Apartment Investment and Management Company (AIV) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Third Quarter 2014 Apartment Investment and Management Company Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lisa Cohn, Executive Vice President and General Counsel.

Thank you, and 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 adjusted 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 Chief Financial Officer. 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. The apartment business is good, and Aimco results are on track. In fact, Aimco enjoyed an excellent quarter across all 5 of our most important priorities. First, operations exceeded our expectations, leading to our guidance raise. The increase in occupancy and improvement in rent during the important summer leasing season provide a solid foundation for the fourth quarter and for next year. Second, redevelopments are also on plan and creating shareholder value. During the third quarter, we completed the lease-up of one redevelopment in San Bruno, California, and started 2 more, one in Philadelphia's museum district and the second in the very special submarket of La Jolla, California. Third, the transformation of the Aimco portfolio continues as we pursue paired trade, selling properties with lower rents and lesser prospects to invest in better properties with superior locations, higher rents and greater expected rent growth. Across our entire Conventional portfolio, average revenue per apartment home reached a record $1,650. Fourth, the Aimco balance sheet remains safe and liquid and improving. We continue to bring leverage down and to increase flexibility. By year end, we expect an unencumbered pool worth $1 billion. Fifth, and most important, the Aimco team is cohesive and focused on execution of our plan to emphasize customer satisfaction, cost control and value creation through redevelopment. They have my enthusiastic thanks for a solid quarter. And with that, I'd like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

Thanks, Terry. I'm pleased to report that we had a strong quarter in operations, with revenues up 4.4% year-over-year, 1.3% sequentially and 4.4% on a year-to-date basis. Our on-site teams demonstrated their deep commitment to providing world-class customer service. Through this dedication, we maintained low customer turnover and renewal rent increases averaging 5.6% for the quarter. These renewal rate increases were by led by the Bay Area, Denver and Miami in the 8% to 9% range. Of those leases that expired and were not renewed, new leases were signed at rates that were on average 6.4% higher than their expiring leases. The Bay Area, Los Angeles and Denver led the way with new lease rate increases between 10% and 17%. As a result of our team's hard work across the country, we achieved blended lease rate increases of 6% for the quarter, all while improving occupancy year-over-year. 6% is the highest blended increase since the third quarter of 2011. Turnover for the quarter was 46.2%. Of the customers who decided to move out, 24% were for career moves, 20% did not renew due to price and 13% 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 in replacing move-outs with better qualified residents at higher rents. The average income of those new customers at our same-store communities who moved in during the third quarter of this year was $147,000. The median income was $85,000, resulting in a rent to income ratio of 20%. The median income of our new residents versus those that moved in a year ago is up 13%, as we improve both our portfolio and resident quality. Looking at our 10 largest markets, which make up 75% of our revenue. The top 4 performers had revenue increases from about 6% to over 9% for the quarter, led by the Bay Area, Denver, Los Angeles and Chicago. Our steady performance for the quarter, with midrange growth of over 4% to better than 5%, were Miami, Orange County, San Diego, Boston and Philadelphia. And rounding out our 10 largest markets, we had Washington, D.C., which improved by 80 basis points. And with great thanks to our teams in the field and here in Denver for your commitment to Aimco success, I'll turn the call over to John Bezzant, our Chief Investment Officer. John?

Thank you, Keith. I'll provide today an update on our major redevelopment projects as well as additional information on our transactional activities. On the redevelopment front, we completed a quarter of solid execution. We completed the lease up of Pacific Bay Vistas, which was 97% occupied at quarter end, with rents ranging from $2,300 to $3,000. Construction continued at our largest redevelopment projects at Lincoln Place in Venice, California and Preserve at Marin in Corte Madera, California. Work at these communities is progressing in accordance with the budget and schedule we outlined earlier this year. At The Palazzo in Los Angeles, construction is nearly complete, with just 2 penthouses under renovation at the end of the quarter. We had hoped to have these wrapped up by September 30, but now expect to complete them in early November. At the Sterling in Philadelphia, we completed the redevelopment of 69 apartment homes on time and on budget, 66 of which are leased as of today, with rents ahead of underwriting. We're also excited to have started 2 new redevelopments in various special locations. First, Ocean House on Prospect is located in La Jolla, California, one of the most exclusive and desirable places to live in San Diego. This $14.8 million redevelopment includes renovation of all apartment homes, common areas, exteriors and amenities, as well as the addition of a new fitness center and clubroom. The location of Ocean House, coupled with unique apartment interiors and upgraded amenities, will position this community to lead the luxury apartment rental market in La Jolla. The second redevelopment which we started is at Park Towne Place. Constructed between 1957 and 1959, Park Towne Place is located along the Benjamin Franklin Parkway in the heart of Center City, Philadelphia's growing museum canvas. In 2011, the community was placed on the National Register of Historic Places, making it eligible for receipt of federal historic tax credits. We expect to redevelop Park Towne in several phases, the first of which includes renovating existing commercial space, upgrading common areas and amenities and redeveloping 1 of the 4 residential towers. We anticipate a net investment in this space of $60 million, which reflects a gross investment of $71 million, reduced by $11 million of historic tax credits. Depending on the success of this initial phase and other investment alternatives, we may redevelop additional apartment homes at Park Towne. If we redevelop the other 3 residential towers, our net investment, including the first phase I just described, could be up to $160 million. Our teams are looking forward to these new opportunities and are focused on the solid execution of our plan to deliver an exceptional product on time and on budget. We also had a successful quarter in our transactional activities. During the third quarter, we sold 15 Conventional apartment communities with approximately 4,600 apartment homes. Among these sales were our last Conventional communities in Texas, Indiana and Orlando. And since quarter end, we sold our last Conventional community in Jacksonville. During the quarter, we also acquired 21 Fitzsimons, a 600-apartment home community here in the Denver area. This community is situated in a unique and vibrant location, the only land currently zoned for multifamily use within the Anschutz Medical Campus. Anchored by 3 major regional hospitals, the Anschutz campus is currently home to more than 20,000 jobs. This number is expected to more than double upon completion of planned medical bioscientific research facilities. As we maintain our paired trade discipline and our investment activities, investing the proceeds of property sales and communities in special locations with higher growth, higher margins and better opportunities, we see continued improvement in the quality of our portfolio. Including October activity, more than 90% of our Conventional capital is now invested in our target markets. Revenues per apartment home averaged more than $1,650 per month, and our portfolio average is a solid B+, with 43% of our capital invested in A-rated assets and 36% in B-rated assets. We continue to find the transaction market liquid and demand for our properties is strong. As you will see in our earnings release, we have updated our guidance to take into account the volume of activity during the third quarter, as well as anticipated fourth quarter sales. And with that, I will thank our team, and I will turn it over to Ernie Freedman, our Chief Financial Officer. Ernie?

Thanks, John. Pro forma FFO of $0.51 per share was $0.01 above the midpoint of our guidance, with out performance in property operations somewhat offset by higher than anticipated casualty losses. As we contemplated in our guidance, we incurred $0.02 of prepayment penalties in the third quarter associated with the payoff of 3 loans that increased the size of our unencumbered pool. On the balance sheet, our financing activity increased the size of our unencumbered pool to $750 million. We expect it to grow to $1 billion by year's end as we plan to pay off 2 more properties. This result will get us to the size of unencumbered pool that Fitch requested for consideration of an upgrade to investment grade. Looking ahead, pro forma FFO is projected to be $0.53 to $0.57 per share for the fourth quarter. Full year 2014 pro forma FFO per share is projected to be $2.06 to $2.10, which is unchanged at the midpoint compared to the guidance we provided last quarter. At the AFFO line, we are projecting $0.41 to $0.45 per share for the fourth quarter, and full year AFFO guidance is unchanged at the midpoint, with a range of $1.67 to $1.71. As to operations, year-over-year Conventional same-store NOI growth is projected to be 4.75% to 5.75% for the fourth quarter. We are increasing our full year Conventional same-store NOI guidance to 5.25%, which is equal to the high end of our previous full year guidance range. Supporting our full year NOI growth expectation is a higher revenue projection of 4.4%, offset somewhat by a higher expense expectation of 2.75%. Embedded in our expense expectation for the year is that controllable operating expenses, that is expenses exclusive of taxes, insurance and utilities, are up 1.25%. We are working hard to see if we can do a little bit better than that. With our increased sales in 2014, we may be required to pay a special dividend next year. The amount of any special dividend will be dependent upon 2015 sales volume and related taxable gains. To the extent a special dividend is required, we may pay a portion of the dividend in stock. 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 will come from Nick Yulico of UBS.

Maybe if we could just start with the FFO guidance this year. I mean, you raised your same-store guidance, but you also increased the asset sales. I mean, do you think that you would have been able to raise your FFO guidance if you hadn't increased the asset sales? Or is there something else going on there?

Nick, it's Ernie. With regards to guidance, you've got it exactly right. With the raise in our NOI guidance for the year, that certainly would have given us the opportunity to earn another $0.01 or $0.015 to FFO. That is being offset somewhat by the fact that we were successful in doing what we said last quarter in wanting to dispose some of our lower-rated assets and get ahead of our needs for 2015. So that, at a high level, is the offset. So the way you're looking at that is the correct way.

Okay. And then Terry, when you're talking about this possibility for increased asset sales even going into next year, and the possibility of a special dividend, I mean, what -- is there a message you're trying to send to investors? Because it doesn't seem like you necessarily need increased capital. Are you taking advantage of just the very strong market? Or are you just cleaning up the portfolio to maybe make it even more attractive to a potential acquirer? I mean, what are you trying to tell the market by doing this?

Nick, just -- that we're pursuing our paired trade discipline. That essentially, every day we have a decision whether to hold the properties we have, which are good properties, or trade them for others that have better prospects. And when we see that opportunity, we'll make a trade. And it's just as simple as that. John, would you want to add to that?

No.

Nick, one thing I'd point out, this is Ernie, is that we did announce the acquisition of 21 Fitzsimons here in the third quarter and we needed to fund that. So to Terry's commentary on paired trade, it's exactly that. That was not contemplated on our beginning of the year guidance. And so, what we continue to do, what we've been doing for a while around paired trade discipline and getting ourselves a little bit ahead of our needs for 2015 with regards to the redevelopments that we've announced now with Ocean House as well as with Park Towne Place. And hopefully, there'll be another 1 or 2 redevelopments that will be prepared for -- to have it start sometime in 2015 and we'd announce it then.

Okay. Appreciate that. And just one last follow-up on that. As we're thinking about, I know you haven't given guidance for 2015 yet, but how should we think about how you're thinking -- you're looking at your -- the impact to your FFO next year from increased asset sales? I mean, would you -- do you care about diluting your FFO next year if you're a net seller? Or is it just, again, it just makes more sense longer term?

Sure, Nick. No, I'd say a couple of things. We look at FFO but importantly we look at AFFO as well. And on an AFFO basis, as you've seen over the last couple of years, as we've been a net seller, we've continued to grow AFFO at over 10%. And we disclosed in our Schedule 8 with regards to asset sales, both an NOI cap rate as well as a free cash flow cap rate. And I think that's important because that can certainly help folks model what the expectations would be then going forward to both FFO growth and AFFO growth. We absolutely do care about dilution, whether it comes to FFO or AFFO, but we see we're putting our portfolio in a better position. But I think importantly for next year, and you're right, Nick, that we're not providing guidance at this point, is that we have some real positive headwinds. One is the work that Keith and his team has done on operations. And you can see on our Page 2 of our release the success we've had in both new and renewal lease rates that we'll earn in into 2015 will put us in a very nice position from an operations standpoint. Secondly, most importantly, we have these redevelopments that we've been working on for a long time for our projects like Lincoln Place, Preserve at Marin, Pacific Bay Vistas. John talked about in his comments how Pacific Bay Vistas has been stabilized here in the third quarter, and Lincoln Place and Preserve at Marin will have construction complete in early 2015 with stabilization later in the year, which is giving us a nice headwind as well. And then finally, most importantly, with our balance sheet, through property debt amortization and in through lower interest rates, we have a following wind, as one of our friends has mentioned to us in the past, where we continue to have an increase in FFO and AFFO results because of lower debt costs. And so certainly sales could offset that a little bit, but we feel very confident that they we're going to have good results in terms of FFO growth and more importantly AFFO growth when we announce guidance in the first part of 2015.

And the next question will come from Nick Joseph of Citigroup.

For the Park Towne Place redevelopment, can you walk us through some of the targets and benchmarks that you'd like to see achieved before you would start redevelopment on other phases?

Sure. I think ultimately we want to look and make sure that -- from a cost perspective, it is coming in where we've got it costed out and projected, that we see the performance in terms of the revenues as we go through the lease up and that it performs and hits to our underwriting. That's going to be the primary measure for us as we look at whether we'd go into the additional phases.

Okay. And then Terry, I'd like to get your thoughts on the government potentially loosening lending standards and how you see that impacting the homeownership rate and I guess your business directly?

Nick. I think that I would emphasize that we're really in a parallel market that has a loose connection to home purchases. Almost 50%, I think it's 48% of our customers, are single occupants of apartments and they're not interested to go buy a home just because of lower credit standards. Our locations are in markets where the homes that are available for purchase are at very high prices. And so the impact of government lending standards on Aimco is quite limited.

And the next question will come from Jana Galan of Bank of America Merrill Lynch.

As you look at potential acquisition opportunities, I was wondering if there's, in target markets are you looking to kind of maintain your current geographic mix?

Jana, this is John. Yes, we are looking at -- all through our footprint today. So largely that's a 12 to 13 market footprint depending on how you want to define Southern California, but we look actively in all of those markets. And as Terry's indicated earlier, for us, it really comes down to a free cash flow internal rate of return paired trade that we can look at on a nondilutive or hopefully accretive free cash flow basis to upgrade the portfolio into submarkets within those target markets that have higher growth rates, better metrics for rent -- both rent growth, demographics and other measures.

And so I just wanted to see if there was potentially more of a West Coast focus currently?

Jana, just to jump in. We'll have almost 1/3 of our capital invested in California with the completion of the redevelopments now underway. And that's been a wonderful market, but that's probably about as much as we'd want to have there. We'd like to increase our allocation to Seattle by -- significantly over the 2 properties we have there today, but not so much that it would make us more weighted to the West Coast. So the investment activity that we'd like to add to that is either upgrading locations in California or moving from a suburban portfolio in Boston to a more urban portfolio, moving -- increasing our allocation to New York, moving from a suburban portfolio in Washington, D.C. to a -- one closer to the district.

And then maybe just quickly on the redevelopment activity. I think previously, you've expected redevs to add about $1.50 to NAV per share. I know the La Jolla project is a little bit smaller, but with that and Park Towne Place, do you have new expectation for contribution to NAV?

Yes absolutely, Jana, of course it's a rolling number, because part of that $1.50 is our projects that are in different stages of completion, Pacific Bay Vistas, of course, which is complete at this point. And so I think we can certainly calculate to a dollar amount per share in terms of NAV, but what we're seeing across the board is pretty much for every dollar of redevelopment that we are -- that we're spending, we're going to have a profit on that of about 30% or so, between 30% and 35%. And so it's all going to then come down to how much we're announcing and starting each year, so whether we can get up to $1.50 in some of years, over a couple years it could actually more, some years might be a little bit less. But we're seeing pretty consistently across the board now a nice uptick of about -- for every $1 about $1.30 of value.

And our next question will come from Haendel St. Juste of Morgan Stanley.

So I wanted to get a bit more clarity on the third quarter dispositions. I just wanted to be sure, was the accelerated pace intentional on your part? Or did the demand pricing come in stronger than anticipated? And then also pro forma this quarter's activity and fourth quarter's contemplated sales, ballpark, how much would you say is still left to sell in that call it noncore, long-term bucket?

Haendel, I'll take a stab at it. In terms of the sales, and again, as Terry has already mentioned and Ernie referenced as well, we bought the 21 Fitzsimons property in the quarter. Our activity in the third quarter was really to pay for that and to prep us for next year, and candidly, to pay for a little bit of our additional redev costs as we work through these redevs this year that we disclosed a couple of quarters ago. And that -- we achieved that and more. And as we got into the quarter, we got into the pricing on them, yes, we saw very a good execution and took advantage of the opportunity to continue to upgrade the portfolio with some selective pruning. And we anticipate with additional paired trades down the road, we'll continue to upgrade it.

Haendel, with regards to your question then on what's left to sell, as you know, and we've talked about, we're always going to have a bottom 5% to 10% of our portfolio and those will certainly be the candidates for us to consider to sell with regards to our paired trade discipline. John mentioned in his prepared remarks that over 90% of our assets today, our communities are in core markets. And so that leaves a little bit less than 10% that are in our noncore. There's always going to be some noncore assets that we want to keep and we keep them long term. A great example is the Calhoun Beach Club in Minneapolis which is a very valuable asset. And so I would say rough, rough, a little bit less than half of that noncore, so maybe 4% to 5% of our noncore, in terms of non -- I should say, nontarget markets, excuse me, would be ones that we'd be looking to exit sometime in the near future. And then we get to the point where we get to take the best of the best of our target markets. And as Terry just described a few moments ago, maybe selling out of some more suburban less desirable submarkets into better submarkets within those. So there's not a broad cleansing of the Aimco portfolio that's coming, it'll just continue to be incremental improvements that you've seen and you've certainly been following for a long time, Haendel.

Haendel, I would clarify, too, that kind of 5% at the bottom that Ernie has talked about in terms of near term, that is not the fourth quarter. We do not anticipate that level of volume in the fourth quarter.

You can see from our dispositions guidance that we're pretty much done for the year. We've got a handful of sales, maybe 2 or 3 more on the Conventional side and then a few more than that on the Affordable side. So most of our heavy lifting for 2014 is now complete.

Got it. Appreciate. What was the CapEx load on the assets sold? And then would you care to quantify the impact of same-store revenue that the dispositions had on your full year guidance adjustment?

Sorry, let me hear that again, Haendel, the 2 questions?

The CapEx load on the assets sold? And then also, you mentioned in an earlier question that there was a benefit to same-store revenue in terms of your increased guidance. Just curious as to -- if you would put maybe some round ballpark numbers around that impact.

I don't have the CapEx load on top -- at hand, Haendel, on those. Those properties likely I would guess would have had a CR that was going in between $800 and $1,000 per home on an annualized basis, not too inconsistent with what we see across the board. And importantly, when we do our paired trade discipline we assume actually a higher number of $1,200 per door as we compare that to acquisition opportunities. In terms of the impact on our guidance, I may have misspoken earlier, Haendel, or wasn't clear about, there really was no impact on us, or increasing our same-store revenue guidance because of the properties that we had sold. We had actually anticipated those properties selling when we gave our guidance previously. And so we've seen -- some of these properties actually had revenue projections and revenue year-to-date that were actually higher than what we were expecting our 4/4 [ph] to be during the year. So it's -- it didn't have an impact. Where it had an impact on our guidance, Haendel, it's just the fact that we lost some NOI. And so we have -- because of the greater level of sales, we had some dilution on the FFO line, not on the AFFO line, from those sales that offset the fact that we do have higher projected same-store NOI for the year.

Got you. Okay. And then it looks like you saw some deceleration both new and renewal leases into September. Curious what October looked like and if you'd be willing to talk about how you're thinking about the relationship between new and renewals into the weaker seasonal demand periods of 4Q/1Q?

Sure. Haendel, we'll provide specific numbers in NAREIT next week to everyone as to where October exactly came in. We are still closing the books on that. We have one day today and we'll close them over the weekend. That said, we're seeing the typical seasonal slowdown we would expect to see on new lease rates, and we're seeing that renewal rates are holding pretty steady. As we go into the next few months, we certainly have more confidence in what we think will happen with renewal rates, where renewal rates went up between 5 and 7, so we'd anticipate that we would say in the high 4s to low 5s is what we'll do on renewals as we finish out this year. And we'll have to see what happens to new lease rates as they'll be dictated by what's going on in the markets over the next couple of months.

Okay. And then just one last follow-up. I know it's early to talk about 2015, but a number of your apartment REIT peers have discussed their directional sense for same-store revenue for '15. Effectively, the view is largely that it will be very similar to 2014. So I'd be curious if you guys would be willing to share an early assessment about how you're feeling about same-store revenue heading into '15.

What I would say, Haendel, without giving a specific number, is that if you look at what we've done year-to-date in terms of new and renewal lease rates, we're at 4.9%. That will certainly come down with fourth quarter activity, likely to put us somewhere in the range of 4.25%, 4.5% for the year with regard to how we're doing on 2014 leases, and of course half of that earns in next year. More than half of our business next year will be renewal business. We've had a very good track record of having lower turnover, especially lower than our peers, and that's been a pretty steady business for us for the last many years, that plus or minus 5%. So if you take that as well you get to about 75% of what likely our revenue projection will be next year. And then you can look at third-party forecasts to get a sense what things are going to do on the new lease side, and you'll see that it looks like it's going to be a pretty good year for all apartment operators as well as for Aimco.

And our next question will come from Karin Ford of KeyBanc Capital Markets.

Just a question on -- you mentioned the possibility of maybe paying a special dividend next year. Just to be clear, do you guys, I guess, potentially needing to pay that based on the sales you've done already today? Or is it in contemplation of additional sales in 2015?

Karin, it's Ernie. It's a little bit of both. We're going to end this year likely with taxable income greater than we are paying out with our dividend, but of course you have some flexibility around being able to both accelerate dividends from a future year as well as throwing back dividends. And there's actually some new legislation out around what's required in terms of what needs to be booked for depreciation expense that we're putting our final touches on. So we'll actually have a little bit less taxable income than what we were projecting today as I go through that exercise with our Senior Vice President in charge of tax. So because of the flexibility inherent in how you can count the dividends, we're not going to have to do one in 2014. But of course if we take any dividend coverage from 2015, that does put more pressure on '15. So we kind of wanted to signal to the market, Karin, there's a possibility. But if we don't have the taxable gains from sales that we may potentially have, depending on how much we sell, it could make that requirement go away. But as we sit today, Karin, I'm confident we won't do one in 2014. And I'd say it's likely we have to do one in 2015 just based on our normal course activities and we didn't want that to be a surprise next year.

Got it. Next question is just on revenue growth. You guys continue to see nice growth on other income per apartment home, it was up 8.7% this quarter, I think it added like 30 basis points to overall same-store revenue. Do you think that is sustainable as we head into 2015? Or are you getting to a point where there's harder comps there, it would be more normalized?

I think, around this time every year, Karin, I've told folks that we have harder comps, and I don't think we can quite sustain it at that much of a level higher than what we're doing with rent growth, and every year Keith and his team seem to outperform. So we certainly look for ways to do that. We do see it as a way to really differentiate our pricing strategy with our residents and allow them to put a premium on what's important to them, whether it's that parking space that's much closer to their home, whether it's that extra storage space they need, whether it's the fact they enjoy living with their pets and are willing to pay a premium for that, and part of our redevelopment activities are putting in great pet parks, so a lot of these -- on our new projects. So I always like to tell folks -- and I have a little bit of a reputation to be a conservative side, that assume that we'll do as well as we think we'll do with rent growth, but don't be surprised if Keith's able to outperform that a little bit.

And then my last question is just on capital. The stock's obviously done really well this year, delevering and the investment-grade rating remain priority. Is there any desire, any necessarily -- you don't necessarily need the proceeds, but any desire to issue stock at this point or are asset sales still the way to go in your mind?

You kind of laid it out the way we look at it, Karin, it's all around paired trade, and we do want to continue to bring leverage down. So as we think about acquisition opportunities and/or redevelopment, or rather investment opportunities, increasing the leverage is not something we're considering. So it comes down to what's the better cost to capital for us? Is it our share price, is it our common stock based on where the share price is, or is it asset sales? And John demonstrated some pretty strong asset sales here in the third quarter for us with a fantastic free cash flow cap rate as well as an NOI cap rate. So we still have a leaning towards asset sales, but if common stock becomes the better opportunity for us to fund our activity, it's certainly something we would consider.

And our next question comes from David Bragg of Green Street Advisors.

Just following up on that. I think that last quarter, Terry provided a pretty clear answer on that question, the stock is below more informed NAVs and there's just no appetite. Do you still feel that way?

Terry, go ahead.

David, I appreciate your evaluation, and we look at all capital allocations as paired trades. And a stock sale is just another form of paired trade. It's my opinion that the net asset value of the company continues to be in excess of the current share price. But we're working hard to narrow that and we'll see if that creates any options for us.

All right, Terry. Question on disposition pricing. How did that fare relative to your expectations? Is it your observation that cap rates have stayed flattish or perhaps declined for the quality of assets that you've sold this year?

Dave, this is John. A little of both. I think we haven't seen a major decline in cap rates, but I would say that as we got out and priced in the market, we were very pleasantly surprised on some of them, where they probably coming more to the lower end of the bounds of what we expected. But we weren't shocked by anything. But you will note that we sold some Harlem assets in here, the cap rates on that and what's going on in New York right now are astounding, candidly.

Okay. And last question is on the Ocean House deal. Given the acquisition plus the redevelopment, what type of return will you be achieving on that post redevelopment?

John again. We're right in that same marker that we've communicated for several quarters now of looking for a redevelopment premium, if you will, of something in the range of 150 to 200 basis points above a cap rate, or a yield -- a stabilized yield within the market. And I think we would be looking at that same type of yield or return on that -- we are looking at that same level here in La Jolla.

David, what I would add is that I did read your note this morning, and so I take your opinion seriously and I just wanted to think about what I'd say. First of all, I agree with you that it's better to get higher returns, and that's a truism, but it's something that we're highly focused on. And in La Jolla, even in what John has said and disclosed, it will be an accretive investment, it'll be something that will be profitable for shareholders, even if as not as profitable as you would like. We do have the underwriting conundrum, if you will, that there's not a large market of competitive rental property in a location as exclusive as this. And so that has meant that we're -- we think that's a good thing, not a bad thing, by the way, in terms of having an opportunity to hit a home run there, but it's also made us cautious about what rents we want to tell the market. And so, my hope is that we'll have some upside in that as we execute.

Okay. That's helpful. We didn't get to that premium John cited, but we'll follow up with you on the numbers and compare notes.

And next we have a question from Rich Anderson of Mizuho Securities.

On the special dividend, I just want to kind of get back to that for a second. You mentioned a portion of it in stock. Is that further evidence that you're driven by wanting to continue to delever? Or why a portion in stock?

We just want to keep all things on the table. As folks have known, in the past, we've used stocks for special dividends, and we had large disposition activities in the past, then we were buying back stock and doing it, some modest delevering. I just want to put everything on the table as a possibility and that, what you'd say, Rich, would be one reason why we would want to do that.

And any hazard a guess at how much of it would be in stock?

At this point, it would premature to hazard a guess.

And I assume this would happen, if it does, towards the end of the year, in the fourth quarter?

It would likely be a second-half event in 2015, yes.

Okay. Mentioned earlier in the call about the $147,000 average income of renters, of those that had signed a lease in the third quarter, is that -- did I hear that right?

You did. Keith gave the average number and the median number again, Keith, was $87,000?

$85,000.

$85,000. That's right.

Is that one person or is that the combined, is that 1.5 people?

That's a household.

That's a household.

That's a household, okay, got you. And then last question is on the mention of the 50% of your occupants being single folks, or at least living by themselves. I'm wondering what that number was 5 or 10 years ago? Has it changed much, or has that always kind of been the number?

This is Terry, Rich. That probably increased over that time period. Of course a lot of that is we're comparing apples to bananas in the portfolio that we have today compared to what we had 10 years ago. But the increase -- the change in demographics of our customer base are that it's they're fewer occupants, they have higher incomes, as you've just pointed out, and they're older.

And next we have a question from Michael Salinsky of RBC Capital Markets.

Just using the term de-leasing from the press release there. As we think about the redevelopments going forward, how much disruption impact should we expect on that? And then also, can you walk us through kind of how the tax credit recognition's going to work there? And what we should expect in '15 related to the one in Philadelphia?

Sure. Mike, this is Ernie. Happy to do that. So one, with the de-leasing activity. This is not typically our normal way to do it, but in the case of Park Towne, as well as Ocean House, because of the amount of construction activity that's going to be going on, it does make sense to, in the case of Park Towne, empty out one of the towers, and in the case of Ocean House, empty out the entire building. We project that roughly that's going to create a little bit less than $0.01 of drag each quarter for the next couple of quarters, so for fourth quarter as well as going into the first and second quarter. And that will quickly dissipate, because then, as you can see from what we disclosed in Schedule 10, the construction periods are not real prolonged on these. In the case of Park Towne, a phase, in the case of Ocean House, generally a smaller project. We did a similar activity with The Sterling, where we had the 3 floors, and John talked about that in his prepared remarks that those are already leased back up. And so we did have a couple of months where we had some minimal drag. But the good news is with the size of these projects and how we're phasing them, it's not a real material impact to the bottom lines, for either FFO or for AFFO. With regard to the tax credit on Park Towne Place, Mike, those will be earned in ratably over the year. So you'll have, for the $11 million in tax credits, we'd expect roughly $3 million each quarter earned in 2015. Of course, those will be earned in with a tax expense against those, so $11 million will equate to roughly about $6 million of FFO/AFFO from that activity. We'll still have some tax credits that we'll be earning in as we finish up Lincoln Place. And there'll actually be some tax credits from Park Towne from the big capital project that we completed last year that we'll be earning in, in 2015. So net-net, we'll actually earn-in roughly plus or minus $20 million of tax credits on a gross basis, or $12 million on a net basis in 2015, roughly about 1/4 of that each quarter next year.

That's very helpful. How many -- how much is left on the Lincoln Place tax credit?

Not a whole lot. By the end of this year, we will be close to $20 million of those. And we're expecting about $25 million, so it will be about another quarter of $4 million or $5 million to go.

Okay, that's helpful. Then finally, can you just give us an update what you're hearing from the rating agencies, just given the push to $1 billion by the end of the year on the unencumbered portfolio?

Yes, well we -- Patti Fielding on our team has dialogues with the agencies at least quarterly on a formal basis, and more often than that on an informal basis. We have the unencumbered pool in underwriting currently with both Fitch and S&P. So they're looking at the assets that are currently in there as well as the 2 assets we expect to add before the end of the year. The good news is our unencumbered pool has better metrics on average than across the entire Aimco portfolio, so it's a higher-quality pool than on average for Aimco, it has a higher rent level and lower cap rate than the rest. So that certainly helps us as well. And so we certainly can't predict what they will do and when they will do it, but all we can do is keep going forward with what they're asking us to do and we hope to have good news them next year.

And next we have a question from Buck Horne of Raymond James. Buck Horne - Raymond James & Associates, Inc., Research Division: All my questions have been answered. I appreciate it.

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

Well, thank you, all, for your interest in Aimco. We know or expect that we'll see many of you next week at NAREIT in Atlanta. We thank you for your interest. If you have any questions, please call Elizabeth Coalson, Ernie Freedman or me, and we'll do our best to answer them. Thank you.

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