Apartment Investment and Management Company (AIV) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Third Quarter 2012 Aimco Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Cohn, Executive Vice President and General Counsel. Please go ahead.

Thank you, Amy. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2012 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's 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; Keith Kimmel, EVP in Charge of Property Operations; and Ernie Freedman, our CFO. Also in the room today are John Bezzant, EVP of Transactions; Miles Cortez, our EVP and Chief Administrative Officer; Dan Matula, EVP of Redevelopment and Construction Services. They 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 morning to all of you on this call. Thank you for your interest in Aimco. The apartment business is good. The economy continues to mend, boosted by low natural gas prices and the early stages of a housing recovery. Better economy plus strong demographics equals solid demand for rental apartments. We expect favorable conditions for the next several years. New supply is increasing in some markets and may well slow down rent growth at the highest price points. This impact in our BB+ portfolio should be muted. Buoyed by favorable macro conditions, Aimco is on track to execute its plans for this year. Operating team led by Keith Kimmel has done a good job in customer satisfaction, measured by a high percentage of lease renewals and a steady increase in renewal rents. The earn in of 2012 leasing provides a solid foundation for rent growth next year. Keith's team has been superb in their cost discipline. Operating costs, that is before taxes and insurance, are actually down year-over-year. Our portfolio gets better and better. Average revenue per apartment home is more than $1,300, up 8% year-over-year. John Bezzant and his team continues selling lower-rated properties and investing the proceeds in property upgrades, [indiscernible] redevelopment and a few attractive acquisitions. The business is simpler and more profitable. With better properties and better markets, with fewer properties held in partnerships and with higher margins because capital replacement spending is declining as a percent of higher price point NOI. Under Dan Matula construction is ramping up at all 10 properties identified for redevelopment starts this year. We expect these will add about $2 per share to net asset value when completed over the next 2 years or so. Our balance sheet is getting stronger under Ernie's careful watch. We enjoy ample liquidity. Leverage is down by $700 million year-to-date. We expect year-end leverage to fourth quarter EBITDA annualized to be about 7.7:1, down 20% year-over-year. We are on track to meet our target of 7:1 within the next 15 months or so. In sum, we feel good about 2012, and we're optimistic as we make our plans for next year. For more detail on third quarter operations, I'll turn the call to Keith Kimmel. Keith?

Thanks, Terry. So far in 2012, the revenue growth has been accelerating. Each quarter's year-over-year revenue growth has been greater than the preceding quarter. In the third quarter, Conventional Same Store revenue was up 4.9% year-over-year, up 4.5% year to date and up 1.7% compared to the second quarter. Let me provide some additional color on revenue. Third quarter blended rates were up 4.8%, with new leases up 3.8% and renewals up 6% on a lease-to-lease basis. This sets us up well for this quarter and creates a book of business that will earn in over the next several quarters and well into 2013. As we finalize October, preliminary blended lease rates will be up between 2.5% and 3%, highlighted by our continued success with renewal rates up close to 5%. New lease rents flattened out, and we expect this to improve between 1% and 2% for the entire quarter, demonstrated by our second half of October building north of 1.5%. October's average daily occupancy was 95.3%, 10 basis points better than October 2011's result. We anticipate occupancy will improve for the balance of the year. November and December renewal offers went out at 5% to 7%. And turnover was 46.8% for the quarter compared to 45.5% for the second 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. The top 3 reasons for move outs in the third quarter were career moves and pricing, both at 22% and purchasing homes at 12%. The home purchase number represents a 2% decrease from the second quarter. While we've also been tracking move outs to home rental, it's thus far been negligible. We continue to be successful in replacing…

Thanks, Keith. Today, I will focus on the following 4 topics: impact of Hurricane Sandy; portfolio and redevelopment activities; balance sheet activities and, finally, I will provide a guidance update. We are quite fortunate and thankful that Hurricane Sandy's impact on our residents and team members was no worse than a significant inconvenience. They are still determining the extent of the damage caused by the storm, costs associated with it will include cleanup expenditures and repairs. The rough estimate currently is $1 million to $2 million in costs, of which we anticipate more than half will be covered by insurance proceeds. As for the portfolio, during the quarter, we sold 22 properties with about 3,900 units, including 8 low-rated conventional properties at an average NOI cap rate of 5.9%. These properties had average revenue per unit of $795 compared to our portfolio today of $1,332. We also sold 14 affordable properties at an average NOI cap rate of 7.0%. For the year, the NOI cap rate for our sold properties is 6.5%. The properties sold are among our lowest-rated assets and disproportionately weighted to affordable properties, as we accelerate our exit from that business. Average revenue per unit of the properties sold was $762. Our average revenue per unit for our entire current portfolio is $1,300 per unit. The implied cap rate for our entire portfolio based on our current share price is about 6.6%, higher than what we are achieving on sales. As we reported on our second quarter earnings call, we acquired a property located in Downtown San Diego in July. We had no other acquisition activity during the quarter. For the year, properties acquired have average revenues per unit of $1,400 compared to $799 for properties we have sold year-to-date, helping to further our goal of increasing…

[Operator Instructions] The first question comes from Rob Stevenson at Macquarie.

Is -- where are you guys in terms of the NAPICO sale?

Rob, this is Ernie. We continue to make good progress with the group who we'll be selling that to. And we -- just as we talked about at beginning the of the year, we anticipate that, that closing will occur prior to year end of 2012. We expect that to be a fourth quarter event, and we will announce it as soon as that's complete.

Okay. And then you guys have had one of the lowest same-store expense growth rates of any of the apartment companies, and you talked about Schedule 6D in your comments. Can you talk a little bit about what's recurring going forward? And where you see the most upward pressure over the next few quarters? I mean, is the payroll and utility saving sustainable? And is the software and insurance likely to be more recurring?

Sure. I'll take a crack at that, Rob. With regard to -- one, we don't want to get too far ahead of ourselves in terms of providing guidance around expenses for 2013. But as we look at our expenses, our largest stress will be around real estate taxes. Real estate taxes each quarter this year have increased over the prior quarter, and we still do expect for 2012 real estate taxes to come in around 6% increase year-over-year. And year-to-date, I believe we're about 4.4%. So we think as we look at 2013, by far, that will be our biggest stress item. Items around software should stabilize out, because we rolled out the system last year. And so I would not expect a significant increase nor a significant decrease. It should be about flat in terms of software and technology costs. And importantly on the personnel side, we continue to find ways to be innovative and find different ways to potentially look to keep those costs under control. So real estate tax is our biggest concern. Other cost items, we feel pretty good about. I would say on utilities is this year was a mild winter, and we had a milder summer in terms of electric usage in the summer. The utilities could be a little bit of a stress point for us next year, but we'll just need to see as we get closer to next quarter, and we provide guidance there as what could happen with utilities and overall how that impacts expenses.

And payroll on the on-site payroll side, is this savings due to technology and software rollout? Or are you guys doing something different in terms of how you staff and manage and rotate people around near communities in order to save costs there?

It's a combination of things. I'll let Keith give you a little bit of detail and just a few examples of where we've been able to have significant changes where things are being done more by the customer and there are more automated processes versus manual processes. Keith?

Rob, a couple of the opportunities is that with -- electronic payments online has been a big change in how we've done business with the new system. To give you a reference point, 71% of our payments now are done by our customers online. They don't have to be taken to the bank via manual check, as they were in the past. Online renewals is another great opportunity that the technology platform has really enabled us to have efficiencies. 60% of our renewals now are actually executed online, where previously they were a manual printout of a physical lease and hand signed. And now it's electronically signed and done through the technology platform. So just a couple of areas of opportunity where we've been able to gain some efficiencies.

Our next question comes from Karin Ford at KeyBanc Capital Markets.

Thanks for the initial thoughts on the impact of Hurricane Sandy on your portfolio. Can -- is Aimco still self-insured on those types of costs? And -- or is the third-party insurer that would get you down to sort of the net $1 million to $1.5 million?

Let me try turn it over, Karin, to Lisa, who's responsible for our insurance and our risk group.

Karin, thanks for that question. A portion of our losses are self-insured but not related to Hurricane Sandy. So after deductibles, that will be covered by our third-party carriers.

Okay, great. And second question just relates to the reduction in your expectations for occupancy for the second half of the year that drove your same-store revenue guidance down a little bit. Just talk about what happened there that changed your view on that? Do think you pushed rents too hard? Or was there something that was different than what you expected that drove that occupancy decline?

Karin, this is Keith. I'll answer that for you. The variance in our -- in the occupancy is largely attributed to a couple of operational opportunities in Los Angeles and Philadelphia. Particularly, these 2 markets really have not increased on occupancy as quickly as we had anticipated last quarter. And frankly, they're a bit behind from where they were last year. And so both markets, while they were growing, they just didn't grow at a pace that we had anticipated.

Okay. But it's really limited to just those 2 markets? It wasn't a portfolio-wide sequence of events?

No, that's correct.

The next question comes from Ryan Meliker at MLV & Co. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: Just a quick question. I was hoping maybe you can help us understand a little bit about your Affordable Same Store NOI growth. Clearly, you put up good numbers, and you're expecting that to continue through the fourth quarter. How have you been able to drive NOI so much stronger than expectations heading into the year in the Affordable portfolio?

A couple of things I'll highlight there, this is Ernie, on the Affordable side. One is we've had the best success that we had in the history of the company in pushing occupancy there. It's always been a high-occupancy portfolio for us, running in the high 97% to low 98%. This year we've actually bumped up almost to 99% in occupancy, and we just had a laser focus on that this year by our operations teams with Leeann Morein and Keith Kimmel are really pushing to get that up as high as possible. And secondly, similar too on our Conventional side, we've had similar successes on the expense side that we didn't anticipate at the beginning of the year. At the beginning of the year, across our Conventional portfolio and Affordable, we thought expenses would be going up closer to 2.5%, and our expense experience in the Affordable is similar to our Conventional, where now we think it's going to be a 1% to 1.25% type of increase to expenses. And so it's just having the opportunity to get a little bit more out of occupancy has really led to a stronger year in Affordable than we had projected at the beginning of the year, Ryan. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: That's helpful. And then, also, with regards to that, I guess, is the occupancy up so much not only because of the efforts your team's doing but also because you've got more people that fall into the affordable camp than we might have over the past few years, and that creates, I guess, a larger demand pool?

Not really so much for our portfolio. Most of our portfolio, Ryan, is tailored to seniors. And so even though that populating -- the baby-boom population is growing. We haven't seen a major shift in demand from that. It's really just being real active with our waiting list, making sure when a unit comes open that we have a fresh waiting list. So we have multiple people who can move in, not potentially 1 or 2 who may have moved to different things. It's just being a little more focused on it and going after that opportunity. So it's not so much a demographic or demand item that has helped us drive that. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: Okay. That sounds good. And then just one last follow up. And this is -- I guess, at 99% occupancy and inability to really push rents that much, it's unlikely for us to see this type of revenue growth next year. Is that a safe assumption?

We'd like, Keith, to get 101%, but unfortunately we can't rent out the closets and other places in there, so no. What I would say is that we always have opportunity to push rents there from the perspective of what we can get from the various agencies. We get our inflationary increases. So we'll be more challenged. We won't have as much of an uptick from occupancy as well as that -- next year as we've had this year.

[Operator Instructions] Our next question comes from Dave Bragg of Zelman & Associates. David Bragg - Zelman & Associates, LLC: Just a question on the comment that Ernie made. You're selling assets below the implied cap rate of the stock, which Ernie said was 6.6%. So what does that tell you? I think that, that's -- the discount has certainly been a focus of yours for some time. But given the recent efforts that you've made on the portfolio and the balance sheet and the continued discount, could you just update us on your plans from here to close that gap?

Dave, it's Terry. I think our plans are steady as she goes. We've had a successful 2012, and we plan to continue it through the balance of the year and into next year. And so I think next year, you'll see continued same-store net operating income growth. You'll see a continued upgrade in the quality of the portfolio. You'll see a continued delevering of the balance sheet. You'll see a continued simplification of the business. And you'll see continued lower G&A cost. And so I think as we keep working, there has been a transformation in the company. And I think over some time, that will be understood better and appreciated by the market.

Dave, I would just add to that, that it also means you'll see more of Terry and Miles and me and other of the senior team. Throughout the year we've been out meeting with folks and talking about this portfolio transformation that has occurred. And we are seeing momentum from the fact that many folks are discussing it, writing about it and/or discussing. We meet with investors talking about, but we just have to continue to point out to folks where the portfolio is today, and it's a much different portfolio than it was many years ago. And so it's on us to continue that communication, and we'll do that, and we'll do it in a couple of weeks in NAREIT and we'll do it at [indiscernible] soon after that and continue to be up with folks to pound the drum about where -- how we think the stock is valued compared to the quality of the portfolio that we currently own. And it's only getting better. David Bragg - Zelman & Associates, LLC: Can you provide some early -- just a commentary on how you're thinking about asset sales for 2013?

A little bit early for us to talk about that. And we gave disposition guidance that we've maintained in terms of what we think will happen with 2012. What we'll do is we'll match up our needs as we talk about, and make sure we have the sales to cover that. When we talk about our needs, we talk about what we think is our best opportunity, we continue to improve the portfolio and grow its value, which is through redevelopment. And so it's to continue to fund that great redevelopment pipeline that we have, and we'll look at our other needs as well. But it would be a little bit early for us, Dave, to provide a range for what we'll be looking to dispose of in 2013.

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

Just going back to the last question, I know you wouldn't talk about 2013. But can you give us a sense on the fourth quarter? It seems like there's a lot expected in the fourth quarter? Is there any portfolio sales there? And also, just in terms of pricing, are you seeing any changes in the last 90 days in pricing for assets?

Michael, let me start, and I'll turn over to John for that. As you can see from what we've done year-to-date, we've had a significant ramp up in the third quarter compared to the first 2 quarters, and what we need to achieve in the fourth quarter isn't too dissimilar from what we sold in the third quarter to get to our disposition guidance for the year. With that, let me turn it over to John to give some more specific details [indiscernible].

Volume and how our transactions piece together, the vast majority of them are single-entity transactions. There will be certain circumstances particularly in the Affordable side, where we deal -- same buyer will buy 2 or 3 properties, generally, in a tight geographic area and of the same product type. But we're doing one-off sales, no portfolio transactions. And our pricing is consistent to what we've seen over the rest of the year.

Okay. The second question is more of a strategy question. You talked about growing the unencumbered base there. Aimco's traditionally been a secured borrower amortizing mortgages. Is that still going to be the case? Or is there a thought process over the next several years to diversify the capital structure a bit more?

Mike, good question. We've had that question with regards to the unencumbered pool, and we're not looking to change our strategy. We still want to remain financing our properties at the property level. We do want create the unencumbered pool to provide us a little more financial flexibility and safety. But it's not from a desire to want to change our strategy in terms of how we're employing property debt or any other type of debt at the company.

This concludes our question-and-answer session. I would like to turn the conference back over to Terry Considine for any closing remarks.

Well, thank you very much for your interest in Aimco. We're pleased by our third quarter results. We look forward to a solid fourth quarter and another good year in 2013. Thank you.

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