Apartment Investment and Management Company (AIV) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Fourth Quarter 2012 Apartment Investment and Management Company Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Lisa Cohn, Executive Vice President and General Counsel. Please go ahead.

Thank you. Good day, everyone. 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, Executive Vice President, in charge of property operations; and Ernie Freedman, our CFO. We are available to answer questions at the conclusion of our remarks. I will now turn the call to Terry Considine. Terry?

Thank you, Lisa, and good morning to all of you on this call. Thank you for your interest in Aimco. This is a time when we can review what was accomplished last year and preview our plans for the coming year. Looking back, in property operations, Keith's team did a great job at attracting, satisfying and retaining customers while also controlling costs. They increased Conventional Same Store net operating income by 6.5% year-over-year, 25 basis points above the midpoint of earnings guidance. They also improved Conventional Same Store net operating income margin by 130 basis points to more than 65%, an Aimco record. In portfolio management, John, Lisa and their teams worked together to improve investment quality and to simplify Aimco's business. Their disciplined pruning of weaker properties contributed to the increase of average revenue per apartment home to more than $1,360, up 8% year-over-year. They also continued the wind-down of our Affordable business and have sold more than 80 Affordable properties in the past 2 years. The remaining Affordable portfolio is less than 8% of our investment total. In addition, they sold our asset management business and further simplified Aimco by greatly reducing number of properties owned with outside partners. In redevelopment, Dan and his team invested $100 million in 10 well-located, highly accretive redevelopment. On the balance sheet, Ernie, Patti and their teams managed effectively Aimco's well-lettered maturities of low-risk property debt. In particular, Patti and her team secured $190 million FHA-insured loan to fund the Lincoln Place redevelopment at an all-in interest rate of 2.73% for the next 42 years. Ernie and Lisa worked together to issue equity, using the proceeds to redeem $600 million of preferred stock and lower our leverage-to-EBITDA ratio by 2 full turns. The entire Aimco team remained focused on cost control and continued to reduce offsite cost below peer averages, for example, as a percent of property revenues. In sum, we got a lot done, and it showed in the bottom line where pro forma FFO was up by 12% per share. AFFO was up by 31% per share, and the Aimco Board of Directors increased the dividend in May and again, last week. The 2013 dividend per share is double the 2011 rate, all while maintaining a payout ratio about 60% and generating a high level of retained earnings. We expect 2013 to be another good year for our business, and we plan to stay on course. In property operations, we expect some acceleration in revenue growth from our portfolio, well diversified across both markets and price points. We expect continued cost discipline, improved customer satisfaction and increased investment in property upgrades. In portfolio management, we plan to continue selling affordable and our lowest-rated conventional properties, with proceeds reinvested through redevelopment in tax-efficient fair trades and higher-quality, higher-growth properties. We expect income growth and debt reduction, funded by retained earnings, to take us by year-end near our leverage target of 7:1. Now I'd like to turn the call over to Keith Kimmel for a report on property operations. Keith?

Thanks, Terry. We feel very good about our 2012 results. Our on-site teams executed our plan with laser-focus on customer service. We were rewarded with continued low turnover and renewal rent increases of 5.5%. Of those leases that expired and were not renewed, new leases were signed at rates that were, on average, 3.2% higher than the expiring leases. As a result of our team's hard work, we achieved blended lease rate increases of 4.2% for the year, creating a book of business that will earn in over the course of 2013. Our operations team also continued to find innovative and sustainable ways of controlling costs and continually increasing the efficiencies with which we operate, but never at the expense of asset quality or customer service. With this solid execution, our revenue growth accelerated in each quarter of 2012. For the fourth quarter, Conventional Same Store revenue was up 5.1% year-over-year, 4.7% for the full year and up 0.9% compared to the third quarter. Blended lease rates during the fourth quarter were up 2.6%, with new leases up 0.4% and renewals up 5.1%. Looking at our 10 largest markets, which make up 2/3 of our revenue. The top 3 performers had revenue increases from well over 7% to nearly 11% for the quarter. This was led by the Bay Area, followed by Miami and Denver. Our steady performance for the quarter, with midrange growth from about 4% to over 5%, were Chicago, Boston, Los Angeles, Washington D.C. and Philadelphia. And rounding out the 10 largest markets, we had San Diego and Orange County, who has leveled off some, particularly in the Irvine and Costa Mesa area, as absorption catches up to the latest round of new supply. As we look ahead, we're building upon our 2012 successes with a solid January, establishing an expectation of a strong 2013. January blended lease rates were up 3.8%, with new lease rates up 2.1% and renewals up 5.3%. January's average daily occupancy was 95.3%, on plan and consistent with the fourth quarter. February and March renewal offers went out with a 5% to 5% -- 7% increases. And with great thanks to our teams in the field here in Denver for your commitment to Aimco's success, I'll turn the call over to Ernie Freedman, our Chief Financial Officer. Ernie?

Thanks, Keith. I'll spend a few moments detailing our outperformance to the midpoint of guidance from the fourth quarter and then discuss some highlights around our guidance for 2013, as detailed on Pages 6 to 8 of our earnings release. We had a $0.02 favorable variance to the midpoint of our fourth quarter guidance, which is made up of the following items. Nonrecurring revenues came in higher, as did nonrecurring expenses supporting that activity. The net impact of that outperformance was $0.01. We recognized a $4 million recovery of a note receivable related to our investment in Devco. We had written down this note both in 2008 and 2009 based on our estimate of the value of the collateral underlying that note. Due to some improvement in land values in Southern California, we determined it appropriate to write off the note this quarter. The note is held on our TRFs, so the net recovery is $2.4 million or about $0.015. Superstorm Sandy had a net impact to us of about $300,000. Our current estimate for losses is $2.6 million, and we anticipate an insurance recovery of $2.3 million. As we continue to reduce our offsite costs, we incurred about $0.005 of severance charges in the fourth quarter. In total, these items net to the $0.02 outperformance. Turning to 2013, we expect full year FFO in the range of $1.92 to $2.08 per share, which, at the midpoint, is up about 9% compared to 2012. With setting guidance range for 2013, we have assumed historical utility usage in our property operations guidance and a more typical cost associated with weather events in our casualty loss expense line item. If we are fortunate enough to have a weather year similar to 2012, our FFO could be higher by almost $0.04 per share. AFFO is anticipated to be up about $0.18 per share at the midpoint or 14%. As you can see in our walk and as we have previously discussed, our recurring capital replacement spending is coming down, first, because we have fewer units, and second, because we are using longer-use products, such as simulated wood flooring. We have chosen to invest these savings and more in the upgrade of our Park Towne property in Philadelphia. Regarding operations, revenue growth is anticipated between 4.25% and 5.25%. Earn-in from 2012 leasing activity is approximately 2.1%. The remainder of our anticipated revenue growth will come mostly from 2013 leasing activity, where we expect blended new and renewal lease rates similar to what we achieved in 2012 and improvements in other income, which makes up about 11% of our total property revenues. Our expense guidance assumes increases in utilities, property taxes and insurance. These 3 items represent about half of our property-level expenses. We expect each to grow between 5% and 8% in 2013. We expect the remainder of our property expenses to remain somewhat flat from 2012. Regarding nonrecurring revenues, you'll note in our outlook page that we are projecting $8 million to $12 million of nonrecurring revenues for 2013. All but $500,000 of that amount is anticipated to occur in the fourth quarter. About half of the nonrecurring revenues represent the syndication of a portion of the historic tax credits associated with the Lincoln Place. We are also working to secure historic tax credits at other of our redevelopment projects, but have not included those in our guidance. The remainder of the nonrecurring revenues represent fees earned from the disposition of Affordable assets. Certain of these revenues are taxable as the activity is completed in our TRFs. The $8 million to $12 million of nonrecurring revenues are expected to generate tax expense in the fourth quarter of approximately $3 million. For the first 3 quarters of 2013, we anticipate a tax benefit, in total, of about $1 million. So for the year, we are projecting tax expense of $2 million. Therefore, for the year, we expect nonrecurring income after tax to contribute about $0.05 per share. Finally on the balance sheet, scheduled amortization totals $81 million in 2013, which we expect to fund through retained earnings. Our 2013 property debt maturities totaled $172 million or about 4% of our debt. Of that amount, we will look to refinance 4 loans representing $54 million. The remainder will be repaid in connection with the planned sale of the associated property or will be paid off at maturity as we look to grow our unencumbered pool from about $68 million of assets at year-end to about $180 million by the end of 2013. So far this year, we've unencumbered about $88 million, leaving us with about $24 million to go. About 55% of our redevelopment spend will be funded through committed loans, with the remaining funded through proceeds from property sales. Our earnings expectations and balance sheet activities keep us on the path we have discussed previously of reaching, by early 2014, our 7x target of debt and preferred to EBITDA. With those items in mind, our walk from fourth quarter 2012 results to the midpoint of our first quarter 2013 is as follows: a decrease in operations of about $0.02 due mainly to the seasonal increase in utility costs from fourth quarter, offset some by continued sequential revenue growth; a budgeted increase in casualty loss of $0.01; a decrease in nonrecurring items of $0.06 net, which includes our fees earned from Affordable sales in the fourth quarter in the aforementioned Devco note recovery; a decrease in tax benefit of about $0.01; and dilution from fourth quarter 2012 asset sales of about $0.01. This $0.11 decrease in FFO is offset by lower offsite costs, lower severance costs and no further anticipated Sandy costs. Later this afternoon, we'll post a walk on our website for you detailing those items. Also anticipating some questions, our $400 million redev program begun last year is well underway. On balance, higher than underwritten rent growth largely offset some unbudgeted cost for increased scope and delays. 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, please.

[Operator Instructions] And our first question is from Jana Galan of Bank of America.

Keith, you mentioned in your comments that you expect rent growth to be similar to 2012 levels. Are you expecting roughly the same performance from each market? Or are you seeing an acceleration in certain markets and deceleration in others?

Jana, this is Keith. We have an expectation that there will be some acceleration and some that will hold the line within our assumptions for our guidance in 2013. One -- a couple that I just pointed out that stand out, the Bay Area is one that has been of question about whether or not you can continue to have a strong growth, and I would tell you it's in our upper 1/3 of our guidance is that we anticipate having a strong performance there, as well as Miami and Denver kind of a standout to the top 1/3.

And can you share any comments on the B price points versus A price points within your portfolio?

Certainly, Jana. The As and Bs have been really almost on top of each other, most recently. We use new lease rates as a barometer for that. They've been quite tight. The Cs have been a laggard.

And our next question is from Eric Wolfe of Citi.

Actually, I just wanted to follow up on Jana's first question there regarding your assumption of similar rent growth in 2013 versus 2012. If you could, could you just tell us sort of what gives you confidence in that assumption, especially when the rest of your peers are seemingly seeing slower growth this year?

Eric, this is Ernie. I'll take a stab at that and pass it over to Keith to talk to some of the details. Just looking at our portfolio, in 2012, we had blended lease growth of 4.2%. That would give us an opportunity to earn in at about 2.1%, and we are expecting to see similar type activity in 2012. We saw some upside also in other income and then, specifically within our guidance, Eric, we're calling for occupancy to be flat. So we've given a range that will keep occupancy flat. So each of the items, it really puts us pretty much right on top of our numbers between 2012 and 2013. In 2012, we had revenue growth of 4.7%. At the midpoint of our guidance range for 2013, we're at 4.75%. Of course, different markets are behaving differently, and Keith gave a little bit of color as to -- where some are going to decelerate, some are accelerating as well. But overall, we see a very similar year with our portfolio mainly at that average BB+ price point, very geographically diversified, probably a little bit more than our peers. So I can see a year that's going to be very similar in '13 to '12, at least, is where we stand today.

Got you. So I guess, from your perspective, it's a little bit market mix, but really, I guess, just the price point. I'm just doing a bottoms-up analysis of your portfolio. What leads you to believe that you'll be around the same rent growth? I mean that's -- I guess, the answer to it, why other peers have been seeing slowing growth but you would be seeing sort of stable?

Well, what I would -- it's hard for me to compare to what other peers are doing, Eric. You guys spend a lot of time doing that. But for us, we've seen a nice acceleration of our revenues during 2012, and it gives us an opportunity to perform about at the same levels in 2013. So we feel pretty good about our opportunities to deliver those results for our shareholders.

Okay. That's fair. And then, in the fourth quarter, you saw -- I guess, it looks like some outsized increases in your other income. Is that the result of new initiatives or timing? And also, how would you expect that to trend in 2013?

Eric, what I'd say with other income is that we probably won't have as strong a growth in other income in 2013 versus 2012. But we will still be stronger than our expected revenue growth in terms of what we're going to see our rate growth is what we're going to do. In the fourth quarter, a lot of that has to do with timing in terms of some of the things we charged. We had a nice year-over-year response from that. We'd still continue to see opportunities for us to do a little bit better in some of the areas. And then, importantly, we are expecting utility costs to be a little bit higher in 2013 versus '12, which would lead to a higher utility reimbursement for us than we received in 2012. And so we do think we will continue to do better than the midpoint of our guidance in other income, which is 4.75%. And that helps boost us to that amount of 4.75% for total revenue.

And the next question is from David Harris of Imperial Capital.

I have a question on the dividends, so I think this is for Chairman Considine maybe. Terry, you've increased the dividend quite nicely over the last couple of quarters -- or I should say over the last year. Can we assume that the current rate will stay pretty flat for this year? I mean, the increases were not prompted because of net taxable income increase, these were discretionary choices on behalf of the board.

David, yes. This is Terry. The board tries to keep the dividend -- our policy is that the dividend be in the range of 60% of AFFO and tends to set it once a year. Last year, we had a midyear increase after the equity raised in May, which led to a reduction of preferred stock dividends.

Okay. You took out of couple of high coupon preferred last year. The preferred market is still very attractive. I mean, there are some places now suggesting that rates might rise, and I think you are attracted to preferreds on the balance sheet. Can you -- can we expect you to move sooner rather than later in terms of perhaps issuing at a lower coupon?

David, this is Ernie. With regards to preferreds, we do keep a close eye on that market. We've been a large issuer of preferreds in the past, and we just love the nature of that paper, in that you can lock in a fixed rate forever. To be in that paper is professional. And rates -- interestingly, even the deals that have been announced most recently by some of the other sectors, if rates continue to be very favorable even with the rise in 10-year over the last 90 days. So we keep our eye on it, but it really comes down for us as to what would be the right use of proceeds. And so when we compare preferreds, we compare that to our financing options, where today with 10-year debt, at the property level, we can secure that debt kind in the 3.80% to 3.90% range. And so as long as that range is pretty wide as to where you could potentially issue preferreds, at least where we sit today, we probably have a vent to continue to refinance with 10-year property debt. But we monitor that, we look at that carefully. And if the circumstances are right, we would certainly consider tapping back into that market.

And the next question is from Rich Anderson of BMO Capital Markets.

So do you also keep close eye on the common equity market? $28 -- more than $28 a share. I mean, at what point does the deleveraging strategy may be involved going into the equity markets again?

Rich, this is Terry. We're delighted to see $28, when we look in one direction. But when we look at market estimates and net asset value in the low- and middle-$30 per share, we know we're still at a discount. We've got some further increase in share prices to come.

Fair enough. I see that now. Our number is over $30, so okay. And then, the next kind of, I don't know, big-picture question for you, Terry, you usually have a good perspective on things. At the risk of sounding kind of insensitive about Sandy, me being one of the -- those that got inconvenienced, do you think that there's a potential silver lining here over the longer term? A lot of people going back to work, $60 billion into the economy that actually will be spent as opposed to the banks holding on to their money when we bailed them out. Just curious if you think something like that could happen in consideration of the losses you talked about earlier on in the call.

Rich, I think the general experience around storms, including Sandy, will be that there's short-term stimulus but largely it's relocation of activity that would otherwise have occurred.

And the next question is from Dave Bragg of Zelman & Associates. David Bragg - Zelman & Associates, LLC: A few questions specific to your transaction expectations on Page 6. First of all, for acquisitions during the course of 2013, that will be limited to just $45 million of tenders and mergers?

Dave, this is Ernie. Based on what we've laid out, we expect very minimal, if no acquisition activity. We will continue to see if there's opportunities for us to complete fair trades, that would make sense for us, that would put pressure on us having to potentially sell more assets or come up with another way to fund those. But where we sit today, we don't see very much happening on the acquisition front other than we've laid out in the guidance. David Bragg - Zelman & Associates, LLC: Okay. That's helpful. And then, on dispositions, can you talk about the decision to pull back on disposition volume in 2013?

Well, Dave, again, it comes down to us for use of proceeds, and so we want to make sure we've laid out a plan where we can fund our identified needs. And for us, those are around our capital spending and our redevelopment spending. And if we see opportunities to invest further dollars in accretive ways, then we will consider increasing those sales proceeds. But the plan does put us on a pace to pretty much exit the Affordable assets. We can exit in 2013. That will leave us with our low-income housing tax credit deals that were redeveloped between 2005 and 2007, that time frame, and we keep close tabs on it. John and his team spend a lot of time considering what may be opportunities for us and will be the right fair trades. David Bragg - Zelman & Associates, LLC: And then, really just the opposite of Rich's question and based on Terry's comment about the discount NAV, can you just provide us with your updated thoughts on the possibility of accelerating dispositions and repurchasing stock at some point this year?

David, we don't have it in our base case or in the guidance we've given you. We obviously look at the market and as Ernie says, we keep a close eye on possible sources of capital and use of proceeds. But broadly, what we recognize is a significant discount between the share price and net asset value. We're focused more on accomplishing our business objectives of improving the profitability of the assets we own and operate, improving the results and redevelopment and meeting our leverage targets.

And the next question is from Michael Salinsky of RBC Capital Markets.

Just going back to, I think, the -- not the last question, but the talks about transaction timing and Affordable portfolio sale, can you give us kind of a timeline on that and kind of how you expect the dispositions to play out? Would; -- do you see more back-end loaded, front-end loaded?

Mike, it's Ernie. You're absolutely right. It's going to be very much back-end loaded, and you can see in our guidance walk that we provided for '12 and '13 that we're not expecting a whole lot of dilution in 2013 from 2013 asset sales. Most of our disposition activity on the Conventional side is weighted to the very end of the third quarter to the fourth quarter. On the Affordable side, we will have a couple of assets that do close here in the first part of the year, which are carryovers from 2012. But again, the vast majority of that is also back-end loaded and expected to happen in the fourth quarter.

Okay. That's helpful. Second of all, last year you gave us kind of a year-end 2012 leverage target, as well as what to expect in terms of under redevelopment at the end of the year. Can you give us targets for where you expect to be at '13 and also how much you expect to have in the redevelopment by year-end?

Sure. From a leverage target, Mike, we think we're going to get by early '14 -- on an annualized quarter basis, we're going to hit our 7x target, I would suspect, at the end of '13. That's going to put us around 7.3 or so, and that's debt and preferred to EBITDA. So very close to getting that 7x but maybe not quite making it. But I think we'll get there by the first part of 2014. With regard to redevelopment this year, we're expecting to spend $130 million to $160 million, and that's still on the same 10 projects that we introduced in 2012. We expect the total spend of those to be a little bit north of $400 million. In our base plan, we're not anticipating starting any new projects outside of those 10. That said, we're working hard and we've got -- we're planning. But my guess is, at least where we sit today, the items we're planning today won't get us -- that aren't underway today won't get a start until 2014.

And just to follow up to that. The 3 coastal California communities obviously are not providing a drag. What kind of drag do you think from the other properties -- as you're redeveloping them in 2013, what kind of drag should we expect?

Very little. The net impact of all of our redevelopment activities is about a negative $0.01 when you factor in what's happening with NOI, as well as what's -- factoring in what changes in capitalized interest and then any new interest we're incurring on those transactions. But the vast majority of our $130 million to $160 million spend, Mike, in 2013 is coming from those 3 big projects. We have less than $20 million anticipated from any of the other projects.

Our next question is from Buck Horne of Raymond James & Associates. Buck Horne - Raymond James & Associates, Inc., Research Division: Kind of hypothetically here, just thinking about the Washington D.C. effect and all the politics going on, have you guys thought about the impact to your Washington D.C. properties, if there were to be a some sort of sequestration effect or some sort of form of sequestration went into effect? How would Aimco's properties be affected given your market position? And just more generally, what kind of assumptions do you have baked into your guidance for the Washington D.C. area?

Buck, this is Terry. And despite my fond hopes, I don't actually worry too much about extreme cutbacks in government spending. However, it could be there'd be some volatility if some of the sequesters and other sort of approaches to the government spending occur. But mostly, that won't affect us. We are at a lower price point by design in Washington. We're basically a C+, B- portfolio there, and I would expect we'd be relatively steady through it. Buck Horne - Raymond James & Associates, Inc., Research Division: Okay, great. Also, just thinking about move-outs to ownership, have you seen any trends there? Is it steady? Or is there any upticks in terms of move-outs to home ownership? And can you distinguish between any differences between -- move-outs to ownerships between your A properties and your B properties?

Buck, this is Keith. I'll take that. In the fourth quarter, we saw move-outs for homeownership at 15%, which has basically been right in line almost through the entire 2012. They're definitely -- when we look at San Francisco and Miami, some of our higher price points where the barrier to entry is more difficult as some of the lower reasons for move-out to buy homes in those 2 markets. Buck Horne - Raymond James & Associates, Inc., Research Division: Okay. And one -- just last quick one, maybe for Ernie. Does the first quarter guidance include any extra snow removal cost for the storm this weekend?

It's one of the reasons why we budgeted for slightly higher casualty costs. Joking aside, we know that it potentially could be a big storm. And 2 years ago, we had problems with that. In the Northeast, especially around old Flatley assets, the Royal Crest property. So we have built in a little bit into our numbers for a potential of higher casualty events. We have not -- we did also build into our numbers a more normalized snow removal expectation. We do put in contracts in place that allow us to have snow removal around a certain average -- or excuse me, a certain range of snowfall. This snowfall, by itself, won't put us over that range. But certainly, if it continues to be a snowy winter beyond this, that could put a little bit of pressure on our expenses in the first quarter.

And our next question comes from Ryan Meliker of MLV & Co. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: Most of my questions have been answered by now. But I just wanted to get a little bit of color from you in terms -- I know you've talked a little bit about raising the dividend in the past. Obviously, I don't think it came as a big surprise when you did. But can you talk to us a little bit about going forward how you're going to look at use of proceeds from asset sales and cash flows, et cetera, to reduce leverage maybe in excess of your target 7x or even buy back shares, as opposed to raising the dividend? And maybe give us some color on the conversation the board had with regards to raising the dividend versus buying back shares.

Ryan, this is Terry. And I would say that the board's view around the dividend and the tender activities is to emphasize balance. And so we think increasing the dividend based on AFFO growth is a reasonable way to reward shareholders. And as Ernie's given guidance, we expect higher AFFO growth in 2013. And if so, it would be consistent for the board to raise the dividend again in January of next year. Redevelopment and other investment activities are all tracked, as Ernie has mentioned, on a comparison to cost of capital and expected return on capital. So we analyze those through a free cash flow internal rate of return, and we work systematically to find lower cost of capital through sale of properties at attractive prices and reinvestment, either in acquisitions or redevelopment. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: So then, if I understood you correctly, the board doesn't take into consideration where the stock might be trading, in a discount to NAV, when determining -- when setting dividend?

The board does consider that, and they look at that. And again, as I mentioned in an answer to an earlier question, at the current time and given the amount of expected sales or available sales, we think the better emphasis is improving the profitability of the portfolio and meeting our leverage targets. Let me be clear, we're not at all uncomfortable of share buybacks. We bought back about $1 billion 4 or 5 years ago. And if that seems the right course for shareholders, that's exactly what we'll do. But what we're focused on today is removing issues we think that may be leading to the discount, rather than trying to exploit the discount. And we think -- and so in terms of that, we've made great progress in reducing our leverage. You can see it coming down by 0.6 or 0.7 turns inside of Ernie's guidance. And if that were -- if the board were to decide it wanted a different leverage target, you can see it's pretty straightforward to get that in years ahead.

[Operator Instructions] And our next question is from Rob Stevenson of Macquarie.

Either Ernie or Keith, can you talk about what the property tax assumption is in your 2.5% to 4% expense guidance for the year?

Yes, happy to, Rob. This is Ernie. We expect real estate taxes to go up between 5% and 8%. We also expect insurance and utilities to also go up between 5% and 8%. And all the other expense items will be about flat. And those first 3 I described are about almost exactly half of our expenses at property levels. That's how you get to 2.5% to 4.%.

Okay. And so in that flat would be personnel costs and how much is that?

Well, personnel costs, on an overall basis, is roughly, I don't know, I think 25% to 28% of our costs, and we do expect those to be flat. We do -- we are earning in increases that folks have received in terms of pay raises from July of last year. We're anticipating a similar pay increase in July of 2013. But offsetting those increases are the fact that we continue to find some ways to run our properties a little bit more efficiently.

Okay. And in terms of assets to sort of shuffle up to the top in terms of most likely [indiscernible], do you look -- I mean, is property tax increases at this point in the cycle something that drives some of that where some of these markets where you may see double-digit increases in property taxes having you marking those assets for sale rather sooner than later?

Rob, this is Terry. In each sale, we look at expected free cash flow internal rate of return. And so whether we're making an investment decision or a sale, which is a negative investment decision, we look at expected revenues and costs. And adverse developments in costs for taxes, similarly to adverse developments in cost for repairs or utilities or things of that nature, all get put together in the analysis, and we hope to sell our weaker properties at where we can get a favorable cost of capital.

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

Well, thank you, all, for your interest in Aimco. We're pleased by 2012 results, and we look forward to another good year in 2013. Be well.

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