Apartment Investment and Management Company (AIV) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Fourth Quarter 2013 Aimco Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. And I would now like to turn the conference over to Ms. Lisa Cohn. Please go ahead.

Thank you. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2014 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; John Bezzant, our Chief Investment Officer; and Ernie Freedman, our CFO. A question-and-answer session will follow our prepared 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. Our strategy has always been to increase the amount and quality of our operating results, all as measured by AFFO and NAV per share. For the past few years, we focused on: first, providing competitive operating results, emphasizing customer retention and cost control; second, upgrading the Aimco portfolio through paired trades, where we sold our lowest rated properties to fund accretive investment activity, almost entirely redevelopments, that both increased our financial returns as measured by free cash flow margin and expected growth rate and improved our portfolio quality as measured by average revenue per apartment home; third, strengthening the Aimco balance sheet by reducing leverage to a ratio to EBITDA of less than 7:1; fourth, simplifying our business to reduce offsite costs and to increase transparency to our shareholders; and fifth, supporting a collaborative performance-oriented culture to engage teammates and foster superior performance. The end of a year is a good time to report on how we're doing. And here's how I see it, looking back over the past 4 years, the time after the fiscal crisis and the initial bounce back. Keith and his team are doing a solid job in operations. Our growth rate has improved, and we are consistently above average in local markets results compared to peer results in the same markets. Our customer retention is well above average, and our cost control is remarkable. For example, over the past 4 years, the compounded annual growth rate for property cost before taxes, insurance and utilities is negative for 4 years. John and his team have done a great job in selling more than 36,000 apartment homes over the same 4 years, taken from the lowest-rated properties in our portfolio and including a large-scale reduction of our Affordable business. So while the scale of the Aimco enterprise remains more than $10 billion in gross asset value, it is more focused in fewer properties, with higher rents and with better prospects. More than 200 properties were sold at free cash flow cap rates in the low 5% range, raising capital at an attractive cost, as the expected free cash flow internal rates of return for the properties sold were in the low 6% range. That capital was then reinvested accretively through paired trades and redevelopments and other capital uses, with expected free cash flow IRRs greater than 9%. So one result is that our growth rate will be higher with our new investments. This will become particularly evident as we complete our 3 large California redevelopments, which, by themselves, are expected to add more than $0.05 to next year's AFFO per share. A second consequence is that quality, as measured by the average rent per apartment home, has increased at a faster clip than achieved by any peer. It was up 8% last year to about $1,470 a month. This is not the Aimco portfolio of just 4 years ago. Ernie and Patti Fielding and his team have led our efforts to reduce leverage to our target. Having succeeded 2 years ahead of schedule, they are now seeking an investment-grade rating. We expect leverage to continue to decline in the coming years. Ernie and the entire Aimco team have been remarkably disciplined in reducing off-site costs by more than 1/3 over the past 4 years to reflect our simpler, more focused business. By emphasis on a collaborative, respectful and performance-oriented culture, we have made these substantial changes while maintaining high morale, achieving record scores for team engagement and being recognized by The Denver Post as one of the top places to work in our state. The goal and our strategy and its execution is to produce superior shareholder returns. Over the past 4 years, net asset value per share has increased by about 80%, and dividends per share have increased at a compounded annual growth rate of 24%. And shareholder returns have been comfortably in the top quartile of our apartment REIT peers, whether looking at the past 1-, 2-, 3-, 4- or 5-year periods. I thank my colleagues and the entire Aimco team for their hard work to earn these excellent results. Our plan and commitment to 2014 is for more of the same progress in operations, portfolio quality, balance sheet strength, cost discipline and collaborative teamwork. We believe that this is a proven formula to create shareholder value. Now for more detail about 2013 results and 2014 prospects, I'd like to turn the call to my senior colleagues, beginning with Keith Kimmel, Executive Vice President, Property Operations. Keith?

Thanks, Terry. We feel good about our 2013 results. Our on-site teams executed our plan with enthusiasm and continued commitment to excellent customer service. We were rewarded with continued low turnover and renewal rent increases averaging 5.1% for the year. For those leases expired and were not renewed, new leases were signed at rates that were, on average, 1.5% higher than the expiring leases. We achieved blended lease rate increases of 3.3% for the year, creating a book of business that will earn in over the course of 2014. Our operations team also continued to find innovative and sustainable ways of controlling costs and increasing efficiencies. Operating expenses, less insurance, taxes and utility expense, were down 60 basis points versus prior year. Now turning to our fourth quarter results. Blended lease rates were up 2%. Renewal rent increases were healthy at 4.6%, with particular strength in California, Miami and Denver, where renewal rates are up between 6% and 8%. New lease rates were, on average, 60 basis points lower than the rates on the corresponding expiring leases. This is a result -- this result is a product of 2 drivers: a normal seasonal slowdown in new lease rates and an additional impact from supply challenged mid-Atlantic markets. Turnover for the quarter was 48%. Of the customers who decided to move out, 23% were for career moves, 19% did not renew due to price and 16% moved out to purchase homes. There are no significant changes in these move-out reasons versus recent quarters or our long-term averages. We continue to be successful at replacing move-outs with better qualified residents at higher rents. The average incomes of those new customers who moved in during the fourth quarter was $108,000. The median income was $68,000, resulting in a rent-to-income ratio of 21%. Year-over-year, the median income of our new residents was up 10%. Our operations team also continued to implement several programs designed to provide additional value to our customers through a variety of products and services, generating other income growth of 7% compared to the fourth quarter of last year. Now looking at our 10 largest markets, which make up 2/3 of our revenue. The top 3 performers had revenue increases from 6.5% to nearly 8% for the quarter. This was led by Miami, followed by the Bay Area and Chicago. Our steady performers for the quarter, with midrange growth of 4% to 5%, were Los Angeles, Orange County, Denver and San Diego. Rounding out our 10 largest markets, we had Boston, Washington, D.C. and Philadelphia. As we look ahead to early first quarter results, January blended lease rates were up 2.3%, with new lease rates flat and renewals up 4.6%. January's average daily occupancy was 95.6%, on plan and an improvement on both the fourth quarter and prior year. February and March renewal offers went out with 4.5% to 7% increases. 2014 revenue growth in our top 10 markets can be broken into 3 tiers. At the top of the list, comprising 37% of revenue contribution, with forecasted growth between 5% and 7%, we have the Bay Area, Miami, Denver, Chicago and Los Angeles. The midrange markets, with forecasted growth between 3% and 4%, are Orange County, San Diego and Philadelphia. And rounding out the top 10, we have Washington, D.C. and Boston, forecasted to have positive growth around 1.5% and 2.5%, respectively. And great thanks to our teams in the field and here in Denver for your commitment to Aimco's success. I'll turn the call over to John Bezzant, our Chief Investment Officer. John?

Thanks, Keith. Today, I will recap our 2013 portfolio management and investment activities and provide some specifics around our plans for 2014. As a reminder, our portfolio management activities are driven by paired trades, where the projected free cash flow internal rate of return of an investment is greater than that of the property or properties sold to fund the investment and where our portfolio qualities are increased or enhanced. As we execute this strategy, we use the same 10-year free cash flow IRR model, reflecting cash flows after capital spending across all of our investment activities. During 2013, we sold 29 properties, with about 7,000 apartment homes, generating gross proceeds to Aimco of $406 million. These property dispositions came in about $30 million higher than the midpoint of our guidance range, driven by opportunities to accelerate capital recycling and portfolio enhancement. We sold 16 of our lowest-rated Conventional properties, with average revenue per apartment home of $874, 40% below the average of our retained portfolio. Among the properties sold were the last we held in Dallas-Fort Worth; Tampa, Daytona Beach and Naples, Florida; and Detroit. We also sold 13 Affordable Properties. On average, the properties sold in 2013 had a free cash flow cap rate of 5.6%. Had we held these properties for the next 10 years, as modeled in our free cash flow internal rate of return model, we would have expected them to generate a return of about 6.5%. Proceeds from these sales were reinvested in redevelopment and development projects, a handful of partnership and other acquisitions and property upgrades at a weighted average free cash flow internal rate of return about 300 basis points higher than the properties sold to fund them. As we maintain this paired trade discipline in our investment activities, we continue to see improvement in the quality of our portfolio. As Terry has noted, our 2013 capital recycling, combined with same-store revenue growth, led to an 8% increase in our portfolio average revenue per apartment home. And as a point of reference for the market transformation in the Aimco portfolio in recent years, at $1,469 per month, our average revenue per apartment home is 30% higher than 4 years ago, one of the highest rates of growth amongst the peer group. An important contributor to enhanced portfolio quality is our redevelopment program. In 2013, we completed 2 projects and made good progress on our multiyear redevelopments. In the fourth quarter, construction and deliveries on these projects proceeded according to plan. We ended the year with 204 apartment homes completed at Lincoln Place, with 161 of those occupied. At Pacific Bay Vistas, we had 132 apartment homes completed and 121 of those occupied. And at Preserve at Marin, we signed our first leases in late December and welcomed our first residents to the property in January. Our redevelopment leasing in 2013 achieved average rents above underwriting, and we continue to see solid rent growth in our redevelopment markets and hope to continue our leasing success in 2014. Moving on to our plans for this year. We will continue to follow our paired trade approach to portfolio management, with reinvestment of sales proceeds and properties where rents, long-term growth rates, operating margins and free cash flow internal rates of return exceed comparable metrics on the properties sold. Our 2014 plan is to sell $250 million to $290 million of Conventional properties and $50 million to $60 million of Affordable Properties, generating net proceeds to Aimco of $180 million to $220 million. We expect most of our sales activity to occur in the first half of the year, with 2 transactions already closed and others well underway. Specific to our redevelopment activity for this year, as I mentioned earlier, construction and leasing activity are progressing well at Pacific Bay Vistas, Preserve at Marin and Lincoln Place. The completion of lease-up of these 3 projects will increase our investment in and our share of revenue from the strong Bay Area and the rebounding southern California markets from roughly 1/4 of our portfolio today to nearly 1/3. During 2014, we will continue our redevelopment of The Sterling in Philadelphia, where we also look forward to the construction, starting this summer, of the Comcast Innovation and Technology Center. This expansion of Comcast's headquarters presence in Philadelphia will add 1.5 million square feet of office and luxury hotel space, with 2,800 new jobs right next door to our Sterling property. We also plan to start a second redevelopment project this year in Philadelphia, as well as others in Seattle and southern California. And we will complete the planning our anticipated 2015 starts. We have a deep pipeline of redevelopment opportunities within our existing portfolio and look forward to working on them in coming years. And with that, I'll turn it over to Ernie Freedman, our CFO.

Thanks, John. First, I'll spend a few moments on our fourth quarter results. Second, I'll provide some details around the assumptions we used in providing our outlook for 2014. You can find all of our provided projections for 2014 on Pages 5 to 7 of our earnings release. Regarding fourth quarter 2013 results, I'd like to turn first to our balance sheet as, importantly, we ended the year with leverage to EBITDA of 7.2x, putting us right on top of our 7x target that we established a couple of years ago. We have reached this milestone 2 years faster than we originally anticipated when announcing this goal. As to earnings, our fourth quarter AFFO was $0.02 ahead of the midpoint of our guidance and FFO is $0.01 ahead. Looking forward to 2014. In operations, we anticipate same-store revenue growth between 3% and 4%. Keith noted that we achieved blended lease rate increases of 3.3% in 2013, so half of that will earn in during 2014. We expect to achieve similar blended lease rate increases in 2014. Other income, which makes up about 10% of our total property revenues, is expected to increase at a rate slightly higher than rent growth. The combination of these items and our expectation of similar occupancy rates for the year provides for a result at the midpoint of our guidance range. On the expense side, projected increases in utilities and property taxes account for most of our projected 2% to 3% increase in expense growth. We expect the remainder of our property expenses to be up less than 1% compared to 2013. Regarding our portfolio, as John has discussed, we exceeded our expectations for property sales in the fourth quarter, and we begin 2014 with most of our planned property sales anticipated to close in the first half of the year. As a result, and together with committed loans, funding plans for our redevelopment and development activities are largely in place. We anticipate the combination of market rent growth and our portfolio management activities will lead to another 8% increase in average revenues per apartment home. Regarding our balance sheet, leverage to EBITDA should remain in the low-7s throughout 2014. We anticipate that leverage to EBITDA will dip to the high-6s in 2015 as our large redevelopment projects reach full year stabilized operations and as we continue to delever through scheduled property debt amortization. Debt amortization for 2014 totals $83 million, which we expect to fund through retained earnings as we've done for the last several years. During 2014, we plan to continue to increase our unencumbered pool from about $380 million today to somewhere between $525 million and $575 million at the end of the year, based on current property values. We will continue to work with the rating agencies with the objective of gaining an investment-grade rating. And finally, regarding off-site cost, we expect to continue to adjust costs lower to adapt to our more simplified business. These items provide the basis for our expectation that full year AFFO per share will be in the range of $1.63 to $1.73 per share, up 10% at the midpoint. AFFO growth continues to benefit from the elimination of the capital replacement spending associated with the 18,000 apartment homes sold over the past 2 years. For 2014, we have -- we also have a sizable reduction in capital replacement spending for our multiphase capital projects. Much of this decrease is at Park Towne Place in Center City, Philadelphia, as we finish work in anticipation of its pending redevelopment. We expect FFO to be up slightly from 2014 because our program of selling lower-rated properties results in NOI dilution at the FFO line that, over time, is offset by capital replacement savings at the AFFO line. Finally, as we announced last week, our Board of Directors approved an 8% increase in our quarterly dividend from $0.24 to $0.26 per share. Before turning the call over to questions, I wanted to take a few moments to summarize some of the items we discussed today. In operations, Keith and I provided guidance that our blended new and renewal lease rates will grow consistently with what we achieved in 2013. Certainly, it will differ by market, but overall, we are guiding to steady rent growth consistent with last year. Regarding expenses, we are at our usual spot at the top of the pack in cost control. We have been at the top of the pack consistently for the last 7 years. This leads to an NOI expectation that is in the same range as are all the apartment peers, except for one. Turning to our portfolio. We ended 2013 with average revenues per apartment home of $1,469. We will finish 2014 bumping up against $1,600. I hear from some folks that we have a portfolio that is well below the quality of our peers. It just is not the case. We have said our goal is to average a BB+ portfolio across all of our geographies. We really are getting to the point where we might need to drop the B from that description and just say B+. John spoke about some of the properties we sold in 2013. We exited suburban Detroit. Chrysler and Bob Dylan may have a view that Detroit is coming back, and I hope they are right, but we think there are better opportunities elsewhere for us to invest our shareholders' capital. We sold out of Daytona Beach. I guess that means John, Keith, Lisa, Miles and I are going to have to find a different spring break property for our trip to go on this year. We sold Fisherman's Wharf, no, not the property in San Francisco, the Fisherman's Wharf in Clute, Texas. I'm sure you're all familiar with that city. Clute is famous for its Mosquito Festival, seriously. Go Google it. The funny thing is John sold assets like these, as well as Affordable Properties, all from the very bottom of our portfolio at an NOI cap rate of 7.3% in 2013 and a free cash flow cap rate of 5.6%. Why is that funny? So I run some math this morning, we have leverage today of about $4.5 billion, including a mark to market on our debt. Where our stock is trading, we have a market cap of about $4.2 billion, so total capitalization of about $8.7 billion. In Supplemental Schedule 3, we note that our trailing 12 NOI is $581 million. A 4% NOI growth would add about $23 million to this. We expect that once stabilized, in 2015, our big redev projects add approximately another $30 million to NOI over what they contributed in 2013. Offsetting this is about $27 million of property management expenses. So that totals about $605 million of NOI. As you know, though, we measure profitability after capital replacement spend, not before. At $1,200 a door, that CR is $66 million, leaving total free cash flow from our properties of about $540 million. So with a total capitalization of $8.7 billion, NOI of $605 million and free cash flow of $540 million, we are currently trading at an implied forward NOI cap rate of 7% and a forward free cash flow cap rate of 6.2%. And we just sold from the bottom of our portfolio at 7.3% and 5.6%. I certainly think our current portfolio with Conventional revenues approaching $1,500 is significantly better and is worth higher price than what we've got in from what we just sold that had revenues of $900. And I suspect, if you run the same math for all of our peers, you'll see that our implied cap rates are too high, especially since our NOI growth rate is about the same as all the apartment peers, except one. Certainly, in the past, our balance sheet has been an outlier. But back in 2012, we told you that we had a goal to get to 7x. We did not want to be an outlier. We would create flexibility by growing in an unencumbered pool. We've been seeking an investment grade. Well, we can report that we're not an outlier anymore. There are certainly some peers with lower leverage than Aimco, but there are also some peers with higher leverage. We reached our 7x target 2 years faster than we laid out. We increased our unencumbered pool to almost $400 million currently, faster than what we said we would do at this time last year. Finally, as I was watching the Super Bowl this past weekend and as the game got away from the Broncos, I started having thoughts about our upcoming call. I started imagining what the headlines might look like after our release went out. I envisioned something like, "Omaha, Omaha, Aimco snaps the ball over their head with a 6% miss to consensus FFO." I was pleased to see that reports last night and today noted that while Aimco guidance missed consensus FFO for 2014, more importantly, Aimco was on plan doing what we said we would do. We continue to have solid operating results. We are markedly improving our portfolio through our paired trade discipline. We are markedly improving our balance sheet as we bring leverage down, and we'll bring it down further. We will continue to seek an investment grade. Our focus is to grow cash flow and create value in our activities for our shareholders, and I want to thank our shareholders for their support, guidance and advice. And I want to thank my Aimco teammates who make it happen. With that, now, I'll turn the call over for questions. Operator?

[Operator Instructions] Our first question comes from Jeffrey Pehl at Goldman Sachs.

Just wondering if, you've kind of touched briefly on this in your opening remarks, but when you expect your redevelopment cash flows will affect earnings over the next couple of years, in '14 and '15.

Sure. Jeff, this is Ernie, I'll take that. We disclosed it in the release. You can see in the footnotes to our outlook page, as well as in our walk. For 2014, we expect redev contribution of about $0.07 to NOI. So that's going to be a good guide to cash flow. Offsetting that, though, is going to be the fact that, from an FFO perspective, we're going to have increased interest expense as we fund those loans of about $0.02. And not a cash flow item, but certainly an FFO item, we're going to drop off capitalized interest of about $0.05. So in 2014, we'll have a $0.05 contribution to cash flow from redev activities. But from an FFO perspective, because capitalized interest is dropping off because we're delivering units, we'll actually have a very minimal impact to our FFO and AFFO numbers for 2014. For 2015, the good news is that we expect that to grow even further still. We think a little bit -- a contribution of NOI of about $0.11 from those big 3 redevelopment projects. No more interest expense as the loans will have been fully funded early in 2014 and a slight drop-off in capitalized interest of another $0.04. So in total, as we noted in our release, the $0.07 good guy to FFO in 2015 compared to '14. And then, there'll be a $0.01 charge for capital replacements as we start going through our typical capital replacement program at those redevelopment programs. So better contribution for cash flow than for FFO. But I want to make sure people understood both of those numbers for their models.

Okay, great. And then as a follow-up, you've been very active in redevelopment versus ground-up development. But could there be a shift towards more ground-up developments, like your One Canal Street project going forward?

Jeffrey, this is John. We did One Canal because that was a deal where we saw an opportunity to enhance our portfolio in Boston and recycle some capital out of suburban and tertiary markets and put it to work in a market we thought had better long-term prospects and a property we thought had better long-term prospects. While that is an element, I would call it an arrow in our quiver, but it is not our only arrow. It's one we will use selectively from time to time. But I would envision that redevelopment for the foreseeable future will continue to be the bulk of our reinvestment activity.

Our next question comes from Nick Joseph at Citigroup.

Can you break down what makes up other income and quantify your expectation for other income growth in 2014?

Which other income are you referring to, Nick? Is that the other income -- the other revenue...

Yes. The 10% that you talked about in terms of...

I just want to clarify that. So within other revenue, other revenue mix of about 10% of our contribution to total revenue is at the property level. About half of that, about 5% of that comes from utility reimbursements, where, with our properties, typically, we get the utility bills and ensure the -- and charge our customers, our residents, of their fair share. And about half of that comes from other fees and items like garage, storage, parking, pet rents, application fees and the like. In the past many years, Nick, as you've noted, before, we have been able to grow that a little bit faster than we've been able to grow rents per unit. But we look at the total contribution. In 2014, we expect utility reimbursements to grow at a pace a little bit faster than we're projecting for a total revenue growth, and we're expecting those other fees to grow about the same pace as we expect for other revenue growth. In the past couple of years, we've had the opportunity to grow other income by 10% and better. That's not in our projections this year to get to the midpoint of guidance, just slightly better than our other -- our rental revenue growth.

Ernie, it's Michael Bilerman speaking. So enjoyed your math walk-through that you did. You're clearly frustrated with where the stock is at. So what else can you do about it and what other levers can you pull? And I do appreciate the fact that you've gotten the balance sheet to where you sort of wanted to get it to, but it still is modestly more highly leveraged than where the industry is at. So it doesn't seem like aggressive share buybacks or aggressive selling and special dividending it out is a wise use of capital. So sort of how do you narrow this gap that you see that the market is not willing to pay for?

Mike, let me take a first stab, and then I'm sure Terry is going to add a comment, too. And first, I certainly don't want to come across as being frustrated with it. We're actually pleased with the results we're making. In the last 2 years, our discount to consensus NAV is actually closed by half compared to peers. It certainly had a better acceleration there from 2011 to 2012 versus '12 to '13, but we're making progress. And I just think, Mike, we just got to keep our mind and focus on all the great progress we're making because we're making it over a long period of time. And that's certainly why, in our prepared remarks statement, we wanted to call out some of those good things that have happened over the last few years in terms of average revenue per apartment home growing the way it has. The fact that we're getting to a balance sheet that's not an outlier, and we've always talked about the safety of our balance sheet and feel good about it. But we're certainly in the pack with other folks. And so I think it's just more of the same with what we're doing and talking to folks and making sure they understand. And I know Terry certainly has some thoughts on that. Terry?

Well, Michael, I would say that it's not unusual for the business to improve faster than the market's understanding of it. We do trade at a discount to net asset value. But as Ernie pointed out, it's half the relevant discount it was just a couple of years ago. And in the interim, we've provided stellar stockholder returns. So compared to peers, we're in the top quartile of total stockholder returns in -- whether you look at the last year, the last 2 years, the last 3 years, the last 4 years or the last 5 years. So Ernie is right. We're not frustrated. We're ambitious, and we're hopeful that we'll make further progress on pricing the stock.

And then just in terms of the sizing of the transactions that you said had already been completed or under contract, just from a sales disposition program. Can you sort of outline some of that?

Sure. This is John. We've closed 2 deals, one on each side of the shop, the Conventional and the Affordable side of the shop. The business that is booked at this point in time, we have things under contract, the vast majority of it under contract, but also in due diligence still. So we don't want to commit that those are guaranteed lockdown. They're not under contract -- not all of them are under-contract hard at this point in time. But we have a pretty clear path to achieving most of our results in the first half of the year.

In the first half, but is there -- it sounds like things are even accelerating from that. I'm just trying to figure out, from a modeling standpoint, how early do we have to. . .

Bulk of the impact would be toward the end of the second quarter.

Yes. Based on the size of the transactions or when it happens, it will be a little bit less in the first and more in the second, if you're trying to hammer it down from an all-in perspective.

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

Maybe just to ask Michael's question in a slightly different way. You guys have done a lot of the sort of the right things that the public market has asked, that you outlined pretty extensively in the opening comments and the NAV discount still persists. Can you just give your thoughts about privatization and M&A as a potential way to possibly narrow the gap and sort of just your thoughts around that?

Karin, our thoughts around M&A are that M&A is often value destructive for the buyer so that we would be quite cautious and disciplined about looking at an acquisition. If it were to be that a person -- if we looked at an opportunity to privatize Aimco, I would think that we'd look at it as good shareholders. I mean, we're significant shareholders as in the management team and on the board. And the board, in making the decision, will focus on what creates the most value, over time, on a risk-adjusted basis.

Okay. And then you guys have done a great job squeezing out the offsite costs and keeping expense control. How much more room induced do you think there is in the platform as it stands today? And how much longer do you think that you can keep expenses sort of below trend?

Karen, it's Terry. We looked around the room because everybody raised their hand, because we're all engaged in it. We think there's plenty to do, that there are opportunities to get better at what we do and that productivity will drive lower costs. And we're optimistic that we'll do that again this year and that we'll do it in the years ahead.

Okay. And last question for me. Can you just give us a sense, Ernie, just a timing on when you think the Lincoln Place tax credit will be coming into the income statement?

Well, sure. Good question, Karin. Those will come in ratably throughout the year. And so that $10 million to $11 million number that I note in guidance, you can assume about 1/4 of that each year. So we earned those as the redevelopment dollars are spent and we expect we'll be spending redevelopment dollars on Lincoln Place up through about November, December of 2014.

Our next question comes from the line of Ryan Bennett at Zelman & Associates. Ryan H. Bennett - Zelman & Associates, LLC: I just want to ask a couple of questions on first on the renewal side. You realized 4.6%, the fourth quarter in January. What were you going out with to the market for those renewals versus what you achieved?

Typically, those were going out at 5% to 6.5% is what the ask was. Ryan H. Bennett - Zelman & Associates, LLC: Got it. And then just quickly on the markets. In your comments earlier, I think you kind of grouped Los Angeles in your top bucket along with some of the Northern Californian market. I'm just curious what you're seeing in terms of -- possibly the convergence of Southern California revenue growth and in Northern California and what your views are there?

Ryan, let me -- I'll walk you through that. So as we look at Northern California, Northern California continues to be quite healthy. And while there's been some level of moderation, if we look at the third quarter at 10% revenue growth and in the fourth quarter being at 8%, it still could have been one of our top performers. As we look at Los Angeles, the way we think about Los Angeles is it has been very strong for us over the past several quarters, and we're quite optimistic as we look at our particular portfolio in the West side of Los Angeles and how fantastic our assets are, and our on-site operations team is one of the best in the business and we're -- we believe that in '14, we'll continue to build upon our '13 successes as being best-in-class. Ryan H. Bennett - Zelman & Associates, LLC: Okay. Got it. And then just lastly from me, just in terms of Philadelphia, I think you grouped that into the market that's going to see same-store revenue growth above 4%. I think it kind of ended the fourth quarter about flat year-over-year. Curious what's driving that and does it potentially -- what the contribution is from you putting some of the Philadelphia assets into redevelopment into that 4% number?

Ryan, I'll start with -- just the prepared remarks. Let me clarify. Philadelphia was in the 3% to 4% range, just for a clarification there. What we see in Philadelphia, is in '13, there is quite a bit of new supply, particularly in Center City. A lot of that has been absorbed. There will be some that will carry forward into '14. I'd also point out that we have talked about in previous calls that we had some operational opportunities, and we're quite confident in the team that's there, and how they'll be able to execute better going into '14. And so with that, let me turn it over to Ernie, to give some insight around the redevelopment question.

Yes, Ryan, with regards to your question on whether redevelopment will provide a benefit for us in that 3% to 4% growth rate for Philadelphia. The answer is, no. Sterling, which we announced here in our earnings release, which is now undergoing redevelopment, has been moved out of our same-store pool. So as of the first quarter, its results and any benefits from redevelopment will not be reflected in same-store, so not in that 3% to 4%. Similarly, we do anticipate later in the year that Park Towne Place, which started its redevelopment, and as that commences and ramps up, we would then at that point take Park Towne place out of redevelopment. So our results in Philadelphia truly are a same-store view that Keith talked to.

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

Just curious, do you have any properties in Omaha? You mentioned the $0.07 of impact from redev in 2015, netting it all up. But when you layer in dispositions, I mean, I'm trying to get a sense of the net-net number, right, when you consider how you'll fund that. Is it going to be a positive number in 2015 as opposed to negative $0.20 of dispositions in the 2014 number? How does that math work out for next year?

Rich, that's a good point, because that $0.07 good guy really helps offset in '15 the $0.20 bad guy you're seeing in 2014. All our redevelopments will be fully funded in 2014 with the proceeds from sales that we achieved from 2013 sales as well as 2014. So there won't be a bad guy in 2015 from our property sales that help fund the investment of those redevelopment projects. Now of course, we will likely have other paired trades and commence other redevelopments and those property sales would have an impact. But for the big 3, the cash is pretty much in hand in this point through loan commitments and or through property sales that John's going to close shortly, and that's part of the lumpiness and jumbleness that happens with AFFO around the timing with this.

So to put it real simple, it's minus $0.20 today for 2014 versus plus $0.07 next year when you just look at those kind of bulky factors?

Sure and plus the $0.07 from 2014 that we disclosed in our walk on the -- in our outlook section as well. So it is -- I don't want to run away from the fact that it’s dilutive to FFO. It certainly is. But when we measure our profitability to AFFO, and AFFO are paired trade investment activity worst case scenario has been breakeven for us is typically a little accretive, but you're looking at it the right way, Rich.

Okay. And then I was just looking back at the third quarter conference call and I asked the question to you about deleveraging and you said, we wanted to deleverage but -- and we hope that gets us investment grade rating but that is not our goal, that's how you put it. Sorry to stick you with what you'd said in the past. What is changed for you to now say, that is our goal?

All right. I probably didn't say it very well in the third quarter, Rich. We would like to get to investment grade. I guess what I was trying to say back in the third quarter was we were going to do what we plan on doing regardless if we got to investment-grade or not. We think it's smart to have an unencumbered pool, regardless of whether the rating agencies -- I think that's the way we need to go to -- get to investment grade. We think it's smart to be not an outlier with our balance sheet. We think it's smart to use property debt, long dated, nonrecourse amortizing. It's that's why I mixed up my words and didn't say it very well in the third quarter. We certainly hope all that equates to an investment grade and I do feel comfortable saying that's a goal of ours. If we don't achieve that and still have leverage in the high 6, 6s, we still focus on property debt, which is say for a fixed rate long-term amortizing, we're going to do all right by the balance sheet. So, appreciate you gave me the opportunity to clarify that.

Next question comes from Dave Bragg at Green Street Advisors.

I do think that Rich has a point as it relates to the change in your view on going unsecured -- rather over the last several years. And my question relates to what your outlook for the ultimate future of Fannie and Freddie has to do with that strategy?

Well there Dave, I certainly don't want to communicate everyone that we want to go down the unsecured route, that's not the case. We want to get to the investment grades. I think it's important to get that good housekeeping seal of approval from the rating agencies because we do believe, our strategy from a balance sheet safety perspective, is safe or safer than what others are employing. And that's why we want to get to the investment grade. So again, I'm glad you guys gave me a chance to clarify this, so there's no confusion. We're not seeking or thinking about going to unsecured route. That said, it's always nice to have that flexibility that something did change in the future. But that's not something we're expecting to do today. Regarding Fannie and Freddie, Terry, do you want to add anything there?

I think the -- as Dave as you've reported the latest twist and turn on the GSCs is that they're likely to continue to be an important fact -- force in providing property debt to multifamily. But more broadly, if Freddie and Fannie go away, there will still be a very deep property debt market. And I'll expect it to price quite competitively with unsecured debt and -- but if it were to change, then we would adjust. But for the moment, I think Ernie has got it exactly right, we like the safety and we like the liquidity of the property debt market.

Okay. And Ernie, can you provide the Affordable same-store NOI growth in '13 and the expectations for '14?

I don't know if I have those exactly handy for '13. For '14, we expect it to be about 2%. I believe the '13 number was kind in that 1% to 2% range. I just don't have it in front of me right now, Dave. So I think it's going to be consistent. It's going to be -- taste a little bit less, a little bit slower than our Conventional portfolio.

Got it. And last question relates to your guidance for similar rent growth in '14 versus '13. You and many of your peers saw deceleration in '13 from '12, and a lot of your peers are looking for an incremental deceleration in '14 versus '13. Why are your expectations that it will be the same?

Well, let’s just talk about definitionally, Dave. In 2012 we had revenue growth of 4.7% . In 2013, we had revenue growth of 4.4%. And we are calling for -- at the midpoint of our guidance revenue growth in 2014 at 3.5%. So under that definition deceleration, we're seeing are under that -- those numbers, we're seeing deceleration, I think it's very consistent with our peers. But I think a lot of folks are saying that they kind of seeing that in terms of into, when you look at rates. So what's happening in the transaction markets, say when you look at new lease rates versus renewal rates in those blends, we're certainly seeing deceleration in some markets but we're seeing acceleration in others with our geographically diverse footprint in our different price points, we are projecting that for 2014 to get a blended new and renewal lease rate about the same as what we did in 2013 which is about 3.3%. And that doesn't seem to be too far off for what third parties are projecting for our markets, and didn't seem too far off just seeing what other people have talked about for what they expect to achieve for rental rate achievement in 2014.

Right. That was my focus, not same-store revenue growth. And so you're a little behind in January although that's a light month, but you expect to really close that gap as the year progresses. It sounds like you can get back to that level?

Well the agenda -- you said it exactly right. January came in at 2.3% and we're expecting for the year to be roughly at 3.3%, and that would not be an abnormal growth to come out of those and close decent Qs in January.

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

So Terry, the last few years, Aimco's talked about strategies culling the bottom 5%, 10% of portfolio to invest in redev, in acquisition of higher quality properties. Can you guys talk a bit more about the decision or strategy behind accelerating some of the near-term dispositions, weighing the short-term dilution impact? And can you discuss some thoughts on how the capital will be reinvested. It looks like there'll there be some excess disposition proceeds beyond the 2014 redev spend if all goes to plan?

Haendel, first of all, thank you, those are very good questions. I think that around acceleration, there are really 2 thoughts. One is that we don't want to get our commitments very far ahead of our funding. And so we've made commitments to fund redevelopment and development activity, whether it's at Lincoln in the redevelopment sphere or One Canal in the development sphere. And we want to be sure we have cash on hand and we know what the cost of that capital is, so that we know that we're making a -- what would our spread or accretion will be on the use. I think, secondly, there may be a bit of a tactical feeling that pricing is good today and we might as well take it now and not be at risk for a future change. Does that answer your question?

Broadly, I guess. Can you also talk generally about the buyer appetite for the product that you guys are selling? Have you noticed any change in the depth of the buyer interest, getting any pushback on pricing, any retrading?

I think John would be more knowledgeable than I and I'd like to hand it to him.

Yes. And I would tell you, Haendel, it's been pretty consistent over the course of the year. We've talked previously a few times about sales activity. We obviously had a very good year. A very good fourth quarter in terms of getting deals done and closed. As you look back into '14, as we've talked about previously, interest rates kind of ran up over the summer. There was what I would call a deep breath or a slight hiccup in August that then quickly dissipated in September as rates dropped back down again. And what we saw during that timeframe was, if you recall what we had in the market, it was effectively booked through the summer run-up and then we put some additional product to market in the fall. And frankly, saw a very little difference between the first half of the year and the second half of the year in terms of buyer appetite, pricing, cap rates and ability to execute and get deals closed.

Appreciate that. And then one more small, and maybe for your Keith. Can you talk, give some specifics on the new lease rates achieved in January specifically for your D.C. and for your Philadelphia portfolios?

Sure, Haendel. In both those markets, they were about negative 6%. I mean, it just gives some context around that. What you see in the new product and new stuff coming online are given a month free to 2 months free, which a month free represents negative 8% to price and 2 is negative 16%. So negative 6%, I think it's a representation where the -- our product lies and be in BB+ product that it doesn't have the same impact that others might have.

The next question comes from Nick Yulico with UBS.

I just wanted to go back to this -- talk about how your portfolio has changed versus what was in the past, and I was hoping you guys could talk a little bit about, if you thought about the portfolio that you have today versus what you had in 2007. If you owned them both today based on today's cap rates, what's the different cap rate between those 2 portfolios? On a magnitude change, I am not asking to give a cap rate, but what, is it 50 basis points, is it 100 basis points?

Well, you should -- it'll -- you also have to adjust for interest rates and the era. But if you take the average portfolio that we had in 2007, where average rents were.

Half of what they are today.

Half of what they are today, then I would say the spread on NOI cap rate might be 200 basis points and the spread on free cash flow cap rate might be

Comparable.

Comparable. But if you're interested in it, we can take a minute and give you a more scientific answer. But it's quite a big difference. If you think about, just the assets that are best-known if you will that we're investing in, a Lincoln Place will price in California at 4% or below at an NOI cap rate and at a free cash flow cap rate, not too much higher than that. And so, compared to properties that had $700 or $800 average rents, many of them in lesser markets. Today, those would price at, I don't know, 7 NOI.

6 to 7.

6 to 7.

Right now, I understand, I mean, it sounds like you're talking a little bit more about what you've gotten rid of versus what you've incrementally invested. I'm wondering, as you think about your entire portfolio today, the average cap rate on that portfolio versus what you owned in 2007, what's the difference in that, because I think, as you did mention, your stock is trading a very similar employed cap rate -- employed cap rate or even a spread versus the rest of the group. Today, in 2007, yet you're saying that you deserve a lower cap rate. So any sort of commentary on what that -- what that benefit has been I think would be helpful?

I think, Nick, of you take a look -- this is John. I think if you look at footprint would be one piece to look at. In 2007, we were probably pushing 70 markets that we're in and well over half of those were secondary and tertiary markets, where you would've seen cap rates if we were trading in them today that would have been easily 200 basis points higher than primary markets. That would be one element of it that you ought to look at. I think part of it, in terms of today's portfolio, we talked about having roughly 25% of our revenue or income coming out of California. And those -- that California portfolio is predominantly Peninsula in the Bay Area, and West L.A. and coastal San Diego. And cap rates in those markets are substantially lower than what we sell at for example. There's been a little nervousness in looking at some of the reports on our cap rates in the fourth quarter that is, Ernie has already alluded to, this is -- it's a mix of what sells, and as we look to sell in a rural community on the Gulf Coast of Texas and Detroit and Daytona Beach, those cap rates are not comparable to the remainder of our portfolio where we are very strong and very increasingly dedicated to course up markets in target markets.

Yes. And Nick, this is Terry again. What I would come back in, I think the market does understand a lot of that change. There's a range of estimates out of peoples GAV for the company and NAV for the company. And the people at the higher end have it about right, in our opinion, that -- and so, as that analytical understanding has not yet fully translated into the share price. But I'd point out, as Ernie did, that we've narrowed the gap on discount to NAV by half over the last couple of years, and that there are other factors that go into pricing the stock besides just NAV, leverage being the example that again we focused on. So I think that we're quite optimistic that, that gap will narrow.

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

Ernie, just going to you gave good detail on the press release about capital replacements. Can you talk about the other bucket of CapEx, capital improvements? And then as we think about the reduction in capital replacements for '14, how much of that was related to trimming in asset sales versus expensively reinvesting in the properties over the last couple of years?

Sure. With regards to capital improvements, we give guidance as well that we're spending some money on property upgrades, about roughly $40 million, $40 million to $45 million. Those are for projects like putting in similarly wood flooring, there projects like energy replacement projects, where we get more energy-efficient properties, just putting granite in the countertops and in our various properties. We've had a run rate over the last few years spending across entire portfolio about $40 million -- $30 million to $40 million a year. That's what those represent. And they get pretty good returns for us. They have long life, they help bring down expenses well as grow revenues and it's been a good way for us to create value for our shareholders. With regards to capital replacement spending and there's certainly a bunch of different numbers in our report. On our outlook page, we note that our capital replacement spending is going down from $75 million in 2013, down to $55 million in 2014. But as we talk about it in the release, a big chunk of that decrease is due to the fact that we've completed a significant amount of work at one of our properties, Park Towne Place in Center City, Philadelphia, where we have 4 towers, approximately 960 units, and it's a 50-year old plus building where we're going into the guts and replacing the plumbing, the electrical, the mechanical, almost everything in there. And we're able to complete 3 of those 4 towers in 2013, which is at 1 left to go. That makes up almost all of the decrease in capital replacement spending. About $2 million or $3 million of that capital replacement spending decreased which is the fact that we have less units. That's one of the reasons why would we measure AFFO, because that's real spending that has to happen each year. Short of it, is Michael, we've actually increased our capital replacement spending on our current portfolio for what we're keeping for about $900 in 2013 to $1,000 in 2014, that's the right thing to do. We want to continue to maintain our assets and put the money into it, that is needed. So that's kind of the moving pieces and the parts of what's happening with capital replacements.

Great color. I appreciate that. Second question, as you think about ramping up REIT, this probably more for Keith or John. As you think about ramping up redevelopment in the back half of the year on additional projects, as you complete the current pipeline, the 3 coastal California communities were vacant as you think about the next wave of redevelopment. How much displacement are you assuming on that in back half of '14? And as we kind of think about '15 at that point?

Yes, I'll let Ernie speak to the potential dilution of future redev but just a couple things. One, in terms of our ramp-up. I would envision our run rate this year, we've guided $125 million to $150 million of redev activity this year. And we would envision that we would stay at roughly that run rate on a go forward basis. You are correct that the big 3 in California will come out of the pipeline this year and those will be backfilled with other projects as we move into '15, in terms of displacement, if you will. Typically, on those operating properties, there is some drag associated with the project. But we try to manage again within the scope of any specific project, we try to manage that by doing bulk of our work on turns. We certainly have no plans to empty out any properties to rehab them in our near-term pipeline, and would envision that the drag would be minimized to the extent we can. And I'll turn it to Ernie for a minute.

Yes. John, sums it up well, Mike. With the projects we have going on right now, there's certainly isn't a drag at the big 3 because we're filling units that were empty otherwise. With Sterling, there certainly will be a little bit of drag as we work on the 69 units that we're doing there, but it's going to be pretty immaterial across the broader scope of Aimco. And as we ramp up redevelopment spending away from the big 3 and other projects in the 2015, drag and displacement that something need to talk again but at the dollar amounts we're talking about, it's going to be pretty minimal. I haven't done the math recently. If I'm guessing, it would be no more than $0.01 or $0.02 at the level of spends we're talking about. As we go out we will certainly provide a clear insight to that as we get into 2015.

Finally. Just a question in terms of, you got the portfolio mix of A and B. Can you talk about -- what's the differences between you're seeing in markets where you have both A and B product in terms of pricing? And then also, just in light of jobs report this morning. How sensitive is your rent growth forecast and overall forecast to employment growth?

Regarding A and B, I'll let Keith to talk. We have a couple of markets where we do have A and B type of assets combined, a market like Los Angeles. I'll ask Keith to talk about.

Michael, we would tell you, we use new lease rates as a barometer to kind of gauge how an A or B product in a similar market. And what we're seeing generally across the board is As and Bs are performing within about 50 basis points of each other.

And then, what I would say, Mike, regards to the jobs reports, we go through and put together our guidance and our budgets. We do it from a bottoms up approach in terms of working with our properties and understanding what's happening locally. So certainly national type metrics like jobs reports don't have a lot of impact to what's going to happen on the local scene, it really is going to happen locally with jobs. But for us, we would expect that the economy in the market kind of stays as it is, it's kind of sluggish but slowly growing and slowly improving. We feel pretty -- we feel solid with our numbers that there would be a major black swan type of event or major change in the macroeconomic situation that's starting to impact localities, we have to of course go back and visit, but we think there's a lot of flexibility in our numbers with regards to them and Terry want to add one thing, too.

Mike, good morning. I think even looking at the jobs report this morning, the economy is getting better. It's choppy, it's not on a tear, but it's getting better. So that's a pretty good condition for us because it keeps things tempered, if you will, it's not running away, it's more steady. The second thing I would call out is that in that economy, there is a -- the people that are better educated and have better jobs are gaining at a faster rate than the average of the economy. And that target customer is exactly where we're going. And to me, the most -- there are a lot of very interesting and exciting and encouraging numbers in our report, both in the earnings release and on the call. But one that just stands out at me, is that the median income of our new customers, this on a same-store basis -- the median income of our new customers in the fourth quarter was 10% higher than in the fourth quarter of 2012. So rents are 10% higher. So the customers’ ability to pay rent has improved year-over-year.

I mean, I hope the job environment continues to improve.

Yes, I hope so.

[Operator Instructions] Our next question comes from David Harris at Imperial Capital.

Terry, I never read you as being someone that naturally runs with the pack. I'm just wondering if how much you see that pursuing focus on many of the same markets of the other public companies selling off the Affordables, and upgrading the portfolio, seeking an investment grade REIT. What opportunities are you missing that you would be doing if you weren't pursuing those strategies?

David, thank you very much. I don't -- I guess I do think that, in general, a good idea can be overdone and there's some risk in running with the pack. I would like to call out those -- some very important differences between what we're doing in our points of emphasis and what the pack might be doing. And just looking at operations, the one that jumps out is cost control. We have had substantially better cost control than the average of our peers because we've worked very hard at productivity, at job redesign, at technology. Now there are others that are pretty good at it. Our neighbors here in town at UDR have done a wonderful job. But we're the champs. And so, we'll be distinctive in that. The second would be around portfolio management. We will be -- while we admire and appreciate the value of coastal California and of the sexy 6 markets, we don't want to have all our eggs in one basket. I mentioned to Mike, that a great number in the call was this 10% increase in median income of our new customers. But another very interesting fact to me is the rotation in our top-performing markets. So while it's correct that, the Bay Area is a wonderful market for us, so too are Miami and Chicago, which don't show up on other people's portfolio allocations. We want to be more diversified than would be implicit in some of the other strategies.

Well, I guess one of the observations here, and maybe this is a conversation between you and I as a personal conference call, but is there a public market discount if you pursue different strategies from that which many of the companies that have high prestige and high valuations by becoming sort of me too and yet you sort of cutting off your chance to create value that by not running with the pack?

I think there is a chance of that. A person has to be sure that the differences are differences that add value. And we're quite comfortable with, for example, our total returns over the last 1, 2, 3, 4, 5 years as compared to any apartment REIT. And so, the only one that would be comparable would be FX [ph] with it's wonderful allocation to the Bay area, but again that's a concentration that we probably would not take on.

Right, right. Okay, well I guess to be continue when I see you next.

No, I'd look forward to that. But I would just go down again, look at balance sheets. This came up again on the call today where, I think it was Dave Bragg was asking if this meant we're going to be a corporate issuer. I don't think so. I mean, I'd be glad to have all options. But there's an inherent safety in property debt that doesn't get priced in the public market every day, but is quite real. And so, we're going to stay being different in that third area.

Well, I mean, I'm inclined to agree with you. And I think there's an overvaluation of that, which is plain vanilla by many investors.

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

Well, operator, thank you. And any of our listeners who are still on this call after which has been fairly long, I just want to thank you and appreciate your interest in Aimco. Please call Elizabeth Coalson or Ernie Freedman, or me if you have any questions. And for those whom we'll see in a few weeks at the Citi conference, we look forward to being together. Thank you so much.

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