Apartment Investment and Management Company (AIV) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Aimco Third Quarter 2015 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Lisa Cohn. Please go ahead.

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 2015 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 and 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 Paul Beldin, 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. Thank you for your interest in Aimco. And special thanks to those of you who joined us a few weeks ago at our Investor Day in Philadelphia. As we reported then, the Apartment business is quite good. Our third quarter results confirm that we are on track in our execution of the long-term and explicit strategies that we’ve discussed before and that we’ve reviewed in detail well together in Philadelphia. Before my colleagues report on the particulars of the third quarter, I’d like to point out a few highlights. In property operations rent growth during the third quarter leasing season continue to be strong and in fact accelerated over the prior year. Setting us up for a strong close to 2015 and an excellent foundation for next year. Keith and his team continued to keep a close eye on operating expenses, which were up by less than 2% year-over-year. In redevelopment as we discussed in detail at our Investor Day, ongoing redevelopments are on time, on budget and expected to create value equal to $0.32 for every dollar invested. Patti and her team achieved several milestones in third quarter. Here are three. Our redevelopment at Preserve at Marin in Corte Madera, California reached 97% occupancy. Our redevelopment at Pacific Bay Vistas in San Bruno, California enjoyed another quarter of 20% plus rent increases. And third, based on success at Park Towne Place in Center City, Philadelphia in redevelopment of the south tower, we have now begun the redevelopment of the east tower. Next, in portfolio management third quarter revenue per apartment home was more than $1,800 a month, up 10% year-over-year. The rate of increase reflects market rent growth but owes even more to our long-term discipline of making pair trades where we sell lower rated properties to fund the purchase or redevelopment of properties with better locations, higher rents, greater expected rent growth and higher projected free cash flow internal rates return. I’d like to take a minute to discuss our commitment to buy a Northern California property that was reported in our third quarter release. I acknowledge that the seller’s requirement of confidentiality makes it difficult for you to review, what I can’t say is that this acquisition is exactly consistent with our longstanding pair trade discipline. The Bay Area is a market where we have long said that we are under allocated and looking for opportunities for further investment. The property we’ve agreed to buy is well located and at a high quality. We expected to be attractive to the high income consumer that we had explicitly targeted and that is market rents will be more than $3,800 a month. While we do not consider the price a distress price, we do believe that it is an attractive price due to our willingness to make a commitment prior to completion just as we did at Vivo in Cambridge and to accept lease-up risk. We project a free cash flow internal rate of return of 7.91% which we think incorporates an appropriate risk premium considering that we have no entitlement risk and no construction risk. Our underwriting was consistent with our explicit discipline using the average of market forecasters, long-term rent growth and conservative operating expenses. We project an NOI yield of stabilization of 4.88% assuming average rent growth after closing of 3.6% for the remainder of our 10-year model. We think that stabilized assets of this quality priced today at NOI cap rates well below 4%, and this creates value creation of $100 million at stabilization unlevered. In particular, our investment decision is neutral about the apartment market in general because we’re buying and selling at the same time using exactly the same methodology. Of course the paired-trade will be leveraged neutral. The equity component will be funded by sale of two properties. One that is 42 years old and one that is 17 years old, located in slower growing markets with average revenue under $1,500 a month and expected free cash flow internal rates of return of 6% if we were to hold them for the same 10-year period. We’re confident that shareholders will prefer our acquisition property to our disposition properties, because the paired-trade improves our real estate quality, our portfolio allocation of the Bay Area, our free cash flow and our growth rate. Let me also address three other specific questions that I’ve been asked this morning. First, this acquisition has been moving through our underwriting and documentation process since early last summer. Second, our view in Northern California is that it is volatile, a point that we explicitly made at our Investor Day. We also believe that they’re slow sometime from its recent remarkable growth rate. That said, the Northern California economy is perhaps the most dynamic in the world and rent growth there continuous to be the best in the country. While we’re by no means making a call on Northern California rent growth, we underwrote the proposed acquisition assuming rent growth no better than the long-term compounded annual growth rate of 3.6%, which is markedly lower number than recent rate of growth. Third, the disposition properties have been in the market and are in various stages of documentation and closing. Next, on the balance sheet, we continue to prioritize safety, liquidity and flexibility. We expect leverage will continue to decline and project our coverage ratios will improve even further as redevelopment and acquisition properties are leased up. Most importantly, the Aimco team is cohesive and focused on the collaborative execution of our plans that emphasize customer satisfaction, cost control and value creation to redevelopment. For these good results offer sincere thanks to my Aimco teammates, both here in Denver as well as across the country to privilege and a pleasure to work with you. And now for more detailed report on third quarter operations I would like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

Thanks, Terry. I am pleased to report that we had a solid quarter in operations with revenues up 4.3% year-over-year. Expenses were up 1.9 year-over-year, with NOI up 5.4% for the quarter, all an improvement over third quarter 2014. Our residents continue to increase our marks in customer satisfaction. They give us better than a four-star rating for the quarter and we continue to see improvement year-over-year. As a result, renewal rent increased 6% for the quarter, some 40 basis points higher than third quarter 2014. These results were progressively better in each subsequent month of the quarter. We saw particular strength in the Bay Area, Denver and Atlanta. Renewal rents in these markets increased 7% to 11% compared to expiring leases. For those leases expired and we’re not renewed, our new lease pricing accelerated during the final months of leasing season, peaking at 7.7% in August. Each individual month in the quarter, outperformed the same month from 2014. This resulted in a quarterly increase in new lease rates at 6.6%, 20 basis points better than prior year. New lease rates were particularly strong in Denver, Seattle, Austin and Los Angeles with increases between 11% and 15%. As good as those numbers are, the Bay Area had the single greatest result, new lease premiums at 19%. As a result of our teams hard work across the country, we achieved blended lease rate increase 6.3% for the quarter, 30 basis points better than Q3 2014. Turnover for the quarter was 46.7%, up 100 basis points versus prior year. Of the customers who decided to move out 22% were for career moves, 21% did not renew due to price and 14% moved out to purchase homes. There are no significant changes in these move-out reasons versus recent quarters or our long-term averages. Our resident quality continues to improve. The average income of those new customers who moved in during the third quarter was $142,000 with the median income of $95,000. Year-over-year the median income of our new residents was up 12% compared to the third quarter of 2014, due to an increase in household incomes and portfolio quality. As mapped out at Aimco’s Investor Day, our 12 target markets which represent 19% of same-store NOI, had top-line revenue growth up 4.5% in Q3. The top performance had revenue increases from nearly 6% to 10% for the quarter. This was led by the bay area followed by Seattle, Denver, New York and San Diego. Our steady performers which had revenue growth of 3.5% to better than 5% were Boston, Greater Los Angeles, Atlanta and Miami. And finally, with revenue growth of almost 2% to nearly 3% we round out our target markets with Chicago, Philadelphia, and Washington DC. As we start the fourth quarter, the acceleration continues on trend with October results better than last year. Blended lease rates are up 4.6%, 19 basis points ahead of October 2014, with new leases up 3.6% and renewals up 5.7%. October’s average daily occupancy with 95.4%, in November and December renewal offers went out with 5% to 7% increases and with 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?

Thank you, Keith. During the third quarter, we invested a total of $70 million in our portfolio through redevelopment and development activities. We invested in properties located in Boston, Cambridge, Center City, Philadelphia and La Jolla, California. We expect from these investments stabilized average revenues per apartment home of more than $3,000 continuing the substantial improvement in our portfolio. Breaking down these activities, we invested $30 million in redevelopment during the quarter, most of the [indiscernible] paced in the Sterling both located in Center City, Philadelphia. Many of you have the opportunity to see these communities during our Investor Day last month. As we discussed then, we are executing both of these redevelopments in phases, providing us with the flexibility to just as we go depending on product acceptance and competing supply. We’re having good success of both communities, with absorption on phase with our plan and rents above our underwriting. Through October we’ve completed a 180 of the apartment homes in the South Tower of Park Towne place, and 83% released. Rents and the lease departments are ahead of our underwriting cost in construction deliveries are on plan and we expect to complete redevelopment of the south tower and the amenities in the first quarter of 2016. With these positive results to date, and to approved the plan during the third quarter to redevelop the East Tower of Park Towne place for an additional net investment of $37 million. During construction, we plan to combine some apartment homes in this building, so that the tower at completion will include 245 apartment homes. In order to facilitate the extensive construction activity, we began de-leasing the east tower last month. At the end of October, 91% of the 216 completed apartment homes at the Sterling released, again at rents on those lease departments above underwriting. In October, we completed construction on time, and on budget at our Ocean House on Prospect Community in Ohio, California. 41 of the 53 apartment’s homes at this community are leased with rental rate achievement above underwriting. Overall our redevelopments are enjoying good lease space and achieving rents at or above expectations. During the quarter, we also invested $40 million in two developments, one in Cambridge and one in Boston. At our Cambridge community Vivo, which we acquired with construction in progress last quarter, construction of the apartment homes is now complete and we started to lease up in October. Early activity has been promising. At our One Canal development in Boston, construction is proceeding well, we have commenced our pre-leasing activity there and look forward to first occupancy early next year. As we’ve discussed at our Investor Day, Aimco has made significant upgrades to its portfolio over the last few years through a series of pair trades. This quarter we did not complete any sales or an acquisitions, the date as Terry mentioned and are into a contract to require an under construction community in Northern California for $320 million. We anticipate this acquisition will close upon the completion of construction next summer. This acquisition which will increase by a third on investment in the Bay Area, will be executed with the same pair trade business when we’ve undertaken with our previous transactions. Our portion of the acquisition price will be funded through a leverage neutral property loan, with the equity portion funded primarily with proceeds from the sale of the 17 year old Phoenix asset that is scheduled to close this quarter and a 42 year old asset in Alexandria, Virginia, where we anticipate closing in the first quarter of 2016. These properties have average revenues per unit of $1,459, and the negotiated pricing represents an average NOI cap rate of 4.95%. While the seller has specifically precluded that from disclosing property specific information around the acquisition, Terry has provided some of the key assumptions around our underwriting of it. We believe our underwriting reflects appropriately conservative assumptions for the future of this property, and at the pair trade provides a clear opportunity to move investment dollars from ageing properties with lower long-term prospects to one with the much brighter future. And I might add, we look forward today, when we cannot only identify the property, may give you the opportunity to see it, we believe, you’ll agree that it is a great trade and a positive add to our portfolio. And with that, I’d like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Thanks, John. Starting with third quarter 2015 results, AFFO $0.48 per share with a penny ahead of the high-end of our guidance range. And FFO of $0.57 per share exceeded the midpoint of our guidance range by $0.01. The primary driver of FFO outperformance was stronger than expected conventional operating results including same-store net operating income growth of 40 basis points above the midpoint of our guidance range. At the AFFO line, the $0.03 outperformance was driven by the $0.01 FFO outperformance and $0.02 due to the timing capital spend, which is now expected to be incurred during the fourth quarter. On the balance sheet, we continue to focus on reducing the amount of our leverage as well as of cost. Our target is to maintain total leverage to EBITDA at a level below 7.0 times. For the third quarter, leverage was 7.1 times. Leverage was elevated above target at quarter end due to the timing of planned property sales. At year’s end, we expect total leverage to EBITDA to be 6.8 times. The property debt market remains deep and liquid with the best rates being offered by life companies, savings banks, and community banks. While we did not close any property loans during the third quarter, we did close two non-recourse fixed rate loans related to our Mezzo community in Atlanta and Chestnut Hall community in Philadelphia. These loans totaling $64 million at senior terms of weighted interest rate of 3.73% and a 30-year amortization period. Also included the flexible step-down prepayment penalty during the last five years at 1% and a 60-day opt out at the end of year seven with no prepayment penalty. In addition, we [indiscernible] a property loan on our second quarter acquisition in Cambridge, Axiom, this $35 million 10 year fixed rate non-recourse loan also with a 30 year amortization period which rate loss at 3.7%. Finally on the balance sheet, we are also closed to finalizing the debt terms on the Northern California property acquisition. We expect the loan to price similarly to the three loans I just described as adjusted by changes in treasury rates. Patti and her team are doing an excellent job, managing our property debt activities and keeping our cost down. For the third consecutive quarter after midpoint, we are raising pro forma FFO, AFFO and conventional same-store sale NOI growth guidance. We had increased the full-year pro forma FFO and AFFO guidance to take into account our third quarter outperformance. We have established fourth quarter pro forma FFO guidance of $0.56 to $0.60 per share and AFFO guidance of $0.47 to $0.51 per share. So our conventional same store operations for the year, we expect revenue growth of 4.4% to 4.6%, expense growth of 2.1% to 2.3% resulting in full year NOI growth of 5.4% to 5.8%. For the fourth quarter, we are projecting NOI to increase 4% to 4.5% compared to fourth quarter of last year and to increase 2.5% to 3.0% sequentially. We will provide full 2016 guidance as part of our fourth quarter earnings call. Once we’ve completed our budget progress. However, [indiscernible] preview we do expect 2016 same store revenue growth to be on part with if not slightly better than 2015, which is shaping up to be a very good year. I look forward to sharing the details of our guidance with you in February. Before we take question I’d like to point out the change we’ve made in our report in this quarter. Specifically, we have confirmed the market level disclosures and our reporting of same store and total conventional portfolio metrics on our supplemental schedule six and seven to be consistent with our presentation of the 12 target markets at our Investor Day last month. You’ll find additional information on the schedules describing the changes in more detail. With that we will now open up the call for question. Please limit your questions to two per time in the queue. Operator, I’ll turn over to you for the first question.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Jana Galan of Bank of America Merrill Lynch.

Thank you. This question is for Keith. I was curious if you could comment on other revenues and fees like parking storage packs in the quarter as the same store revenue looked a little late considering the blended lease rate you’ve been achieving for the past year and a half?

Sure Jana, this is Paul, I’ll start with that and then kick it over to Keith for some of the more particulars. What I would say in regards to other revenues that it grew about 2.8% for the quarter, which was lower than our overall rental rate growth and that was really in line with our expectations. As far as the major components, our utility reimbursements increased slightly by only 3% at our past history, that growth rate in prior years had been much higher, but this year it’s inline with our expectations. And fee income grew about 5%. Keith you want to add some color on any other particulars there?

Paul and Jana I would just add that while there has been a little bit of a deceleration from where we were a year ago that we still see opportunities, as we’ve been putting some very particular focus on parking and storage and a variety of other components within the communities that we are able to present a special opportunities for our residents to have a unique living experience.

Thank you. And then maybe just on the Washington DC, your portfolio was one of the best performers among peers for the third quarter I was wondering if you could just comment on any trends you saw in DC?

Sure, Jana. This is Keith I will take it. We’re definitely is doing better than we have in some quite – quite some time as we think about DC. For us really two different markets Suburban Maryland and Suburban Virginia is where we’re located, Suburban Maryland has been the out-performer in the two as we look at Suburban Virginia particularly in Alexandria there is still some more supply to be absorbed, but as we think about it, we would say that we’re seeing acceleration, we’re optimistic about it, and as we look into 2016 we think that it’s on part if not better going forward.

Thank you.

And the next question will from Nick Joseph of Citigroup.

Thanks. Did I hear correctly that both the cap rate on the Northern California deal and the expected pair trade sales were both about 4.9%?

Yes, this is John, Nick. Yes you’re correct, we anticipate to stabilize on the acquisition which is about 4.88% and on sales were at 4.95%.

And there is both forward NOI cap rate?

Those are NOI cap rate, correct.

Okay. I think you mentioned that Northern California has been historically volatile, so I’d like to get your thoughts on adding exposure to that region at this point in the cycle both from an operations as well as in asset pricing perspective just keeping how strong that market has been?

Sure, I think two things, one obviously we have talked about the volatility of that market and we talked about it recently is a month ago with everybody in Philadelphia. That said we also look ahead as a good solid absolute growth market long-term, and so it’s one where we want to have a presence, we want to have a presence in high quality product; we want to be in high quality sub markets. And so as we look at the pair trade coming out of lower quality product and lower quality sub markets. We feel good about the long-term investment decision and we in our underwriting are looking at a 10 year model, so you get some of the benefit of, if you will to smoothing the volatility through that 10 years. As Terry noted in his remarks, our underwriting does not assume, we have to have double-digit rate growth for an extended period of time for any period of time during that 10 year hold on that acquisition asset we are using the rent growth rates that are provided by recent AxiaMetrics who are looking at supply, who are looking at job growth, who are looking at all of the econometric trends in that sub market and put out of prediction for what revenue growth will be there. And tell you that the five years, four years immediately following acquisition when the construction is complete next year that growth rate is in the low threes. And so we don’t feel like it's out on a limb to consider that over an extended period of time at five or ten year window, you’d see revenue growth in that market in the threes.

And what does that [indiscernible] assumed for extra cap rate?

I don’t have it right in front of me, but I believe it's a five, but I don’t have it right in front of me right now I apologize and if I can’t get to you later if you like it.

Thanks, and just last question appreciate the 2016 same-store revenue growth comments. What’s the last release for the portfolio today?

And Nick this is Paul, our last release currently is a bit below 8% about 7.5% range and one comment that to clarify that as we look at last release we measured that with our in book based on business and that particular point in time compared to market rates. So there is volatility to that depending upon where you are within the leasing season.

Thanks.

And next we have a question from Nick Yulico of UBS.

Thanks. For the Northern California acquisition the Bay Area is one that you about. Just opening on may be two or four how many units, they’re in the project and may be a little bit more about where it is within the Bay Area, I’m assuming its probably not in San Francisco itself.

Yes, Nick I will tell you definitively it is not in the city of San Francisco. Unfortunately unit count and some of the other specific identifying factors, the seller has asked us very specifically not to disclose those. They have other projects in the area, other things going on that between contractor relationships, city relationships and other things they’ve been asked us to be sensitive to their request that we not provide, identifying indicators on the property. I’d love to be able to tell you what it is, but we can’t.

Okay and then Terry, I mean just going back to this acquisition, and so how you and the board is thinking about the company. This is the largest acquisition you guys have done, it looks like since you bought [indiscernible] in back in 2002, which is an entire portfolio. This is a single asset you’re buying, it’s about 3% to 4% of your enterprise value, I get that you’re switching out deals and buying new. Yes, the earnings impact your scenes pretty minimal, maybe it’s even dilutive in the near-term to your FFO and we can debate AFFO. But I’m sure, why this makes sense this trade, why not to sell assets and buyback your stock or pay a special dividend and how did you guys think about the whole process?

Nick, thank you for the question, first of all we – the Board and I and the management team have thought about that. And you think about that, and I’m just saying exactly how we do with, it’s exactly what we’ve described hope that Investor Day and in numerable meetings over the last several years that we are first of all focused on upgrading our portfolio to serve customers with better jobs, better incomes and better growth prospects. And we think that’s what drives long-term portfolio quality and you can see that in the numbers that Keith reported in his remarks that today we’re at medium rent of almost $100,000 which is astonishing to me. And we’re at average rents today of about $1,800 which again is a market change. So the Board and I focused first on I’m trying to improve the quality of our customer and the quality of our real estate. With that, we have also rethink in according to the third-party forecaster significantly improved the growth rate of revenue and also expected free cash flow internal rates of return. And I think, speaking for the board, I think we feel that John has done a wonderful job in leading that effort and at a point it’s not particularly by buying the market that is simplicity, as to what John has done, what he has done instead he has defined particular circumstances, generally where the seller has some unusual need that makes it just a little bit less liquid, a little bit less efficient then would be a true in a poorly marketed deal. And so, and the issue handed [ph] that we are prepare to commit during construction, just as we did at Vivo in Kendall Square and that we’re prepared to underwrite the lease or risk. In return for that, we get a little bit of breaking in pricing. So the Board thinks that when all are setting done that and what we’ve already achieved is a very significantly improved portfolio with higher quality customers, higher average rents, higher expected growth, higher expected free cash flow, internal rates of return. I’d note that the effective of this trade is to increase our California exposure to just under 40% which is about where we like it and our Bay Area exposure to about 12%. And so again those are allocations that we’ve described to the market before and I don’t think there’s any surprise. People are thinking that that’s just what we wanted to do. The question about special dividends and stock buybacks, I’d like to speak too. First of all, it’s something we’ve done in the past. We paid special dividends and we paid and we made stock buybacks. We’re familiar with both of those. And we discussed it at length, both on the board and also with shareholders and we have a lot of occasion to meet with our shareholders and ask them their opinion. And as you know, if you ask two people their opinions you’ll get three answers. So there’s not newly limited, but the broad consensus of our shareholders and our board is that we’re employed to own and operate in development apart with properties. And they want us to focus on that and not on trying to time the market. So that’s what we’ve done.

Okay, thanks for that Terry. And just one last question, Paul do you mind just maybe giving us a bit of a preview of how to think about your tax credit income as you’re heading into next year since – I know you have some of that burning off and it’s’ – it can be a bit of a volatile impact on your FFO perhaps next year. Thank you.

You bet, Nick. As it relates to our tax credit agreements, you pointed that there is certainly some volatility to it. And during 2015, we’ve been relating, recognizing income related to our Park Towne’s place projects. And as we have looked at the second phase when we’re moving onto the next tower, we’ll earn some additional credits next year related to that, but the number is somewhat still in lots, but the amount will roughly probably be between $8 million and $10 million or so. And so, as we start spending actual dollars on that, that is when we’ll start to be able to get better definition around the exact timing of recognition pattern, but if you think about it for the full year of 2016, it will be in that range.

Thanks a lot.

And the next question is from Austin Wurschmidt of KeyBanc Capital Markets.

Hi, it’s Jordan Sadler here with Austin – excuse me. First, I guess, just following up on California sort of beat a dead horse here, is there a way that you can kind of describe the nature of the seller or the exiting capital if you will without giving too much away?

Sure, this is John. The seller is a developer – an active developer in multiple markets around the country. They raise development equity for their deals, some deals they retain and holding their own portfolio, others, they flip out and sell similar to a merchant builder type of a situation. This happened to be a situation where it is a group that we’ve done business within the past and they had an opportunity here where they had a capital partner that was ready to get out of the deal upon completion of construction and we were able to start the deal.

Okay. And then…

That answer the question?

Yes, that’s pretty good actually.

All right.

And then as it relates to the IRR that we talked about, is there in your rent growth assumption because you’ve talked about the volatility in California and it’s tremendously unpredictable, this is quite a strong upturn. You are taking possession in presumably nine months. Once you take possession you said there’s a low 3% number over the following four months – four years that you’re assuming in terms of rent growth. Is there a meaningful downturn embedded in that?

No, but let me explain it to you why. So, if you look at the third-party data provider, again as I said earlier we use recent axiom metrics. They rarely forecast a downturn, a negative growth number. They also rarely forecast double-digit growth, [02:41] [indiscernible] ever forecast double-digit growth. And so if you were to go back and look at the last three or four years in that submarkets in the Bay Area as a whole, I don’t think it was ever a year where they forecasted double-digit rent growth particularly out two or three years in front of it. What general happens with their revenue projections is a tail off and they revert to [indiscernible] of around 3.5% over a period of time. And that is the pattern that we see there. So if I were to take the submarket growth rates for the submarket where there is property is located, it drops into the low threes for the five year period from today that they forecast out, that’s below 3.5%. The long-term growth rate which is a 20 year growth rate of actual growth in that submarket for the last 20 years is 3.77%. And so, our average over the – our model starts now, started back in the summer when we underwrote and did the property. So the first year out – is effectively run before we buy the property. So there is nine years left in the model, that’s where that 361 that we talked about earlier comes in, it’s an average rate through the life of that remaining nine years of the model.

Okay. That’s helpful. I guess in your experience and ours, if you look back over the last 15 years, there have been higher – high peaks and low values in suburban or San Francisco or the Bay Area apartments and I was thinking – downturns could probably be more severe just to peak to have been higher.

Yes, absolutely right, you are absolutely right that there are high peaks and low valleys in that submarket, in Bay Area in general. And you can look back at the .com bus, you can look back to big swing, double-digit swings and that’s a 20 year growth rate for that market, just move some of that out and just want to remind everybody that we are underwriting for a long-term portfolio of – that we are looking at a long-term allocation, a long-term commitment for good submarket with a high 377, 20 year growth rate. That takes into account, both of those dips that we talk about, but also both of the obstructs that we looked during the last 15 years out there.

That’s helpful. The last 4.5 years, 4 years, just from an accounting or earning perspective, when this comes online, it sounds like – it’s a suburban property, but not high rise, but how would this should come online economically, I mean is it $320 million and a 0 NOI effectively or will there be some capitalization allowed, just trying to figure out?

As soon as that comes in, $320 million next summer, [indiscernible] earns in quickly, obviously we will do pre leasing, we will – we have rights under the agreement to begin pre-leasing early next year and we would hope to ask some pre-leasing done when the building is turned over to us, but it will be turned over to us in whole and so move ins would commence after completion of construction, but it would be an old building.

Okay, thank you.

And the next question is from Rob Stevenson of [indiscernible].

Hi, good afternoon guys. Keith can you talk about, when you’re sitting here today, what markets do you feel like that there are likely to be stronger in the next 12 months than they’ve been over the last 12 months, in terms of rental rate growth?

Rob, it’s Keith. Let me walk through it. As we looked around the country, I would point to [indiscernible] we’ve seen some very strong acceleration this year a little better than we had anticipated and we think that that could continue. I would look to the Bay Areas and other opportunity it’s – it’s when we talk about in my prepared remarks 19% on the new lease side this past quarter, it’s continue to show acceleration. And I would also point to Los Angeles is an opportunity.

Okay. And then, when I look at the year-to-date expense growth is 14, the guidance at the mid-point is 22 on the same-store side. How much pressure are you seeing into the back half of this year on real estate taxes in personnel and other sort of major bucket to the expense load that’s likely to push 2016 same-store expense up into the 3, 3.5 range. When you thinking on it.

Hi, Rob, this is Paul. I’ll start off by commenting on the fourth quarter impact, you’re correct, and noticing that our year-to-date expense control is quite good and our implied guidance indicates a fairly significant expense growth here in Q4. And that’s really being driven by two items that we’re actually benefits to our expense numbers in 2014. Last year in the fourth quarter we had a favorable tax appeal that significantly reduced real estate taxes in the quarter. And then we also have some adjustments to our loss reserves related to our insurance activities that reduced our insurance costs on a year-over-year in Q4 of 2014. So, I you were to normalize for those two factors, our expected expense growth rather than the 4% or so that’s implied in our guidance would actually be closer to 2% versus in line with what we’ve seen so far this year. And then as it relates to 2016, as we’re still on to the planning process, we’re working to the detail property budgets, we’re not prepared to give any sort of indicative range or percentage or like at this point. But I will assure you that we’ll continue to do our best through control expenses and to continue to lead the pathway comes that regard.

Okay. I mean, is that…

Rob I...

Sorry.

Rob, I just curious is going to add specifically it’s the taxes, you’ll recall I would mentioned that our allocation to California, we just under 40%. And so, in that important part of our portfolio will be kept at the lesser of CBI are 2%.

Okay. And then what is the – in the 2015 guidance, what is the, you’ll remind us what the same-store, what the – in the same-store guidance what the increase in real estate taxes and personnel costs are computed in that sort of to full year guidance?

Yes, within that full year guidance that would imply year-over-year real estate tax increase of 4% range.

Okay, and then on Personnel.

Personnel, I don’t have…

I’m sorry about that. Rob, do you think we are comparing those, we don’t have that in front of us, we can give you call back to close little bit down that.

Okay, guys, thanks appreciate it.

And the next question is from Dan Oppenheim of Zelman & Associates.

This is [indiscernible] here with Dan Oppenheim, we just had a few questions here in terms of leasing activity what were new leases and renewals achieved in October, and what you went out for new renewals in November and December?

Dan this is Keith, I’ll take it, new leases in October went out at 3.6, renewals were 5.7 for a blend of 4.6 and I just point out that was 90 basis points better than we were a year ago. And the renewals went out at 5% to 7% for November, December.

Great, thanks. And in terms of what you’re seeing in Miami it seems revenue was a little light there compared to the rest of the target markets. Can you just speak through what you’re seeing there?

Yeah, Keith, I will take that one. What were seeing in Miami is that there is a new supply that’s next to one of our buildings, that’s in the process of lease up and it’s put a little pressure on that community and so that’s really what the difference is. But as we look at it, where our community is located in South Beach in the Brickell Area we think they are best located communities in Miami and it’s just a blip as they’re getting to it.

Okay. Great, thanks.

And the next question comes from John Kim of BMO Capital.

Thank you. Diversification has been a major part of your strategy, but when you’re spending your capital is unquestionably the higher end product California centric, are you still married to your diversification strategy of the point, and does that makes sense to exit markets more aggressively at this point in cycle?

What is the last part of that John?

Does that make more sense to take the market like some of your competitors have done?

Well. John, this is Terry and I don’t want to necessarily speak to our competitors, but we have a unchanged commitment to being both diversified both by price point and by geographic market. And in pursue of that, as I mentioned earlier we’ve targeted higher income customers and we have had exceeded a great many markets. And today are focused on 12, which you’ll recall that we discussed that some length at Investor day, and we continue to look for a balance among those 12, we said that for a long period time that we would like to be allocated roughly in proportion to a market capitalization in each local market, but without being unduly committed to one, and without being mechanical about pursuing market allocation as opposed to being opportunistic in where we found the best opportunities. And so just to walk through them, we’ve been under allocated to New York City, which for us is Manhattan. We've been under-allocated to the Bay Area and we've been under-allocated to Seattle. And we call that out repeatedly and we continue to look for opportunities to address that, I think John’s work on this most recent acquisition there’s a lot to address our under-allocation to the Bay Area and – but we’d continue to look in Seattle if we had an opportunity for attractive pricing we’d invest there and get in Manhattan. In other markets we felt that our capital – our allocation was appropriate, but there we wanted to improve the quality of the portfolio and improve the locations and we've called out many times that that was true in Boston, which we've – are addressing both through our investment at One Canal Street and in our two properties at Kendall Square. And also in Washington, D.C., which is where there is work to be done. So we’ve are 100% committed to being broadly diversified across geographic markets and across price points. And so what I think is correct is that we have become more A oriented and we are aggressively looking for B product as well. And when we have bought these in the recent past at East Point in Boulder last year and at [indiscernible] in San Jose last year and we have an healthy appetite for B property and we would like to maintain that balance.

Sure. But I was looking into market exposure and exposure to the markets like Atlanta and Chicago. And I'm wondering how many investors are buying your stock because of those exposures.

I don’t know, but I don’t know that it’s a investor would make a decision on that exact point, but what I do now is that many of them who invest with Aimco know that we have a preference for diversification and that we have expressed – we said that we are not focused on being concentrated in one, two, three, four, five markets. Those can be winning strategies, but they also include concentration risk that we have chosen to avoid.

Okay. On your same-store revenue growth for next year how much of that is driven by the recent development that are hitting the same-store pool next year?

Sure, John. As we look at what's going to happen with our same-store pool, we are going to be moving in four properties into the pool that we’re acquired in 2014, that’s the East point [indiscernible] properties that Terry just mentioned and then additionally we’ll do moving in 21 specimens which is in the Denver area and then lastly Trimo in Atlanta. And then as we, we’re also will be adding the Trimo developments that have stabilized during the period and that’s PBB in 2900 on first and anything that might come out of that pool will be largely depended upon our sales expectations.

So Lincoln Place and Preserve at Marin they were completed its first quarter but is that going to hit your same-store pool next year?

That’s correct, John. Because those properties are still going through the process of NOI stabilization where we don’t have the up stabilized rents at those properties. We are playing on excluding those until we get a fair competitive year-over-year look at them.

Okay. And then finally on the announced acquisition I just wanted to double check that the acquisition price has been fixed and there is no ratchet feature for the seller and also in Aimco was doing the leasing for the asset?

Yes, so the acquisition price is fixed with one caveat that if we choose to make modifications to the building we can make some modifications to it at our cost. And we will be doing the leasing on the building.

Great, thank you.

Our next question is from Conor Wagner of Green Street Advisors.

Good afternoon, John could you give me some more detail on the 49 stabilized NOI cap rate what year is that in and where did the rents that are underlying that cap rate where are they versus where rents to be on the similar product today?

Okay, I’ll walk you, I don’t have the model right here in front of me, Conor but I will walk you through to the best of my ability and then if we need to take it offline, I’m happy to do so. So that 49 is in the first stabilized years, Paul just mentioned, and we look at stabilization on properties and when they come in – and we look at two things. One of them is an occupancy stabilization which for us is 95%, but then it also got a rents or a NOI stabilization, which is really the earning of what we think is a stabilized rent. And so for us in this model that is four years from when we underwrote back in the summer of this year. So it’d really be three years after acquisition. As to the components of that, yes, it is rents that are in place today effectively concept rents today grown by that 3.5 range revenue growth that we’ve talked about earlier. And so in large part those rents we would expect to be about 10% higher little bit over 10% with the compounding in the stabilized year than they are today.

Okay. So then, also then particularly 2019 and the 3,800 that stabilized rent in three years from acquisition correct?

I’m sorry…

Did the $3,800 in rent is that where you think rents are today or that $3,800 the…

That’s where we think rents are at acquisition next year.

Okay, add acquisition next. Okay and then – and then we grow that back three years to get to the $4,900.

Yes.

Okay, great. Thank you, appreciate that. And then…

Third year after the acquisition, right. So…

Okay, thank you. And then Terry you’ve talked about the ability to create a $100 million of value on this project, how do you look at that versus what’s happen in the stock today, I think we can probably attribute most of it to concern over the acquisition given that your operating results were largely expected after the Investor Day?

Well, Conor, I think the value creation through the acquisition is one that you can calculate looking at current cap rates in that market and current and what John assists told on the underwriting. And so I think that $100 million call at a 30% value creation on an unlevered basis compares favorably to other uses of corporate capital. As to the stock performance today, disappointing time, it’s hard to know what the market will conclude, one thing we’ve tried to do in this call is to be as transparent as we can to emphasize that this is exactly consistent with what we told to the street that we followed very conservative underwriting that we expect is will continue the long-term improvement in portfolio quality, growth rates, free cash flow, internal rates of return, and we think that over time the market is rewarded us for that.

Great, thank you, Terry.

Thank you, Conor.

And our next question is from Drew Babin of Robert W. Baird.

Thanks for taking my question. I mean, it’s been well-documented that cap rates have compressed quite a bit in the suburbs, probably more so than CBD locations as of late, the EQR transaction, obviously pointed at, even that you are diversified in your end many, many markets across the country, so then you could talk about, which suburban markets are, I can’t seeing the most cap rate compression based on transactions its happen in the market and kind of just give us some color based on your experience there, and also markets where it’s hasn’t really played out as simply as that?

Drew, this is John, I’ll take a stab at it. I would tell you that in general terms the true treasury market, small cities in the Midwest or in the south of those current places, compression is compared to what starting point, again it’s becomes part of a question, I don’t know, I’m not going to call for individual markets how much compression has been it’s out there, there is been simply doubt, but it certainly not as strong as what it is in the so called secondary market. There was a time five years ago, were Denver was considered a secondary market in a lot of peoples mind. In order today, we might consider it an institutional market. I think a lot of people would consider in institutional market. And so the cap rate compression in the Denver has been very strong and stronger than it would have been in say Kansas City or Omaha. As we look today at, generally speaking secondary markets and I will qualify that is for us outside of our target market. I think cap rates have been pretty consistent for the last two and half years, three years, really since the kind of August tick up in rates around QE2 and things going on back in - I think it was August of 2011, if I remember right. We’ve got a little hiccup there and then from that point in time, cap rates have come down. Maybe if 50 basis points to 100 basis points over the succeeding year and half two years and it helps pretty flat. And from our perspective as we look at the trades that we’ve made a lot of what we’ve done has been added these treasury markets. The two that we’ve talked about just earlier as the trades for our acquisition, these are sub five cap rates. But one opens in Phoenix, one opens in Alexandria. I’ll leave it to you or you want to call those as secondary sub markets are primary, I would think that our Alexandria is a primary market. Phoenix, depending on how people want to call it. The cap rate on the Phoenix deal is actually lower than the cap rate on the Alexandria deal.

I guess just to be clear, I mean my question was more guided towards, [indiscernible] markets of major markets on the year end versus markets that you exceeding there is definitely being cap rate compression in field suburbs in many of your markets and that’s sort of more rough going with that. But moving on the Investor Day in Philly, you talked about, it’s staying within the certain bands in terms of the magnitude of your overall match funding activity. With $320 million of acquisition/development activity already spoken about for 16 and the additional redevelopment at Park Town place. Is that the bulk of what we should expect for 2016 in terms of match funding activity or could the overall level be higher.

Well, John again and then I’ll step in if you’d like to. So from a sales perspective, we have outlined the base capital need, but we’re still going to our budget process. And so we will make that call based on capital needs for redevelopment, development activities what our financing strategies are for next year, and ultimately we will have a laid out plan for next year. I can tell you that we are in the market right now today and it’s not secret. You can go to the AMICO dispositions website and see what we got out in the market today, but we have properties out in the market today that will largely meet our identified capital needs for next year. And then it will come to a per trade discussion around, if we find other opportunities that make complying trades, then there may be an opportunity there to continue to work through some of our sales on the secondary locations and acquisitions into something we would consider to be there.

Okay that’s helpful. Thank you.

Okay, John could you just supplement that a little bit for John, will layout our exact plans in connection with fourth quarter call when comes to guidance for 2016, but our approach for 2016 will be very similar to what is going for the past couple of years, where we will look forth guidance based upon on what we know for acquisitions and dispositions with that point of time, with the expectation that any transaction that we might do does not contemplating that will be match funded on a pair trade basis where we are improving the quality of the portfolio and increasing the free cash flow, internal rate of return.

Okay, thank you.

And next we have a question from Wes Golladay of RBC Capital.

Hello everyone, a quick question about the acquisitions, you mentioned you’re looking at this large acquisition for a while. I just wanted if you looking at any more acquisitions over the $215 million market?

No, John again here. No on a definitive single asset basis no, but we are looking at acquisitions all the time and in those range from operating properties in both the A and B price point categories to under development properties that are going on similar to what we did in Cambridge earlier in the year and this transaction that we’re talking about here. And we’re already looking for as Terry mentioned earlier anomalies in crevices in the pricing whether where we see that there is an opportunity either because of the seller’s situation, because of the ability to take some lease of risk or do other things that within reasonable balance. We’re not to going to go out and buy billions of dollars worth of reset properties, and through our long end of the portfolio at one time and I’ll definitively see that, but we do look a lot at various transactions and some of you have heard in the past as we’ve talked about it either investor conferences or other places. In 2014, we screened over 400 deals, we under wrote over 200 deals and we bought six and so I don’t want to mislead that we’re not looking at deals. We look at deals a lot, but the number that we execute on is, is very, very small.

Okay, and then turning to the current environment, I think you mentioned 21% of the people did not renew due to price, any noticeable markets that stand out here and how are your targeted markets doing versus the once you feel as non-core?

Wes, this is Keith, when we look at the 21% due to price, we’ve anywhere between 19% and 21% for color capacity ten quarter’s or so, so nothing that is materially different there, 21% a little bit up from where it was last quarter 20%, so but nothing that’s really changed.

Okay, thanks a lot.

And our next question is a follow-up from Nick Joseph of Citigroup.

Hey, its Michael Bilerman here with Nick, Terry on the asset you are acquiring. Is there a construction loan in place and how much is that and will you be assuming it?

Michael, this is Paul, I’ll take that whether or not there is a construction loan in place on the project during construction I’m not aware about I’d look to John to supplement that, but what I will tell you is that financing that we are looking at its going to be our own financing that’s been put in place subsequent to the construction we have marketed that the piece of debt to a number of institutions we’ve had great interest and we’re very close to locking that down.

And I would add there is a construction loan in place we have no exposure and no guarantees around that construction that’s entirely the sellers issue.

And what is the sizing of that construction loan?

Of their construction loan I have no idea.

And the size of your targeted loan and is that going to be, if I get to assume it’s a floater, just what’s the sizing of that?

Yes, the loan that we’re going to put in place is going to be a 10-year piece of paper consistent with the majority of the other loans that we have in our portfolio, it will be fixed rate. And we’re still in the process of sizing it, but we’re going to size it likely at a level well below 50%.

And then did you have – on top of the $320 million is there a closing cost or any other cost above and beyond the $320 million?

Yes, there are. Yes, there are, they will be between marketing setup closing cost, those kinds of things. There will be some additional cost above the $320 million, we estimate those at less than $2 million.

Less than $2 million? And then as we think about your social mixture, we got the math right. So effectively on a current rent basis today or this summer when you underwrote it, you’re looking at probably something in the low 4% at 95% occupancy that you’re growing 3.5% a year to 2019 upon which it will be 4.9%, does that include at that point any CapEx reserve at all?

Yes.

And that number…

Yes, absolutely. So the IRR number that I quote you is a free cash flow internal rate return. That 7.91% assumes $1,200 a door of CapEx which is what we apply consistently on our sales and our acquisitions.

[Indiscernible] 4.9% is that a cash?

No, I’m sorry, I’m sorry, I misunderstood the question, Michael. In terms of CapEx rate that is an NOI CapEx rate. So that is a pre-cap reserve cap rate.

Pre-cap reserve cap rate. Right, so then effectively that if these guys were developing this to let’s say a target of 6%, there’s probably at least could be up $100 million profit in for them.

I think that’s probably reasonable assumption.

Okay. Thank you.

And while we’re still on your time, Michael, on the next time the cap rate that extra cap rate is $478 million.

Great. Thank you.

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

Well, operator, first I’ll thank you for your help today and for all of you on the call, thank you for your interest in Aimco. Many of us will be together in Las Vegas in a few weeks as the NIRI convention, and we look forward to seeing you there. If you have any questions in the interim, please feel free to call Elizabeth Coalson, Paul Beldin or me, and we’ll do our best to answer them. Thank you very much.

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