have a particular advantage, which is to say, inside Aimco. Business is good.

[Richard Anderson:]

All right. And then the follow-up question is on the discussion about potentially having some prepayment penalties and reducing your debt, I'm curious as to why you wouldn't consider that direction, if you kind of have been in the camp of viewing leverage as a good thing for you guys, even though it's above average, you never really talk about it as a problem. And yet now, you're kind of reversing course and considering to reduce your overall leverage. Can you just talk about the mindset there?

[Terry Considine:]

Correct, Rich. What I'd clarify is mostly what we're talking about is extending maturities rather than reducing overall leverage. The biggest part of refunding activities, our focus towards having a longer weighted average maturity, to having limited exposure to refunding risk in the next 2, 3 and 4 years, to having fixed interest rates as opposed to floating, and depending on individual properties and circumstances, a certain amount of amortization -- a certain amount of debt reduction in excess of the $80 million of property debt amortization that's sort of built into our financial model.

[Richard Anderson:]

Okay, so no part of that strategy is a full pay down of the debt?

[Terry Considine:]

No. We like our -- broadly, we like our balance sheet. We think it's very safe. We think it provides an important hedge against inflation and the dollar. And we just want to be sure that we've got lots of runway to adjust. And that over a business cycle, coverages will be tighter and the trough of the recession, it will be higher in the peak. And right now, we're in a rising time so our coverages should rise nicely with the property markets, just to put us in good position for whatever lies ahead.

[Operator:]

Our next question comes from Rob Stevenson from Macquarie.

[Robert Stevenson:]

In the fourth quarter, you guys guided to -- on the redevelopment side, $50 to $75 million in Conventional and then $30 to $45 million of property upgrade. I mean the sort of outlook in what you're seeing out there, I mean, is there a chance you guys are going to start more than that this year or complete more than that this year to take advantage of the upswing of rents?

[Terry Considine:]

Rob, redevelopment is a core activity for us. And what we described in our fourth quarter call as guidance was kind of the base level of activity, where we have a recurring programs for property upgrade. We do have other activities that would be subject to acceleration, for example, in our kitchen and bath activity or in the large-scale property redevelopments, such as Treetops and Lincoln, which I think are outside of those numbers. And so as the planning for those larger activities are completed and the financing for them is put in place, it's highly conceivable that we would see increased starts above what we discussed in the fourth quarter. Dan Matula runs that operation. And Dan, do you want to add or subtract...

[Daniel Matula:]

Yes, Terry, I mean I would agree. I mean we're certainly on part to probably invest at least those amounts. We're planning a number of other projects and just kind of depending on when those projects come together and we get financing in place, will depend on whether or not those numbers go up this year or whether we'll see that next year.

[Richard Anderson:]

And then how much do you guys currently have in terms of dispositions out there being marketed under a letter of intent right now?

[John Bezzant:]

Sure, John Bezzant here, Rob. We've got out under contract on the Conventional side of roughly $150 million worth of property, another 40 or so that are under negotiations. And we would contemplate another 40 to 50 that would kind of get into the pipeline over the next couple of weeks. But essentially, we are on the disposition side. We've kind of got our order placed for the year. We know what our capital needs are, and we know what our desired disposition targets are. So we're effectively there today.

[Robert Stevenson:]

And anything on the Affordable?

[John Bezzant:]

Affordable, we've got about $150 million, call it -- it's out in the market in various stages between under contracts and under negotiations.

[Robert Stevenson:]

Okay, so that's basically your entire $350 million to $400 million of guidance for the year? It's either out there or under contract right now?

[John Bezzant:]

Correct. We'll have a few others that will come out as we get into the year. But as we sit right now, I would classify it as our order was placed about 6 months ago. We've got the order in various stages in the pipeline that's being filled at this point in time.

[Operator:]

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

[Jana Galan:]

I was wondering if you can maybe specifically talk about which markets are kind of doing better than you had expected? And if any are lagging your initial projections for the year?

[Keith Kimmel:]

Jana, this is Keith. We continue to see some strong marketplace in Washington DC, Northern Virginia, Maryland, also Denver, San Francisco and Chicago. And the markets that continue to show some challenges are Palm Beach, Orlando, Houston and still a little bit in Orange County.

[Jana Galan:]

So pretty much on track with what you were thinking on the fourth quarter call?

[John Bezzant:]

Yes.

[Jana Galan:]

And then it seems that maybe the Boston market was a little bit of an outlier compared to what other people were reporting. Is there anything specific there or just timing?

[John Bezzant:]

I would tell you that -- first, let me start with our communities are not necessarily in Boston proper, but in some of the suburbs. With that being said, we certainly have an opportunity to make up some ground there.

[Operator:]

[Operator Instructions] Our next question comes from Swaroop Yalla from Morgan Stanley.

[Swaroop Yalla:]

I was just wondering if you can tell us about, as you rank order, your assets and look to assets for disposition. I was just curious, a couple of your dispositions this quarter were in the 10%, a high 9.7% range. Just wondering what quartile of your assets when you rank order are you considering to dispose of?

[John Bezzant:]

Swaroop, John Bezzant again. As you look back into the quarter, the most important thing on Schedule 8 that I would call you to is the far right column, which is the average rent of those properties that sold. On our Conventional assets, we sold 2 at $462 average rent. I then take you back to, as we rank and create those quartiles, if you will, internally for what we want to sell, we're really doing it on a free cash flow basis. We are primarily modeling off of a free cash flow, IRR. We report in Schedule 8, an NOI cap rates on these premium low margin properties. And free cash flow cap rates, in fact, free cash flow cap rate that we calculate on these properties is less than half of what's reported as an NOI cap rate. And so as we look at going forward and what we're looking at, yes you will periodically see a high cap rate on an NOI basis as we continue to sell off the bottom of the portfolio. We want to sell our lower rent properties, our lower margin properties. These are outliers, and if you will, we're weeding the garden. And we'll continue to weed the garden as we progress through the year. And that's basically the story on the disposition side. It's a similar story on the Affordable side, a little more color in those deals, if you will, because of the structure and the nature of whatever the Affordable contracts may be are a nature of those properties. But big picture is we are selling off the bottom.

[Swaroop Yalla:]

The other question I have is sort of how you think your residents look at pushing back on renewals, especially given the increase in oil prices and just sort of overall inflation concerns? How you're seeing your ability to push rents?

[Keith Kimmel:]

Swaroop, this is Keith Kimmel. And what I would tell you on that is that we continue to watch demand closely. And if we see the market change and -- we're prepared to react accordingly.

[Swaroop Yalla:]

I noticed that renewals sort of dropped from February a little bit. I was just wondering if that has to do anything with sort of, oil prices or anything like that?

[Keith Kimmel:]

No.

[Operator:]

And our next question comes from Michael Salinsky from RBC Capital Markets.

[Michael Salinsky:]

First question, just talk on the expense side. Can you dive into the expenses, where the savings came from in the first quarter? And also, just curious, you talked about some technology rollouts and stuff. How much is left to cut out of G&A? How much is left to cut at the property and margin front? And were you running pretty lean at this point already?

[Ernest Freedman:]

Mike, it's Ernie. I'll address those, both on the property level as well as on our offsite cost of the G&A. And specifically, at the property level, we saw expense savings across almost all of our categories. In real estate taxes, we saw savings of almost 10%. It was at $1.7 million. In onsite payroll, we saw savings of almost 10% as well, about $1.8 million. What I'll tell you is that on real estate taxes, most of that was in our success that we've really started over the last many quarters on appealing assessments for 2009 and 2010. And we still hopefully -- we still have some wood chop [ph] -- to chop there, in terms of getting to the remainder of those appeals. And of course, we're going to look very closely at what comes across in 2011 with regards to the new assessments. On the onsite payroll, about half of that was really through productivity initiatives, including our technology initiative, which at this point, Mike, we've only rolled out to about a third of our portfolio on the Conventional side. So we still have some upside as we roll that out to the rest of our portfolio. The other half of the payroll savings did come through to the timing of accrual that hit for compensation for bonus in 2010. So that was really a onetime benefit here in the first quarter that won't carry forward for us. Utilities, they jump around, but we were able to lock in lower gas prices this year. We do see water and sewer prices going in the opposite direction. Those are going up, but consumption was down a little bit in the first quarter just because of what the weather was like in our portfolio. So that's obviously hard to predict how that's going to be going forward. And then we saw savings across many other areas, including places like marketing. Marketing, for the last many quarters, continues to show year-over-year variance in a positive way. We're probably running out of a little bit of room there. That number's getting smaller and smaller in terms of how our spend is because it's much more efficient. But overall, we see the opportunity at the property level, Mike, to continue to have good expense performance. And the wild card going forward will be a little bit real estate taxes. Because that will probably become more of a pressure point as we get into later 2011 and in 2012. Overall for G&A -- and we've talked about the technology initiatives at the property. But we also have technology initiatives here at the corporate office, and those are only about halfway through. So we provide the guidance this year that we expect G&A to be about $50 million. Our run rate in the first quarter was under that. I do expect us to get back more to a normalized run rate for the rest of this year. So we should have very good opportunities going into 2012 and 2013 as we finished our technology initiatives. We continue to have more efficiencies in the organization, and we talked about in our earnings release, the fact that we were able to terminate some contracts for asset management. We'll lose a little bit of revenue from that going forward, but we also lose expenses associated with that going forward. So I think we're going to have a good story to tell on the G&A front, Mike, for really the next year or two. Things should continue to improve in terms of the numbers that we're reporting.

[Michael Salinsky:]

In terms of turnover in the first quarter, how did that compare on a year-over-year basis?

[Ernest Freedman:]

Keith, you want to talk about our turnover numbers?

[Keith Kimmel:]

Sure, our turnover actually was very similar year-over-year, just shy of 35%.

[Michael Salinsky:]

Okay, and then just my follow-up question just relates to the preferred. We've seen some pretty attractive rates during the preferred market, as of late. Just curious if you guys are looking at the -- you're talking about refinancing opportunities on the debt side, just wondering if you're looking at the preferred market as well?

[Ernest Freedman:]

Yes, we've seen the same thing with some of the deals that have closed, Mike. So we're looking to see if there's an opportunity for us to maybe trade out some of our higher preferreds that are -- and we had two classes, about $236 million worth that are at 8%. And if we can make the economics work to trade down to a lower rate on those, we're going to try to take advantage of that. So we are looking at that.

[Operator:]

Our next question comes from Haendel St. Juste from KBW.

[Haendel St. Juste:]

Had a question -- actually, could you explain to me what's going on with your fee managed portfolio? Not only with the benefit in first quarter, but there's a meaningful reduction in the number of properties there. And then also what the impact of full year income would be?

[Ernest Freedman:]

Sure. Haendel, this is Ernie. With the fee managed portfolio, we talked about it in our earnings release. We have 2 big relationships or we had 2 big relationships. Now it's down to one. And what we did was we terminated some contracts with someone who were asset managing a large number of properties for us, as well as property managing those. In the first quarter, we recognized a little over $1 million from that termination. Over time, we were getting paid current on some of those asset management fees that were due to us, but not all of those. And we were differing those or, in effect, reserving for those. As part of our termination agreement, the folks we were dealing with agreed to pay us put ups. So that's why you saw that onetime good guide $1.3 million in the first quarter. Going back to our guidance, Haendel, from the beginning of the year, we had guided to $32 million of asset management as well as deferred tax credit amortization, and it varied a little bit. On our Schedule 3, you'll see that we expected about $32 million, $27 million relates to the deferred tax credit amortization before taxes, leaving $5 million of what we would expect to have earned in 2011 on asset management fees. Within that $5 million, we did bake in the expectation of getting that $1 million that did hit in the first quarter from the termination of those contracts. So kind of a long way of saying that our run rate going forward, Haendel, will be about $1 million a quarter in asset management fees. Now, that will definitely shrink over time as we continue to look for opportunities to get out of that business. But based on that number, it's not going to be a real material move for us as we continue to have success there. And of course, we do have the ability to sell those properties and resign from those asset management contracts. Of course, the associated expense will go away from those as well.

[Haendel St. Juste:]

One more quick one. You guys mentioned the $150 million of Affordable assets on the marketplace. Should we expect a similar free cash flow yield as the recent sales and pro forma -- how much more do you have and how much more would you be willing to sell here?

[John Bezzant:]

Haendel, John again. Good question. On the Conventional side, I would tell you that we've talked about our pipeline, okay? In terms of the overall portfolio, certainly, I would tell you, do not assign that cap rate to the entire portfolio. Are there another handful, 2 handfuls of assets that are out there that we will sell over time that are going to trade at a higher cap rate? Yes. On the Affordable side of the business, that cap rate is going to bounce around. But it's going to consistently remain a couple of hundred basis points at minimum, above where you would see comparable Conventional assets trade. And that's primarily just due to structural issues. A lot of what we're trading out on the Affordable side is our low ownership portfolio. A lot of that is small product in very rural areas, a lot of it financed by real development loans, post mark-to-market transactions that have gone through a restructuring with HUD that has limited the cash distributions from the property. And so really, from a valuation standpoint, candidly on what we're selling in the Affordable portfolio and NOI is not the best way to look at value, but we report it to be consistent.

[Ernest Freedman:]

Haendel, I'll drop up the other [ph] important point there. I just want to make sure that folks didn't miss that. That on the Affordable side, these are low ownership assets. And so if you're trying to update your model for it, then we may be looking to sell roughly $150 million of assets. But the actual contribution of assets is pretty small. We own well less than 50% of those. So it won't have nearly as large of an impact on financial results going forward if we were doing a similar amounts on the Conventional side.

[Haendel St. Juste:]

And one more follow-up, if I may. Can you give us a sense -- characterize the level of interest in the marketplace for some of the lower quality assets you've been selling? Who's buying them? And given some concerns about perspective cap rate or interest rate increases here, how much more you might be willing to pull forward some of those dispositions?

[Ernest Freedman:]

Sure. I would tell you looking backwards to the first quarter, we had a fairly quiet quarter, in terms of the number of closings that we had. We closed 2 conventional deals. To some degree, that was the result of, what I would call, a little bit of buyer, maybe caution or weariness, as they got into the quarter. We saw with the interest rate hiccup back in December, just a little bit of caution come in to the buyer universe. The lower rate of assets that are typically highly leveraged are being sold to local and regional buyers. They generally have some operating experience, they're able to get assumptions from Fannie and Freddie, so they can get Conventional financing. But they're a little more sensitive with interest rates, and that is true. And as we got into kind of late February time frame, as due diligence period were running out on our Q1 deals. We had a few buyers that came in and expressed a little concern. Or we had some equity that softened up a little bit on them and backed out or wanted to retrade price. We felt like, from where we were at in our -- what we would call, a disciplined disposition approach, we weren't willing to retrade. We were more than happy to hold on to those assets. We felt like the pricing was where it should be for those particular assets. And so we let some deals fall out. That we could have closed in the first quarter if we'd chosen to do so, but frankly, chose not to. Since that time, we have seen a little more stability come back into the market where the buyers are again getting just a tad more, what I would call, aggressive, where they're anxious to get a deal tied up, a little less tendency to try to retrade. And we don't have any concerns about our ability to execute the pipeline throughout the remainder of the year.

[Operator:]

This concludes today's question-and-answer session. At this time, I would like to turn the conference call back over to Terry Considine for any closing remarks.

[Terry Considine:]

Well thank you, and thank you, all, for your interest in Aimco. We had a good start to the year. We expect 2011 to be another successful year, both absolutely and relative to our peers and industry. If you have any questions that come to mind afterwards, feel free to contact Elizabeth Coalson, Ernie Freedman or myself, and we'll do our very best to answer them. Thanks, and have a good day.

[Operator:]

That concludes today's teleconference. We thank you for attending. You may now disconnect your telephone lines.