Apartment Investment and Management Company (AIV) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Apartment Investment and Management Company's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded. I would now like to turn the conference call over to Ms. Lisa Cohn, Executive Vice President and General Counsel. Ms. Cohn, you may begin. Ms. Cohn, you may begin the conference. [Technical Difficulty]

Good day, everyone, and apologies for the delay in starting the call. During this conference call, the forward-looking statements we make are based on management's judgments, including projections related to 2012 results. These statements are subject to certain risks and uncertainties, a description of which may 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. 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. The participants on today's call will be Terry Considine, our Chairman and CEO, who will provide opening remarks; Keith Kimmel, Executive Vice President, in charge of Property Operations; and Ernie Freedman, our CFO, will review second quarter results and 2012 guidance. Also in the room today are John Bezzant, Executive Vice President, Transactions; Miles Cortez, EVP and Chief Administrative Officer; and Dan Matula, EVP of Redevelopment and Construction Services. We are available to answer questions at the conclusion of our prepared remarks. I will now turn the call over to Terry Considine. Terry?

Thank you, Lisa, and good afternoon to all of you on this call. Thank you for your interest in Aimco. Business is good. During the recently completed second quarter, Aimco continued on plan. During the second quarter, we earned FFO of $0.46 per share. That's up 10% year-over-year. And we earned AFFO of $0.34 per share, that's up 17% year-over-year. The operating team led by Keith maintained high occupancy while increasing rents, with new and renewal rents averaging 5% higher than rents on expiring leases. The 12-month leases, the hard work of Keith and his team, locks in today a revenue base supporting the growth we expect over the next year. Keith's team also excelled in cost discipline, particularly in the area of labor utilization, as you can see in the 8% year-over-year decline in payroll costs. Importantly, we maintained a healthy level of capital investment and maintenance spending. Our properties are in good condition, as you can see from the rising rents they command. Our portfolio gets better and better. Its average revenue per unit was about $1,300 in the second quarter. This important measure of portfolio quality determined and paid by customers was up about 8% year-over-year, about 1/2 due to rent growth and 1/2 due to acquisition and redevelopment of higher rent properties funded by the sale of lower rated properties. Cash from the sale of lower rated properties was used to fund redevelopment activity and 3 property acquisitions. Average monthly revenue per unit for the properties sold year-to-date was about $740. Average monthly revenue per unit for our 3 acquisitions year-to-date is about $1,400, almost twice. And average un-trended monthly revenue per unit for year-to-date redevelopment starts is expected to be about $2,100, or nearly 3x the rate of the properties sold. As I said, our portfolio gets better and better. Our redevelopment business headed by Dan Matula is ramping up, and the 5 projects we have under way are on track. We expect these projects, together with 5 others to be started later this year, to add about $2 per share in net asset value when completed over the next 2 years or so. Our balance sheet is getting stronger under Ernie's careful watch. Year-to-date through July, we reduced total leverage by more than $0.5 billion, about $600 million from redemption of preferred stocks, with increases in property debt from acquisitions, including limited partner transactions, almost offset by monthly amortization and asset sales. As a result, and with steady earnings growth, we reduced leverages of multiple of current quarter EBITDA from 9.5 at the start of the year to just over 8 today. We're on track to meet our target of 7:1 within the next 18 months or so. Our business strategy is simple: own and operate apartments in a cross section of large U.S. markets and upgrade our portfolio by redevelopment, selective acquisitions and sale of lower rated properties. Through this end, we've announced plans to exit the Asset Management business by sale of NAPICO later this year and to largely exit the Affordable business by sale of individual properties over the next 5 years or so. We're on track to execute both decisions. Through simplification, we expect higher quality earnings, lower overhead costs and greater transparency. In January, the Aimco Board of Directors raised the quarterly dividend from $0.12 per share to $0.18. Meeting this week, the board raised the dividend again, this time to $0.20 per share, still below a 60% payout ratio. In sum, business is good. We have a capable management team and outstanding teammates, both on-site and off-site. We're working hard and working well together to take full advantage of the excellent apartment market conditions. We're making solid progress in our plans to create shareholder value over the longer term. Now for a more detailed report on second quarter operations, I'd like to turn the call over to Keith, Head of Property Operations. Keith?

Thanks, Terry. As we closed out the first half of 2012, we successfully improved upon our first quarter start with our second quarter results. Conventional Same Store revenue was up 4.6% year-over-year, up 4.4% year-to-date and up 1% compared to the first quarter. We're pleased with our overall performance and particularly with our ability to grow year-over-year revenues from one quarter to the next. Keeping with revenue for a moment. Second quarter blended rates were up 5%, with new leases up 4.3% and renewals up 5.7% on a lease-to-lease basis. New, renewal and blended lease rates all improved sequentially from the first quarter to the second quarter. This sets us up well for the second half of 2012 and creates a book of business that will earn in this fall and into 2013. During July, these rates continued their positive momentum. Blended lease rates were up 5.3%, with new lease rates up 4.5% and renewal rates up 6.3%. July's average daily occupancy was 94.9% on par with June's result. August and September renewal offers went out with 7% to 9% increases, and October renewals are going out with 6% to 8% increases, a minimal seasonal adjustment. Turnover was 45.7% for the quarter compared to 45.1% for first quarter. We continue to maintain our focus on customer retention as we not only achieve higher rent increases on renewal rents, but also because it allows us to keep our costs down. We have not seen any material changes in reasons for move-outs over the last several quarters. The top 3 reasons being: career moves at 24%, pricing at 21% and purchasing homes at 14%. While we have also been tracking move-outs to home rental, it has thus far been negligible. We are successfully replacing our move-outs with better qualified residents at higher rents. We had 6,900 move-ins during the second quarter with an average income of $87,000, and median income of $60,000 and a rent-to-income ratio of 21.5%. Second quarter Conventional Same Store property operating expenses were up 240 basis points year-over-year due to increases in taxes and insurance. Property level operating expenses are actually down 1.1% year-over-year. The net result of all this was a year-over-year NOI growth of 5.9%. Let me provide some market-specific color. Our top 10 markets represent 2/3 of our revenue. The top 5 performers had revenue increases from 5% to nearly 10% on a year-over-year basis. This was led by the Bay Area, followed by Miami, Boston, Phoenix and Washington, D.C. Our steady performers for the quarter with midrange growth of 4% to 5% were Chicago, Los Angeles and Philadelphia. And rounding out the top 10 markets were Orange County at 3.4% and San Diego at 3.3%. Orange County is reaccelerating, with new lease and renewal price increases at 4.5% and 4.8%, respectively, over the trailing 4 weeks while simultaneously improving occupancy month-over-month. As an update to our expansion in the Bay Area, pre-leasing at our Pacific Bay Vista community is now successfully well underway, with our first occupancy scheduled for later this quarter. We are building upon our second quarter successes with a solid July and setting up well for a solid third quarter and beyond. With great thanks to our team in the field for a strong first half to the year, I'll turn the call over to Ernie Freedman, our Chief Financial Officer. Ernie?

Thanks, Keith. Today I will report on financial results, portfolio and redevelopment activities, balance sheet activities, and finally, I will provide a guidance update. Beginning with financial results, second quarter pro forma FFO of $0.46 per share was $0.05 per share above the midpoint of our guidance range, primarily due to $0.02 from outperformance from property operations, consisting of both higher revenues in our Affordable portfolio and lower expenses in our Conventional portfolio, and $0.03 due to a number of items, including $0.02 related to an unexpected recovery from a previous casualty loss and lower-than-anticipated insurance losses. Turning to the portfolio. During the quarter, we sold 16 properties with about 2,200 units, including 5 low-rated Conventional properties at an average NOI cap rate of 7.1%. These properties had an average revenue per unit of $825 compared to our portfolio today of $1,290. We also sold 11 Affordable properties at an average NOI cap rate of 10.1%. Sales in the second quarter were a mix of higher and lower quality Affordable assets, with the higher quality assets generating cap rates in the range of 6.75% to 8%. In June, we acquired a property located in the Chelsea neighborhood of Manhattan for $39 million. The acquisition was funded in part by newly placed nonrecourse property debt and in part by the tax-free exchange of proceeds from the sale of lower rated properties. The acquired property consists of 42 apartment homes and 10,000 square feet of commercial space. The property's average residential revenue per unit is approximately $4,000, and its average rents are approximately 38% higher than the local market average. We intend to add value to the acquisition through significant capital upgrades in select units and operational improvements. The property debt used to help finance the acquisition is a 10-year note with a local bank at a fixed rate of 3.95%. In July, we acquired for $19.7 million a property located in downtown San Diego adjacent to the Gaslamp district. The acquisition was funded in part by the assumption of nonrecourse property debt and in part by the tax-free exchange of proceeds from the sale of lower rated properties. The acquired property consists of 84 apartment homes and 8,000 square feet of commercial space. The property's average residential revenue per unit is approximately $1,880, and its average rents are approximately 15% higher than the local market average. We intend to add value to the acquisition through operational improvements. The property debt assumed has a remaining term of 4.7 years and an interest rate of 5.51%. For the year, properties acquired had an average revenue per unit of about $1,400 compared to $740 for our properties sold, helping to further our goal of increasing overall revenues per unit for our portfolio. As to redevelopment activities, we described on our last earnings call the 10 projects we expect to have under redevelopment in 2012, which include properties located in Seattle, Northern California, Southern California, Chicago, Center City Philadelphia and South Florida. During the second quarter, our team in Chicago began the construction of 28 new townhomes on a vacant land parcel at our Elm Creek property. Current market rents for comparable products average approximately $2,950 per unit today, and first occupancy is expected in the fourth quarter of 2012. We also continued construction activity at our redevelopment in Pacific Bay Vistas in San Bruno, California, and our first residents will move in later this quarter. Phase 1 of Lincoln Place was completed in April, and 50 returning residents have moved into those completed units. Looking ahead, we are nearing completion of the common area amenity upgrades at The Palazzo in West Los Angeles and expect to deliver these improvements in early September. Additionally, we expect to begin delivering upgraded luxury penthouse units for lease ups in the fourth quarter. We are set to begin Phase 2 construction at Lincoln Place as soon as the financing is in place, which we expect to be in the third quarter. During the second half of this year, we expect to start construction at 2900 on First in Seattle, The Preserve at Marin in Marin County, California, and The Sterling and Park Towne Place, both located in Center City, Philadelphia. And we plan to invest a total of $400 million in these 10 projects, with $125 million to $150 million this year, and the balance over the next 2 to 3 years. We expect these projects to generate current returns greater than 7% and free cash flow internal rate of returns in excess of 10%. A deep pipeline of additional opportunities within our portfolio that allows for future redevelopment investment of $150 million to $200 million per year exists. Regarding the balance sheet. During the first quarter, we provided leverage targets that we expected to meet by the end of 2015. Specifically, we noted our goal to have debt and preferred equity to EBITDA of less than 7x and EBITDA coverage of interest and preferred dividends of greater than 2.5x. Since our last earnings call, Aimco has made significant progress toward these targets with the redemption of more than $300 million of preferred stock during the second quarter and redemption of an additional $300 million in July. Our current and projected coverages for this year on a pro forma basis are as follows: debt and preferred equity to EBITDA of 8.2x currently and 7.7x by year end; EBITDA coverage of interest and preferred dividends of 2.2x currently and 2.3x by year end. Most importantly, we now expect to achieve our leverage target of debt and preferred equity to EBITDA by early 2014, almost 2 years earlier than anticipated at the beginning of the year. Future leverage reduction is expected from earnings growth generated by the current portfolio and by regularly scheduled property debt amortization from retained earnings. Preferred stock redemptions were funded by 2 common stock offerings and option exercises during the second quarter and the exercise of a greenshoe in early July, which generated net proceeds to Aimco of approximately $642 million. In total, Aimco issued 24.2 million shares at an average price of $26.53. Through these transactions, we expect annual FFO and AFFO to increase by $0.04 and $0.12 per share, respectively. Our guidance revisions announced last night take into account the impact for 2012, which is a decrease of $0.01 for FFO and an increase of $0.05 for AFFO. As Terry mentioned, in keeping with its focus on growing dividends with AFFO, Aimco's board increased the quarterly dividend from $0.18 per share to $0.20, effective with our next dividend this month. In addition to the increase in FFO and AFFO from our equity offerings, we expect to further increase earnings in each of the next few years due to activity with our property debt. Each year, we amortize approximately $80 million of property debt using retained earnings. This equates to about $0.03 of increased earnings each year. In addition, we have between $200 million and $300 million of debt coming due in each of the next 3 years. Refinancing these maturities at today's interest rates equates to an average of $0.03 of additional interest savings in each of the next several years. Finally, going back to our portfolio, we have discussed our interest in potentially accelerating sales anticipated for the next couple of years into 2012. One of our identified use of proceeds, the redemption of high-cost preferred equity, no longer exists. That said, if a compelling opportunity presents itself for the sale of some or all of the contemplated assets, we'll certainly give it consideration and compare its merits to the potential use of such proceeds. Finally, as to guidance, we are increasing full year pro forma FFO guidance to a range of $1.78 to $1.86 per share and AFFO of $1.30 to $1.38 per share. Guidance assumes Conventional Same Store net operating income growth of 6% to 7%, which is unchanged at the midpoint. We have narrowed our revenue guidance to an increase in revenues of 4.75% to 5.25%, unchanged at the midpoint, and we have updated our expense guidance with expenses expected to increase 2% to 2.5%, an improvement of 25 basis points at the midpoint. Affordable Same Store net operating income guidance of 2.5% to 3.5% is a 200 basis point improvement at the midpoint. Taken together, total same-store NOI growth is now expected to be in a range from 5.5% to 6.5%. We've also increased our dispositions guidance by $50 million at the midpoint. For the third quarter, pro forma FFO is projected to be $0.43 to $0.47 per share, with year-over-year Conventional Same Store net operating income growth projected to be 6.5% to 7.5%. With that, we will now open up the call for questions. [Operator Instructions]. Operator, I'll turn it over to you for the first question.

[Operator Instructions] Our first question comes from Jana Galan from BoA Merrill Lynch.

I was curious, can you provide the cap rate on the Chelsea and the San Diego acquisitions?

This is John Bezzant. We don't typically provide cap rates on our acquisitions.

Okay. A question on the updated FFO guidance. You beat second quarter by kind of $0.05 of the midpoint that you were previously expecting, but you only took it up $0.02. And am I missing anything with the higher share count or timing of dispositions? Or are you seeing something that's making you a little bit more cautious for the second half than what you were thinking last quarter?

Jana, this is Ernie. No, I can walk you through that. You're right to point out that we had a beat in the second quarter by $0.05, and we only raised guidance by $0.02. The reason we didn't raise it by the full $0.05 is one of those pennies has to do with what you describe as share count, from doing that second equity offering because of the timing of it where we'll have 7 months of preferred dividend expense -- excuse me, 7 months of share count but only 6 months of savings from the preferreds, we'd lose $0.01 there. Also we had an outperformance in operations in the second quarter and for the year we've kept our guidance the same. So that's about a $0.01 there, so that was around timing of expenses and some things like that. And then the other $0.01 is just kind of rounding with some things, and so that's why we kept guidance where we did, raising it the $0.02 versus the $0.05.

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

I just wanted to ask about acquisitions and you identifying them as being some large percentage over the market average in terms of rents and why that's a good thing. I mean, you've said you're 15% above the local area in San Diego. Wouldn't you rather be 15% below the local area? I'm not understanding that fully.

Sure, Rich. John Bezzant here. It's really a matter of quality of the asset in relation to the local market. As we've talked about over the years, we want to be a B/B+ portfolio that we define as kind of 90% to 120% of local market average rent. San Diego asset falls right smack in the middle of that as a good, solid B+ asset. The Chelsea asset is an A asset, it's an A- asset. And we look at that, both of those opportunities, as well as the Phoenix asset we bought earlier in the year, which would also be, in relation to Phoenix price point, kind of an A- asset. We look at all of those as value-add plays. Those are -- we are opportunistically buying where we see opportunities. We're using these acquisitions to cover, via 1031, some tax liabilities on some of the lower rated assets as we sell them, but...

I get the quality thing. I guess, doesn't that though still, even if you do redeploy or deploy some proceeds, doesn't that kind of limit your upside, if you're assuming you're buying at pretty low cap rates in some good markets and you're at 15%, 20%, 25% above the area, I'd say that the ability to raise rents from that point are going to be pretty tough, no?

Well, there's a couple of ways to look at it. Certainly at that price point, we've got a customer that's different than what we would have in a C asset. And we feel like we've got an opportunity to raise rents there through product quality and customer type that we draw into those properties. It's different than if we went in and bought C assets. Nominally, we could take that at a face rate, and say, well, if we had $600 rent, there's more room to raise rents to get up to average. But those $600 rents at a property are reflective of property condition, age, economic obsolescence on the property and other things. And so, again, we feel like on the properties that we're buying, we've got opportunity to have outsized growth. Some of that is related to the submarket, where they're located, and that we feel like we've got submarkets with greater growth potential than those in the submarkets where we're selling. And some of it is related to the physical asset itself, either through management enhancements and improvements or through physical improvements at the property.

Okay. And just, Ernie, if you could just explain this for me -- I was just rereading your comments because I wasn't following. You've said that the preferred redemptions in the equity increased FFO by $0.04, but then you said the guidance assumes a decrease. I didn't follow that logic. Maybe the transcript is just not showing it right, but can you just go through that again? What's the impact from the preferred redemptions and the equity issuance on the guidance, those 2.

Sure, I didn't realize the transcripts came out that quick, but...

Yes, they're talking right along with us right now.

All right. So what happens, I gave 2 sets of numbers, Rich, one was on an annual basis, so if we had 12 months of share increases and 12 months of the dividend reductions because of the redemptions, so on an annual basis, we would expect FFO and AFFO to improve by $0.04 and $0.12. Now this year, because there was a 30-day period from when we call the preferreds until we actually redeem them, for both of those issuances, we had a 1 month where we actually have more shares outstanding than that dividend savings. And so that's why the impact in the partial year is what I described, which is a negative $0.01 on the FFO side.

Our next question comes from Jeffrey Donnelly from Wells Fargo.

Terry, I just -- I want to test your memory if I can. I'm curious how you think about pricing. Where do you think unlevered cash IRRs are right now as a spread to Treasuries versus, say, where they were 10 years ago or even 20 years ago? I want your perspective on where you think that's gone.

You are attacking my memory, and I'm thinking about it. But John has raised his hand, so I'm going to ask him to start, Jeff, while I mull this over.

Jeff, I think we look at them at kind of roughly 400 basis points today in spread. And if you look back historically, that's a wide spread. If we were to go back 5 years ago in Treasuries, it's -- again, don't test my memory and quote me on this. But if Treasuries are 3.5, you probably were down anywhere from 250 to 300 basis point spread to cap rates in that kind of 4 to 5 ago -- year ago range. As we look at it and analyze it, there's some thought that there's room in this spread for interest rates to move a little bit. If they -- everybody is worried about low interest rates, low cap rates. But we feel like there may be a little bit of recovery room in the spread before cap rates start moving, if interest rates tick up a little bit.

Jeff, I think you also asked about free cash flow IRRs. And if you go back 20 years, there were higher cap rates and -- but also a higher Treasury and then a higher -- but I think the IRR spread to the Treasury was probably a little bit -- was higher than it would be today if you had a standardized risk-free rate. When we look today, it seems to many people that the risk-free rate is unusually low perhaps because the Fed is the largest purchaser of Treasuries. And so -- and that it's too low by comparison to, for example, inflation because of all the troubles in Europe and so forth. And so I think, as John said, there's -- it would be my sense that cap rates -- that interest rates could recover back to that more normal level without having the same impact on cap rates. And I'm not sure if I've answered your question or just confused myself. Is that responsive?

Yes. No, you have. And I guess where I was going with it, I was curious if that implied that you thought that cap rates could actually compress further from this point? Or you share the view that over the next 2 years instead, it's more of the industry's pricing and interest rate increase.

I think the market is generally thinking that the risk-free -- this current risk-free rate is a little bit too low. And so I don't know if they're pricing in an increase so much as they're thinking that it's abnormally influenced by flight from Europe, by the Fed buying and factors that are sort of extraneous or exogenous to the economy. And so the cap rates have never gone down as much as the risk-free rate has.

If I could just ask a quick question of, I think Ernie, is what's behind the decelerating pace in year-over-year new lease growth over the course of Q2?

Sorry, say that again, Jeff?

The year-over-year pace of the monthly changes in new lease growth seemed to decelerate over Q2. What's behind that?

Well, I'll take a first stab at it and then turn over to Keith, Jeff. You saw that we had stronger results in April, May and then June is what you're pointing out, and then Keith mentioned in his comments that we saw a rebound in July back up almost to where the rates were at in April and May. Keith, do you want to give some market color around that?

Jeff, I would just -- I'd just add that those lease rates that are up in the second quarter were also against our hardest comps last year, that we were really pushing rates then. So we -- there was a slight deceleration, but really it's picked right back up here in July, and that's right on plan as we are right in our peak of seasonality and where the majority of our leases are signed.

Our next question comes from Michael Bilerman from Citi.

It's Eric. Just based on your guidance, it looks like you're expecting a nice pickup in asset sales in the back half of the year. And given your commentary, it would seem like a lot of that is going to come from your Affordable portfolio, which tend to trade at higher cap rates. So I'm curious, as you think about it, what's the best way to sort of minimize the dilution from those sales, or is that just sort of a secondary concern relative to deleveraging the balance sheet?

Let me just -- this is Ernie. Let me address a couple of things there. You're absolutely right that we have an acceleration expected with property sales in the second half, but I wouldn't say that it's so much from the Affordable side as it is from the Conventional. And it's actually probably more weighted toward the Conventional, those are bigger assets that will generate larger increases. In terms of the number of properties, it will be more Affordable, but the vast majority of the dollars will be coming from the Conventional side. But you raise a good point, Eric. Ultimately, we look at what do these properties generate from a projected internal rate of return perspective or free cash flow internal rate of return. And even though the cap rates on the Affordable side, the NOI cap rates, tend to be higher, when you factor in all the cash flows from those properties, including capital replacement costs, they come in with free cash flow internal rates of return that are projected well south of 7, usually in the 6 range or maybe a little bit lower. And so what that does mean is potentially some FFO dilution. What it certainly means though is much less and if not maybe slightly accretive to AFFO because we lose that CR. And then importantly, we look at that trade and what are we getting for that. And John kind of described how that works with some of the acquisitions we've done and importantly, the work that Dan Matula is doing on the redevelopment side. And so it could cause some short-term dilution in funds from operations, not so much, if at all, in adjusted funds from operations, but a stronger portfolio and stronger return projections going forward.

Got you. That's very helpful. And I guess just along the same lines, I mean, what percentage would come from Conventional versus Affordable in terms of, I guess, gross dollars?

John?

It's about a 2:1 ratio, roughly.

Okay. And then just last question, you did 2 equity raises within a fairly short period of time. So my first question is just why not just do a large equity raise right off the bat? And then I'm just curious if there's anything to the timing there. And then secondly, you mentioned that most of the leveraging going forward would come from growth. Is there other things that you could do by raising the equity, or are you set on just sort of earnings growth and NOI growth to deleverage the balance sheet?

Sure. With regards to our equity activities, Eric, in the second quarter, you rightfully point out, we did 2 transactions pretty much back to back, and we gave consideration as to how we wanted to do that. And we thought, in talking to many advisers and some of the folks from the investment banking side and the people who helped to develop the transaction. We thought, "Let's take one bite at the apple," and we felt confident that would go well and we're pleased with the result. And 40 days later, we saw we had an opportunity to go for a second bite. We just thought that would be potentially the more efficient way to do it. And importantly, after seeing people at the June NAREIT meeting, just take -- let's take leverage off the table. And we're able to do that by doing the second deal. With regards for the opportunity to do further deleveraging, where we stand today, we like the glide path that we're on, that through property debt amortization, which is about $80 million, $85 million a year through retained earnings as well as projected -- continued NOI growth, in our case NOI growth accelerating as we get into the second half of the year, as you can see from our guidance. It puts us on a path to be about where we want to be in about 18 to 20 months. So we feel pretty good about that. We will always keep options open, but where we stand today, we think the right thing for us to do is to kind of do as we've laid out with folks and let things run their course over that period of time.

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

First question, just to go back to the revenues there, just because you've got such -- built in a nice acceleration there on the Conventional Same Store. Can you walk us through the kind of components of that? How much is occupancy? How much is -- how much you expect to come from rate?

Mike, I'll take a first stab. This is Ernie, and I'll ask Keith to chime in. Our guidance for the year is we expect that occupancy to come in between 95.5% and 96%. Importantly, this item implies for the second half, we're going to kind of be right in between there, so that's exactly what we did in the first half of 2012. Last year, in the second half of the year, our occupancy was around 95.2%. So on a year-over-year basis, Mike, we're going to have a nice pickup in occupancy as we projected today of approximately maybe 40 to 50 basis points. So we're going to get some acceleration from maintaining occupancy levels as I've just described. That's going to help somewhat. And then, Keith has given out the information on what's happening with renewal rates and new lease rates. In July, we actually saw our best performance on a blended basis of 5.3. And we feel pretty good that's where, at least going into out of season, we're going to be there. And so that puts us in a good position to have similar rate growth as you saw in our second quarter. So all that math adds up plus what we're doing in other income, to have a second half that's going to be stronger than the first half on a year-over-year basis in terms of revenue growth.

How much differential do you between renewals, between where renewal notices go out and where renewals are achieved?

Michael, this is Keith. We've seen a historical average of 100 to 150 basis point melt from what we send out, the asking, to what the actual take rate is.

Okay. That's helpful. Then just my second question, can you just give us an update on Lincoln Place. When you expect to start Phase 2 with that one? And any cost projections or anything you can think of at this point, just given the size of that project as well as the potential opening of -- I mean, not the potential, but Google's potential impact to that property?

Yes. No, you've pointed out a very important fact that we're very excited about with Google. With Lincoln Place, we completed Phase 1, which has enabled 50 returning tenants to come back in. They're fully in. They're moved in. And everything is pretty much set to go with Phase 2 or Phrase 3. We're just working on the final details and keeping our fingers crossed in getting our loan application finalized and getting our commitment for financing. As I mentioned in my -- in our prepared remarks, we're hopeful that's going to happen sometime before the end of the third quarter, and we can mobilize very quickly right after that within a few weeks and start construction. We'd mentioned in some of our various investor presentations over the last 6 or 7 months, our expected cost to go on that project is about $150 million. We'll provide more specific numbers, specific information around what we think we can achieve for rents, as well as returns, probably later this quarter once we have the financing locked up and we have everything buttoned up. Mike raises a very important point. We learned in the last few months that Google has decided to place their Southern California campus about a mile from the property, a little bit less than a mile at the Gold's Gym location. I'll let Keith speak to that, he's a Southern California guy, but we're just very excited. Those are exactly the type of customer who could be a great resident for us at Lincoln Place.

Thanks, Ernie. I would just point out, Michael, that, I mean, that essentially those Google employees will be able to either walk to our community or ride bikes. And the location is just, one, it's a historical location that is literally right in the heart of Venice. Roughly 3,000 employees is what they're talking about coming there. And of course, they're just the type of customers we'd love to have living in our community.

[Operator Instructions] Our next question comes from Dave Bragg from Zelman & Associates. David Bragg - Zelman & Associates, Research Division: In your press release, and also I think Ernie alluded to it earlier in his comments, it was discussed that, to paraphrase, you might accelerate asset sales if there was a compelling opportunity. Terry, could you just kind of talk in general terms about just what those possibilities could range from?

David, I'd be delighted to. Aimco looks at all of its capital decision making using a consistent metric that we call free cash flow internal rate of return. And so that's a mouthful, but what we mean by that is just everything from net operating income to free cash flow. And for consistency and comparability, we subtract $1,200 a unit of capital replacement spending. So in Ernie's talk earlier about adjusting Affordable NOI cap rates to free cash flow, it means that free cash flow is a significantly lower number, particularly at lower price points. Then we look at it as an internal rate of return, adjusting it for expected growth, generally relying on an average of data providers for the particular submarket. And then very importantly, we adjust the exit cap rate to reflect the fact that today's cap rates are influenced by the very high rent growth that we're all now enjoying. But over a longer period of time, it's more conservative to -- not to predict that, but to predict something like the 20-year average. So we use that measure. And what would motivate us to sell either one asset or large portfolio of assets would be our opportunity to redeploy the capital at a higher, risk-adjusted free cash flow internal rate of return. And so, I wouldn't want you to take away from Ernie's comments the sense that there's a large transaction pending, that's not the case. But we are in the market actively. John underwrites 1 or 2 or 3 transactions a week. We look at opportunities large and small. And if we found the right circumstance, where we could sell lower rated assets at a free cash flow internal rate of return, which I think is probably averaged sub 7 since the start of the year and redeploy it at a free flow internal rate of return in higher quality assets, north of 8 going forward, something like that spread might be attractive to us. David Bragg - Zelman & Associates, Research Division: Okay. That's helpful. But just, can you help us just better understand your appetite for acquisitions? Is it really dependent on accelerating dispositions beyond plan? Or even if you hit your plan for dispositions for this year, could we see you go above your, maybe, current plans on acquisitions?

I think, David, that we will meet our current plan in order to fund our current identified uses primarily in the redevelopment area. But what would cause a change in that is not because of an opportunity to sell more assets or an opportunity to buy at today's market, it's by joining the 2 together. We think of them as paired trades, if you will, that in today's market to have above average returns, we need some value-added opportunity, some opportunity to upgrade the physical product or to provide better leasing and better cost control, as Keith has been able to do. And then we need to fund it with a lower cost of capital provided by an attractive sale. So it's a combination of what we think of as a paired trade.

Ladies and gentlemen, that concludes today's question-and-answer session. We'd now like to turn the conference call back over to Mr. Considine for any closing remarks.

Well, thank you for your interest in Aimco. If you have further questions, please feel comfortable to call Elizabeth Coalson, Ernie Freedman or me with any of that. And I wish you all a good day and a great weekend. Thank you.

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.