Apartment Investment and Management Company
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good afternoon, and welcome to the Aimco third quarter conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Lisa Cohn. Please go ahead.

[Lisa R. 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 2013 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. Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, EVP 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 on this call. Thank you for your interest in Aimco. I'm pleased to report our third quarter of year-to-date results, and I'm delighted to report that Aimco is on plan and on track. Before we turn to the details of the third quarter, I'd like to comment on certain qualitative aspects of 3 important areas of the Aimco business. These are factors that will shape Aimco not only this year but also for years to come. First, under Keith's leadership, Aimco property operations are getting better and better. This can be seen in numerous metrics. Tier 2. Keith places great emphasis on customer service. That pays off when more customers renew. Our renewal rate is well above industry averages, and that is true across Aimco in different markets and at different price points. Second, lower turnover leads to lower cost. Keith and his team excel at cost control. One metric we use measures property expenses, including utilities net of reimbursements, but excluding taxes and insurance. By this measure, costs have declined for the past several years and are down again this year by almost 2%. Second, let's turn to Portfolio Management. You know that Aimco's portfolio is diversified geographically across markets and also by price point, with about 1/3 As, 1/3 Bs and 1/3 Cs. Our mix and our properties get better and better. John and his team continue to upgrade Aimco's portfolio by accretive investments funded by the sale of lower-rated properties. One example is our redevelopment activity. We expect net operating income yields to average about 7% with today's untrended rents and to approach 8% with the rents expected at stabilization. Costs have increased but expected rents have also gone up. The net effect and value creation is roughly a wash. We project that completion of our current redevelopment program will add about $2 a share to Aimco net asset value. A second example is One Canal Street. As we announced earlier this month, we've entered into an agreement with Trinity Financial, an experienced Boston developer, to develop a 12-story building in Boston's West End. We plan to invest $190 million and to achieve average revenues of $3,700 a month per apartment home at today's rents. A consequence of these activities, average monthly revenue per apartment home, already more than $1,400, is expected to increase by $100 or more each year for the next few years as redevelopments in One Canal Street are completed and funded by the sale of lower-rated properties whose rents are well below our current average rents. Third and finally, let's turn to the balance sheet. Ernie and his team keep Aimco finances in good and improving condition. We enjoy good liquidity and have few unfunded commitments. We employ nonrecourse leverage with a long average duration that serves as a partial hedge against interest rate increases. We are committed to lowering our leverage so that the ratio of leveraged EBITDA is below 7

[Keith M. Kimmel:]

Thanks, Terry. I'm pleased to report that we had a solid peak leasing season and we're on track for a good year. During the third quarter, we achieved renewal rent increases of 5.1%. This marks the ninth consecutive quarter in which renewing residents were willing to pay rents 5% or more above their expiring lease rates to continue to live in an Aimco apartment home. These results are reflective of our success in consistently providing excellent customer service to our residents. During the quarter, our new leases were signed at rates that were on average 1.7% higher than expiring leases. Several key markets enjoyed superior results for the quarter versus the portfolio average and as compared to the third quarter of 2012. These include Los Angeles, Miami and the Bay Area. There was a general softening in the greater D.C. and Philadelphia markets, where late in the quarter, Aimco took a proactive approach and implemented a strategic plan to bolster occupancy in advance of our normal seasonal slowdown. We see this as a good trait as we wrapped up a solid peak leasing season and enter into the slower winter months as it's more highly occupied. Turnover for the quarter was 44.7%, 2% better than the third quarter of 2012. Of the customers who decided to move out, 25% were for career moves, 19% did not renew due to price and 16% moved out to purchase homes. There are no significant changes in these moveout reasons versus our long-term averages. We continue to be successful in replacing moveouts with better qualified residents at higher rents. The average incomes of those new customers who moved in during the third quarter was $119,000. The median income was $70,000, resulting in a rent-to-income ratio of 20%. This marks an 11% improvement in median income versus the second quarter and an 8% improvement year-over-year. Our operations team continue to implement several programs designed to provide additional value to our customers through a variety of products and services, generating other income growth of 9.9% compared to the third quarter of last year. Looking at our 10 largest markets, which make up 2/3 of our revenue. The top 3 performers had revenue increases from about 7.5% to 11% for the quarter. This was led by the Bay Area followed by Chicago and Miami. Our steady performance for the quarter with midrange growth from 5% to 6% were Denver, Orange County and Los Angeles. In rounding out the 10 largest markets in the 2% to 4% range, we had Philadelphia, Boston, San Diego and Washington, D.C. With a strong notes as noted above in the Bay Area, Los Angeles and Orange County, we are especially encouraged by our current and future California portfolio. As we stabilize acquired and redeveloped assets in those markets, Aimco's footprint will further expand westward. We will move from 1/4 of NOI contributions in California to around 1/3 of NOI contributions in the coming years. This will poise us to take advantage of the strong markets in both Northern and Southern California. Looking ahead to our early fourth quarter results. Leasing activity completed in the month of October is better than both our September 2013 and October 2012. This is evidenced by our October being 20 basis points more highly occupied year-over-year; blended lease rates, 40 basis points higher; and new lease rates 70 basis points higher than prior year. November and December renewal offers went out with 4% to 6% increases anticipating that will capture 4.5% to 5% renewal growth. I'll now turn the call over to John Bezzant, our Chief Investment Officer. John?

[John E. Bezzant:]

Thanks, Keith. I'll provide today an update on our major redevelopment projects, as well as additional information on our transactional activities. During the third quarter, Aimco invested $47 million in 5 redevelopment projects and $10 million in our One Canal Street development in Boston. We also invested $5 million in projects currently in our redevelopment pipeline. As Terry mentioned in his remarks, we've seen some recent challenges at 2 of our largest redevelopment properties

[Ernest M. Freedman:]

Thanks, John. Pro forma FFO of $0.50 per share was at the midpoint of our guidance for the quarter. Year-over-year, same-store net operating income growth was 5.9% for the quarter. Our average rent per apartment home was up 3.7% over last year, while other income was up 9.9%, leading to an increase in revenue per apartment home of 4.4%. Total revenue was also up 4.4% as average daily occupancy was flat at 95.3%. For the quarter, operating expenses increased to 1.6% from prior year, with real estate taxes insurance and utilities up 4.8% in total while other costs were down 1.2%. Year-to-date, operating expenses increased 3.8%, with real estate taxes, insurance and utilities up 6.9% in total. This result is consistent with our guidance from the beginning of the year, where we expected in total that these items will be an increase between 5% and 8%. All other costs were up 1% year-to-date. Our full year guidance for expense growth is now 2.75% at its midpoint, which is a 50 basis point decline from the midpoint of our prior expectations. We've adjusted our revenue guidance to the lower end of our previous range, lowering its midpoint by 20 basis points. The net effect of reducing both our revenue and expense growth expectations lowered our midpoint for NOI guidance by about 10 basis points or $600,000 for the full year for less than $0.005 a share. Regarding our balance sheet, at the end of the third quarter, we had outstanding borrowings on our credit facility of $298 million. Of this amount, $119 million related to the second quarter purchase of the West Harlem property loans. We expect to repay the line borrowings upon collection of the outstanding West Harlem property loan and with the proceeds from paired property sales. We still expect to reach our target of 7x coverage by the first quarter of 2014. Finally, regarding earnings guidance on pages 6 and 7 of our earnings release, you can find updates to our 2013 outlook. We are maintaining the midpoint of our full year pro forma FFO guidance in narrow -- in its range. We have lowered our AFFO guidance at its midpoint by $0.01 per share. Our guidance for capital replacement spending related to multi-phase capital projects has increased $2 million as we continue to have the opportunity to accelerate investment from 2014 to 2013 at our Park Towne Place community in Center City, Philadelphia. For the fourth quarter, pro forma FFO is projected to be at $0.53 to $0.59 per share, with year-over-year Conventional same-store NOI growth projected to be 6.25% to 7.25%. Fourth quarter Conventional same-store NOI is projected to be up 3.5% to 4.5% compared to third quarter. Fourth quarter FFO is expected to reflect an improvement over the third quarter as we anticipate increases in sequential operating results. Also, as we noted in our initial guidance, we anticipate some benefit from nonrecurring revenues occurring in the fourth quarter. With that, we will now open up the call for questions. You can submit your questions for time in the queue. Operator, I'll turn it over to you for questions, please.

[Operator:]

[Operator Instructions] Our first question comes from Nicholas Joseph at Citi.

[Nicholas Joseph:]

Can you talk more about your decision of proactively target occupancy in D.C. and Philadelphia and what you're seeing in those markets today?

[Keith M. Kimmel:]

Nicholas, this is Keith. I'll take that. As we thought about it, we were looking at our peak leasing season coming from July to August, and we are looking into the fourth quarter and said we wanted to take advantage of the demand that exists in September. And with that strategy in mind, we decided to put a particular special in place in which we built occupancy in both Philadelphia and Washington, D.C. by 60 basis points. And as we look back on it, we feel very good about that paired trade that we made, that we were able to build occupancy and now we're in a stronger position going into the fourth quarter.

[Nicholas Joseph:]

And then how's the increase in expected spend for the redevelopment pipeline impacting your expected returns?

[Terry Considine:]

Nicholas, this is Terry. And the answer is that it is kind of a wash, as I mentioned, that it turns out we're a little optimistic about cost and about scope, but we're also perhaps pessimistic about expected rent growth. And so as we achieved rents, as we lease them up, we think that will come out in about the same place in terms of value creation.

[Operator:]

The next question comes from Rob Stevenson in Macquarie.

[Robert Stevenson:]

Ernie, how many of the remaining 79 Affordable assets can you legitimately sell any time in the near future, given financing or other restrictions on those assets?

[Ernest M. Freedman:]

Sure. Let me take a pass at that, Rob, and I'll ask John to chime in also. As you note in our Schedule II, we -- we know both in Affordable same-store portfolio and that's made up of our tax credit properties and then we have our other Affordable Properties. The other Affordable Properties, which are roughly 30, those we're going to be able to sell here in the very near future. There really are no restrictions from a financing perspective. They're certainly the process we need to go through in those sales in terms of getting approvals for the folks that are going to be buying. But those 30 or so assets we'd expect to sell, John, probably in the next few months to 1 year or so, there'll be a handful of those that maybe take a little longer but that's the group that you'll see going away very quickly here. Of the 48 tax credit deals, there we have more of an economic restriction than anything else, and we anticipate selling those, Rob, as the tax credit compliance period expires on those. Next year, it'll be a few of those that would sell if those tax credit compliance period end. Overall, we expect to take about 5 or 6 years to get through those remaining 48. John, anything you want to add to that?

[John E. Bezzant:]

Yes, just to clarify in the handful that are there. We've made economic decisions on each of those that the right time to sell is not right now on those. For various reasons, we feel like holding those for another year or 2. It gives us the right economic answer as we transact those. There really are no issues in terms of liquidity. People able to secure financing or buyer interest in -- out in the market today.

[Ernest M. Freedman:]

And, Rob, I'd highlight that at the end of this year we'd anticipate our Affordable portfolio will be contributing roughly 8% both at the GAV and NOI lines around there. And then next year, it will be down probably to the high 6s, the low 7s and work its way down from there over the next many years. So it certainly become a de minimis part of our business.

[Robert Stevenson:]

Okay. And given the commentary on sales, as well as the earnings growth here, Ernie, what is -- how close are you getting to taxable earnings with the dividend that would require you guys either pay up it or pay something else out, et cetera?

[Ernest M. Freedman:]

Yes generally -- excuse me Rob, with the numbers we provided in terms of our expectation and disposition, certainly, depending on which asset sells, will have different gains on sales that would impact our taxable income. But what we were projecting today is that we'll have room and I won't have any issue with dividend coverage from that perspective with over projecting to sell this year. From an operating income perspective, we have a lots of cushion. When you start factoring the gains from sales on the sales we certainly get closer to our dividend amount to taxable income. But we're not bumping up against that or over that.

[Operator:]

Our next question comes from Ryan Bennett in Zelman & Associates.

[Ryan H. Bennett:]

Just one question on California. You've been pushing rents there over the past couple of years. I'm just curious where kind of rent to income sits in your California markets today. I think you said it was 20% for the portfolio overall, and what your outlook is for being able to push it further into -- out '14 and beyond?

[Keith M. Kimmel:]

Brian, this is Keith. I'll take that. In California, as you've noted, we have certainly had the opportunity to take advantage of an accelerating market. Over the past quarter, we were able to push rents even further beyond where we were before. In fact, we've seen new lease prices moving north of 6% and renewals staying right and around the 5%. As we look at the rent to income ratios, they are relatively in line with some of our national averages and haven't seen a real material change there.

[Terry Considine:]

Brian, this is Terry. What I would call out and add to that is that, with the upgrading of the California portfolio and with the strength of that economy. In our customer segments, you can see that customer incomes are rising even faster.

[Ryan H. Bennett:]

Got it. Appreciate the color. And then, I guess, I'll just stay with California, you noted that it's going to become closer to 1/3 of your Conventional portfolio over the next couple of years. I guess, which other regions will be -- we'll see a significant, more significant decline if California is taking share here?

[John E. Bezzant:]

Yes, Ryan, this is John. Basically, it's going to be out in the tertiary markets around the country. We've talked considerably of our capital recycling and portfolio allocation over the last few years. You can see in the sales that we executed this quarter what we've done already in October. We'll continue to move out of Central Florida, Texas, upper Midwest, some of these other markets that are not part of our targets long term.

[Ryan H. Bennett:]

Understood. And then just lastly, in terms of the concession programs in Philadelphia and D.C., were any other markets considered back in the summer when you're coming to the decision on those 2 in particular? Or were those going to -- you've been contemplated?

[Keith M. Kimmel:]

Ryan, this is Keith. Those were really the 2 that we contemplated. We were -- we wanted to get in the position knowing that their -- the new supply both in Philadelphia and D.C. could be impactful as we look into the fourth quarter. We wouldn't want to be scrambling or pushing at a time of the season when there's not the type of demand that we could take advantage of the opportunity. And therefore, we saw September as being the place to do that and with a 60 basis point improvement, we feel good about it.

[Operator:]

Our next question comes from Dave Bragg of Green Street Advisors.

[David Bragg:]

On the redevelopment pipeline, what is your level of confidence that there won't be more cost increases on the horizon?

[John E. Bezzant:]

Dave, this is John. These are redevelopments primarily, Preserve and at Lincoln both, these are empty buildings, and so we don't have a clear visibility into every one of those buildings. There are a lot of them at Lincoln, and so I'm not going to give you 100% certainty, but I will tell you that -- they are certainly pretty high wherein we were getting pretty comfortable that as we work through -- throughout as a team at Lincoln this week, we're able to see the progress there and it's good. And we're seeing, as we go through the buildings, yes, there are some issues and we've got those contemplated in the current forecast and the repricing today. At Preserve, same scenario. We feel like we've learned all of the worst lessons. Could there be more surprises? Yes. But we certainly don't anticipate them right now.

[David Bragg:]

All right. And, Terry, this serves as a reminder that redevelopment can be risky. You're doing some development but we all know that, that's risky. You're doing some acquisitions but the market is quite competitive. Another option could be share repurchases. Your shares are trading out at a pretty significant discount, and some of your peers are starting to commence activity. Can you update us on your thoughts on share buybacks?

[Terry Considine:]

David, thank you very much for the question. You're exactly right and share buybacks are something that we consider in keeping our toolkit. It's something that we've done in scale in previous years. I would say at this moment, we're giving a greater priority to fixing the portfolio where we want it to be and fixing the balance sheet, where we want it to be. As I've mentioned in my remarks, in the next 3 or so years as we complete our activities, you're going to see average rents for up from about $1,400 a day to closing towards $2,000 and you're going to see the leverage -- under-leveraged EBITDA under 7

[David Bragg:]

Right. So on the objective to improve the quality of the portfolio, as you sell assets, you are prioritizing acquisitions maybe in line with some of the acquisitions that you've done over the past year over the buyback opportunities. Is that correct?

[Terry Considine:]

No. What I'd say is our acquisitions are quite few if you look at it over the last couple of years. I think we made 2 -- 2 small ones and our 3 small ones in 2012. And I think we've made 2 small ones or 3 small ones this year. So I would not say that we are a aggressive acquirer. Our focus is having the right portfolio and the right balance sheet and see if that doesn't correct the discount that we see to net asset value.

[Ernest M. Freedman:]

And, Dave, let me just add in there because we've been talking about it for a while now that our goal is to get 7x leverage and we had said a couple of years ago, we'll take this through 2015. Today, we're projecting that, that's we'll get there in the early part of 2014. So I would certainly say if you're going to ask how we're prioritizing things, certainly, balance sheet and our internal opportunities to redevelopments far outweigh anything we maybe considering on the acquisition side. And I think our activity has shown that as well.

[David Bragg:]

The last question is on other income. Ernie, I believe that you said that at the beginning of this year is that you won't see a significant gain there as you did in 2012, but it's tracking in that direction. Can you talk about ancillary income, and what are you doing to drive this type of growth?

[Ernest M. Freedman:]

Sure. Let me talk a little bit about other income and then I can ask Keith to add some color to that. Year-to-date, our other income continues to track very favorably, up 11.8%. As you can see there now in the third quarter, it's a 9.9%, so they're starting to decelerate some. And without getting into the nitty-gritty of our fourth quarter forecast, we expect to decelerate even further still in the fourth quarter. And so we'll certainly, I would suspect ending the year at a level at 10% or below in terms of other income contribution growth year-over-year. Our other income is about 10.5% of our total revenue contribution. Roughly half of that 10.5% is through utility reimbursements. The other half is through all these things that you kind of spoke to or asked about, Dave, and I'll turn it over to Keith shortly to talk about our success rates that we're having there. I would caution on the utility reimbursement side, it certainly is very much beholden to what happens with utility rates, and we have seen that utilities are up slightly this year. We also had improvement in utility reimbursement as our ability to continue to pass appropriate levels to our residents and they take up their fair share on that, and we've seen that continue to increase over the last few years. But I would expect that would level off as we're thinking about 2014 and beyond. And, Keith, do you want to spend a quick moment and talk about some of the successes we've had in parking and another amenity type fees?

[Keith M. Kimmel:]

Sure, Ernie. Dave, I'd just -- I would also just point out, as Ernie has, that the half of it is around some of these other distinctive things, we've had similar growth rates for that type of revenue that has also increased nearly 10%. With that being said, we have a lot of emphasis around things like the parking and around pets and around storage and how we can match those things appropriately with our residents in which they get the greatest benefit and, therefore, willing to pay for them. And at times, in years past, it had been more of a -- if they come in and ask about it or -- but instead, we have a more proactive approach to really matching those needs with our residents and, therefore, it's turning into some nice growth here.

[Operator:]

Our next question comes from Haendel St. Juste at Morgan Stanley.

[Haendel Emmanuel St. Juste:]

So Terry, earlier you talked about the balance of Aimco's portfolio today being a benefit 1/3 As, Bs, Cs. How do you think about this balance as you upgrade your portfolio via redevelopment, select acquisition, dispositions? Where'd you like to take this portfolio balance? I know you're worried about upsetting the apple cart, introducing potentially more NOI volatility into your life down the road.

[Terry Considine:]

Haendel, that's a very good question, and it's one that Ernie and I, and John and the entire team focus on a lot and thinking about it. I think that in terms of targets that we would see that our portfolio would become -- which is now about 1/3, 1/3, 1/3, would probably become something 40%, 40%, 20% or -- in that range. And that the 20% that remain Cs would be what we call C+, which is that in their local market, there is C, but it's a local market that has a high average rent. And so even though C+ might have $2,000 a month's rent, for example, in New York City. And so that's where I think we're going. In terms of increased volatility, I do -- I think there'll be a certain element of that in markets and price points where it's exposed to new building. We hope to balance that with geographic diversification and by selective investment in areas that are quite desirable but not as exposed. And by that, I mean, for example, our investment in La Jolla or investment in Corte Madera. Those are areas where we're not quite as exposed to new building. The reason for doing all of that is that we're looking through to the income of our customer, and as we had in earlier question, on incomes, I think it's from Ryan Bennett that whether that -- we're going to be income constrained. On a number of our properties, we are seeing rising incomes that reflect the quality of the locations, and we think that income growth is -- permits higher rents and probably more stable incomes during any recession in the future. So it's a trade-off. But I think there is a certain possibility of increased volatility.

[Haendel Emmanuel St. Juste:]

Sure, sure. One more. Over the past decade, Aimco has not done much of any ground-up development. Can you talk about the rationale? Any of the return expectations for your Boston deal and specially in relation to the redevelopment opportunities within your portfolio?

[Terry Considine:]

Haendel, I'd like to go first just to talk about history and then I'm going to turn One Canal Street over to John because he's the one who quarterbacked it through. But you'll recall that we have done this over time. In fact, the Palazzos in Los Angeles are probably the most prominent example. But even this year, we built -- we're building 100 or so ground-up units at Lincoln Place, and we're building 28 townhomes at Elm Creek. And so we do a certain amount of it, usually as, in connection with one of our redevelopments or as a Phase 2, but sometimes freestanding as in the case of Palazzo. When we looked at Boston, we weighed our long-term desire to upgrade our portfolio there to move from a more suburban portfolio to more urban portfolio. And we worked over time to identify the right site and right partner, and we like the risk-adjusted return. Now, John, you did it so...

[John E. Bezzant:]

Yes, just specific to Boston and to One Canal, this is the deal that we've been working on for a couple of years. It's a complicated site. We've got a development partner there that is experienced in the micromarket of the area, as well as on a larger scale throughout Boston. We've got a high level of comfort with them. And we look at it as a, really, an opportunity to participate in it. It's structured more along the lines of a presale. It's not a joint venture. This is a deal where these guys are working as our, essentially, our fee developer. And we look at yields as we look out and try to remember all your questions, but as we look out yields out into the future on that, roughly 5.5% untrended, on current rent, and this is an NOI yield, and about 6.5% on the trended yield. And I would look at that today. If we had that building in that location built and occupied today, I would expect it to be a 4-cap asset, probably at the highest -- it's going to better than that. And so we're pleased with that. We look at the risk as it related to it in development, and we've structured the transaction in such a way that we have multiple layers of protection, if you will, from risk. Obviously, at first level, we've got some contingencies built into the deal. We've got a guaranteed maximum price contract with a reputable contractor. We have a development partner who has their fee at risk, and we have bonding from a third-party agency on the construction. And so we feel like we've gone through and mitigated this. This is not step one in a large expansion of Aimco's ground-up development pipeline. This is a major calculated decision in a market where we want to upgrade our portfolio. If you were to look at our portfolio today in Boston, it is primarily peripheral, far out suburban. We rank it as primarily a C portfolio given the rental values in relation to the market. And we feel that we needed an opportunity, and we saw one here to upgrade the portfolio.

[Operator:]

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

[Michael J. Salinsky:]

Ernie or John, can you talk a little bit about pricing changes you've seen in the last 90 days as it relates to A, B and C quality assets and if that had any impact on the decision to accelerate dispositions in the first half of the year there?

[John E. Bezzant:]

Sure. I'll take that. In the last 90 days, I would tell you, take it back maybe just a little bit further. So as we came into the summer, there was a reasonable exuberance in the market in terms of pricing and where we were at as interest rates rose a little in August. We did see certain types of buyers in the tertiary markets. Those yield buyers, particularly those that were sponsors that were out trying the source equity from a third-party that candidly had a little bit of a hiccup and backed up out of the market a little bit. There were still very strong participants, what I would call midmarket players, that had equity available and had discretion to them that stayed right on with it and right through it. And those buyers who are predominantly our buyers stayed right with us through the, if you will, the little bump in August with REIT. As they come back down now again, we see people that really, frankly, have -- it strengthened their commitment, if you will, to closing the deals that they have under contract. And we've not seen a major impact at all in pricing. I think we've obviously disclosed our third quarter numbers, disclosed just now, our October numbers and I would anticipate that through the remainder of this year, we will trade in the same range. Free cash flow cap rates that are going to be below a 6 on what we have visibility into right now that's out there and priced.

[Michael J. Salinsky:]

The decision to accelerate dispositions out of the first half of the year versus kind of match spending redevelopment along lines?

[John E. Bezzant:]

Yes, I think I need 2 aspects to that. One is that candidly this year, with the acquisition of the senior loans, we got a little ahead of ourselves and got under the line a little deeper than we wanted to be. And so we want to make sure that we've got that covered. By the second piece of it, we look at the what we call the interest rate reprieve a little bit, and yes, that is an opportunity for us to make certain that we forward fund our commitments goinG into next year as we look at our pipeline. We've got, obviously, One Canal. We just spoke a little bit that we'll have some equity requirements next year. We'd like to make sure we'd take off the table our sources and while we've committed to our uses, and so that's the background of our decision.

[Michael J. Salinsky:]

And then just as my follow-up. I think in the prepared comments, there was a mention about expenses being down next year. Is that just a function of portfolio shift or there's this specific line item? What's going to be the driver of that?

[Ernest M. Freedman:]

Yes. Mike, this is Ernie. That came up in Terry's comments, I'll just want to clarify what was said. What Terry talked about is we expect the expenses will be below trend, not necessarily be down. So trend being inflation, we think we can do better than inflation, so I'm not willing to say at this point that we will be down overall. I'm very comfortable saying that we've been able to achieve other in areas, helping to offset expectations that real estate tax will probably a little bit above trend but not nearly as bad as they were in '13, as we look at '14. That was really the comment. And I think, Mike, it's more of the same. We continue to see opportunities and efficiencies on how we're running our apartment communities, how we're staffing them, how we're doing more and more work in a centralized basis, which has more expertise and more efficiencies. And then just with our capital spending we've done over the last many years, we're bringing a lot of our other costs down because we have more durable goods that require less repairs and maintenance. So we'll provide various specifics, Mike, as you know, in our next call, we'll provide guidance. But I just want to clarify that I don't want to take away from the call being -- that we're signing up for down -- for certain -- for next year but certainly, better than trend.

[Operator:]

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

[Richard C. Anderson:]

So you mentioned earlier, no interest at this point in doing a buyback program. But how much of that is a function of Aimco having gone down the investment-grade path now and making a shot -- taking a shot at that and, hence, any kind of buyback program going in the opposite direction of that process? How much is that playing a role in that spot?

[Ernest M. Freedman:]

That's certainly a part of it because we are certainly prioritizing our balance sheet, as well as our current internal opportunities we have for investment before something like that. And so I wouldn't tie it directly to as going down the investment-grade path. We certainly are eager and hopeful of getting that. But we're making these improvements on our balance sheet regardless if we get the good housekeeping seal of approval and we certainly hope we do, and we think we'll be deserving that over the few years. But you're absolutely right. Share buyback would take us in the wrong direction there, and it will slow us down in what we're trying to accomplish on our balance sheet.

[Richard C. Anderson:]

So, I mean, is there a point where you say, Okay, we're going to give up the investment grade process if we're 25% discount to NAV or something like that? I mean, do you -- at some point do you -- could you possibly make that decision? Or are you committed, no matter what, to going investment-grade route?

[Terry Considine:]

Rich, we're committed to a low leverage strategy. We think that we'll bring an investment-grade but that's not the goal. That's just a recognition of what we hope to accomplish. We want to have -- reduce the amount of leverage in the business. We like our leverage. We like its quality, its long duration, its safety. But we want it at a lower level. And we've committed to having it under 7

[Richard C. Anderson:]

Okay. And then my second question is, when did it stop being silly to consider a contrarian strategy of investing in Washington D.C., one way or another? I'm not saying that, that's now, but is that something you have your eye on at some point in the next couple of years?

[Terry Considine:]

Rich, that is a very good question because the right time to buy in markets is when they're disrupted. So we do look at deals in Washington as we said earlier in the call. We're not a very aggressive acquirer of the market today, but we are always looking for anomalies. And in Washington D.C., it would not be a surprise to have some anomalies emerge. John, would you want to add color to that?

[John E. Bezzant:]

I think that's an accurate look.

[Operator:]

Our next question comes from Ryan Meliker at MLV & Co.

[Ryan Meliker:]

Most of my questions have been answered but just real quickly while I've got you. Looking at expenses in the quarter, I apologize if I missed this, but look like insurance was down but it's still up double digits for the year. Was there something going on in the quarter where you had some seasonality or some of those expenses pushed from one quarter to another? And then you talked about being below trend. Can you talk about what your outlook for marketing expenses specifically? Obviously, marketing expense has been very low this year. How long do you think it's sustainable to be in this sub-1% type level?

[Ernest M. Freedman:]

Okay. Thanks, Ryan. This is Ernie. Let me cover both the insurance and the marketing. With regards to the insurance, it's certainly a little bit lumpy. We had a pretty big increase year-over-year that started impacting us late in the first quarter. Our property insurance renews on March 1. It's on the first part of the year, we certainly had some lumpiness from that increase going through. Secondarily, with insurance, our health insurance costs run through that line item as well, and we did have a poor performance earlier in the year. We actually had a very good performance in the third quarter relative to what we saw in the first 2 quarters this year with regards to what our self-insured health care costs were. So that's why you saw it coming down in the third quarter but still it's tracking higher -- as one of our higher expense increases for the year. And I think it will continue to track that way throughout the rest of the year but hopefully come down a little bit from the year-to-date number that you've seen so far. As specifically with marketing expenses, we've actually seen a slight uptick in marketing expenses over the last year or 2, not a big uptick. No, we certainly had big decreases in marketing expenses the prior years before that. As everyone moved from print type media to Web type media. I would expect that marketing expenses will stay flattish as we go forward, and we certainly challenge our buys [ph] and how we do things and run everything on a cost-per-gas-card basis. But we feel pretty comfortable. We've actually added a little dollars back into that the last couple of years but we feel comfortable with the run rate and I imagine of our many costs that we talked about as we think about next year and for the next many years, that will be more of a flattish-type spend.

[Operator:]

Our next question comes from Nick Yulico at UBS.

[Nicholas Yulico:]

Just going back to Lincoln Place. I know you talked about the cost going up. And did you mention whether you're able to recapture some of the yield there from the costs going up?

[Terry Considine:]

Nick, this is Terry. It's early days. We've rendered 130 or so apartments out of 800, and so we're delighted by the rent we're getting and the customer acceptance. But it's quite a beehive of activity today. It's really an active construction site. So we believe that rental achievement will improve as the property becomes more residential in character. And I think it's going to be quite a home run. I think it's going to be an important asset for Aimco for many, many years to come. And so we do expect above-average -- above underwritten rents at Lincoln, but we'll wait until we're further into it to get much more specifics.

[Nicholas Yulico:]

Okay. I'm just wondering how we're supposed to think about that because I thought that the rehab, there was a restriction on keeping rents below market there?

[Terry Considine:]

Not meaningfully. The expert on that is Miles Cortez, who's here. And If I get this wrong, Miles, please correct me. But there's a certain number of residents, I think, approximately 50 out of the total, who have the benefit of rent limits. For the balance, which is 90% of the property or 95%, they are loosely -- we're not loosely, they're regulated by Los Angeles County rent control, which is a very benign rent levels with many years before it particularly applies to our case. So we're not meaningfully constrained. Miles, would you want to add or correct that?

[Miles Cortez:]

Yes, we have a period of another 4 years in which we can stabilize the property with virtually unlimited opportunities for rental increases. Once that 4 years is up, it becomes subject to the ordinance that Terry referred to, and it's benign in that rent increases are still permitted on an annual basis, ranging from 3% to 8% per annum, and that's after we have an opportunity to run these -- all of these homes up to market 4 years from now.

[Nicholas Yulico:]

Okay. And then just one last one on this. A year ago, when you've got the financing, you put out on the release showing what your net investment would be. I assume selling the tax credits for $16 million and then net income of $15 million achieved prior to stabilization. Are those still -- are those assumptions still in place for the project?

[Terry Considine:]

Nick?

[Nicholas Yulico:]

About a year ago, your net investment -- you're saying was roughly $300 million.

[Terry Considine:]

But we've announced that we had some expected higher costs. But other than that, our investment would be exactly as described.

[Ernest M. Freedman:]

Right now, we're tracking to do slightly better than those rent numbers based on the limited rents we've signed. And that's why we want to be a little cautious not to get too far in front of ourselves and that could -- saying that we're going to beat rents on underwriting. But in a very difficult construction zone, we're winning that battle right now and doing better than underwriting. So we are projecting -- we have the opportunity to do better on the NOI side from those numbers you just quoted.

[Operator:]

At this time, we show no further questions. And I would like to turn the conference back over to Terry Considine for closing remarks.

[Terry Considine:]

Thank you, operator, and thank you, all, in the call for your interest in Aimco. Ernie, John, Elizabeth and I are looking forward to seeing many of you in San Francisco at NAREIT in a couple of weeks. If you have any questions, please call Elizabeth or Ernie or me with any of your questions. We'll try to answer them in advance. Be well, and have a good weekend. Thank you.

[Operator:]

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