Apartment Investment and Management Company (AIV) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Aimco Fourth Quarter 2016 Earnings 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 would 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 2017 and 2018 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. We will also discuss certain non-GAAP financial measures, such as AFFO and FFO. 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, Head 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'll now turn the call over to Terry Considine. Terry?

Thank you, Lisa. And good morning to all of you on this call. I appreciate your interest in Aimco. And 2016 was a good year for Aimco by many metrics. As my colleagues will discuss in detail, property operations were solid, portfolio quality was improved, our balance sheet was strengthened, and our business was profitable. Adjusted funds from operation, our measure for current return, was up 5%. And economic income per share defined as cash dividends plus the change in net asset value, our measure for total return, provided a 15% return on our starting net asset value. In short, 2016 results reflected the steady execution of the Aimco strategy which has produced consistent improvements to our business. For this I thank my teammates and say to them, well done. Looking forward, 2017 seems likely to be of more difficult year for the apartment business. Economic growth is projected to be positive but still slow, political turbulence increases the risk of economic dislocation. The supply of new apartments continues to increase and there are many markets where new lease rent increases have slowed or turned to negative. Inflation and a number of locales minimum wage legislation, increased costs and compressed margins. These factors make us cautious. But none of this is new, at Aimco where we have been preparing for the past many years for this completely normal and predictable phase in local building cycles. We have emphasized customer selection in quality. Our average new customer is financially stable, has an annual income approaching six figures, and has ample financial wherewithal to pay rent including reasonable increases. We have high measured and publicly reported customer satisfaction and relatively high customer retention rates. We have made regular investments in the physical condition of our properties. Our portfolio is broadly diversified by markets and by price points, roughly 50% A's and 50% B's and C's. And we have a safe balance sheet with abundant liquidity and a business plan not especially dependent on access to capital markets, nor very much affected by fluctuations in interest rates or share prices. That said, about one quarter of our capital is invested in markets at A price points in submarkets where competitive new supply is more than 2% of existing stock. We expect these properties to face increased competitive pressure on new lease rates. We also expect the lease-up of some of our redevelopment properties will be made more difficult because of competing new supply. Happily we see numerous opportunities for offsetting improvements elsewhere in our business; for example, by operating efficiencies, by slowing the redevelopment pace. Most importantly, we have a high achieving team with the experience and commitment required to navigate whatever stormy waters may be ahead. For this I offer sincere thanks to my Aimco team mates, both here in Denver and across the country. It's a privilege and a pleasure to work with you. And now for a more detailed report on fourth quarter operations, 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 solid fourth quarter in operations with revenues up 4.4%, expenses down 80 basis points and net operating income up 6.6%. Turnover for the quarter was 51% equal to that of the fourth quarter in 2015. Move out reasons for the quarter are unchanged versus recent results or our long-term averages. And our residents give us better than a four-star rating in customer satisfaction for the thirteenth consecutive quarter. Looking at rates which transacted in the quarter, blended lease rates were up 1%, with renewal rents having solid increases of 4.8%. We saw particular strength in Atlanta, Seattle and Boston. Renewal rents in these markets increased 6% to 7% percent compared to the expiring leases. Were those leases expired and were not renewed, our new leases were 1.9% below the prior lease as we intentionally traded rate for occupancy while navigating choppy waters in a few markets. This strategy resulted in a 40 basis point improvement and average daily occupancy for the portfolio. The trade was worth an additional $500,000 in revenue growth for the quarter. We particularly focused the strategy in Chicago, the Bay Area in Miami. With year-over-year average daily occupancy increases averaging 100 basis points per market while rates were 5% down on average. The balance of the portfolio averaged down about a half point new lease pricing for the quarter. Turning to the fourth quarter revenue growth. Our 12 target markets were up 4.5% for the quarter. The top performers had revenue increases for more than 6% to 16% for the quarter. This was led by Seattle, followed by the Bay Area, Denver, San Diego and Boston. Our strong performers which had revenue growth of more than 4% to nearly 5% were Philadelphia, Los Angeles, and Atlanta. Our steady markets with roughly 3% to 3.5% revenue growth were Washington D.C., New York and Chicago. And finally, with revenue growth of almost 2% we had Miami. Looking towards 2017 revenue growth; our expectations for this year in our 12 target markets could be broken into three Tiers. At the top of the list with forecasted growth better than 4% we have Seattle, Boston, and San Diego. The mid-range market with forecasted growth of 3% or better, we have Atlanta, Denver, Los Angeles, Chicago, New York and Washington D.C. Rounding out our 12 target markets with growth between 2% and 3%, we have Miami, the Bay Area and Philadelphia. Finally and looking at our early first quarter 2017 results, preliminary January blended lease rates are up 2.3% with renewals up 5%, 20 basis points better than last month. New leases improved versus December to down 30 basis points year-over-year. And when comparing our new lease performance of A's versus B's, our A's are down 2.3% for the month with B's up nearly 1% for January. January's average daily occupancy was 96%, flat to prior year and February and March renewal offers went out with 4% to 6% increases, similar to those sent for January. 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 and good morning all. During the fourth quarter we sold four properties, for the year we sold eight properties with about 3,300 apartment homes are gross proceeds to Aimco of $529 million. On average, the property sold in 2016 had a free cash flow cap rate of 4.9% and had we held these properties for the next 10 years, we would have expected them to generate a free cash flow internal rate of return of about 6.6%. Proceeds from the sales were reinvested in redevelopment and development projects, acquisitions and property upgrades at a weighted average free cash flow internal rate of return, about 300 basis points higher than the properties sold to fund them. We invested $183 million in redevelopment and development during 2016. Most of this investment was in our phase projects in Philadelphia, Park Towne Place and the Sterling. At Park Towne Place, we completed construction in the south and east towers; in October, we began construction in the north tower. As of year-end, 81% of the completed apartment homes were occupied. We also continued the final phase of our redevelopment of the Sterling and 92% of the completed apartment homes were occupied at year end. We expect to complete work at the Sterling later this quarter on time and on budget. During 2016 we started redevelopment at four communities; Bay Parc Plaza in Miami, Saybrook Pointe in San Jose California, Yorktown in Suburban Chicago, and the second phase of redevelopment at the Palazzo at Park La Brea in West Los Angeles. Details of these projects can be found on supplemental schedule 10 to our fourth quarter release. In 2016 we achieved NOI stabilization at three redeveloped communities in coastal California; Lincoln Place in Venice, Ocean House on Prospect in La Jolla, and Preserve at Marin in Corte Madera. Combined redevelopment of these communities resulted in value creation of approximately $170 million, at 30% on Aimco's investment in the projects. We also completed development of our One Canal Community in the Bulfinch Triangle area of Boston. Thanks to an excellent execution by Keith and his team, 86% of the apartment homes at Once Canal were occupied at year end, a pace that is several months ahead of our underwriting. And finally as to 2016 activity, we closed on the $320 million acquisition of Indigo located in Redwood City, California last August. Keith and his team have exceeded expectations for the lease-up of this community as well. At year end, 77% of the apartment's homes were occupied, also several months ahead of our underwritten pace. Across our major lease-up properties, our Park Towne Place, the Sterling, One Canal and Indigo; we ended January with limited remaining lease-up exposure. Of the more than 1,700 completed apartment homes, only 267 or about 15% are vacant and our rent to these properties continue to track our underwriting. Looking ahead to 2017; our capital investment outlook for the year remains focused on value creation within our portfolio. We plan to invest $170 million to $290 million in redevelopment and property upgrades over the course of the year, with the upper end of the range dependent upon continued success in achieving targeted rental increases. We expect to complete that One Canal lease-up this quarter and for Indigo to follow in the second quarter. And while we are not contemplating any acquisitions at this time, we continue to look for opportunities to make a creative paired trades that would improve the quality of our portfolio. And with that I would now like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Thank you, John. Today I'd like to spend a few moments on our 2016 results after which I'll provide some details around the 2017 outlook and 2018 forecast that we published yesterday with our earnings release. First, 2016. In operations, Keith and his team delivered solid full year results, 2016 same-store revenue grew at 4.7%, expense growth was held to 1.4% which drove same-store NOI growth 6.2%, 45 basis points above the midpoint of our beginning of year guidance. Additionally, as John just discussed, the team achieved excellent results that are lease-up communities adding $2 million more to 2016 net operating income than originally expected. These successes contributed to year-over-year FFO growth of 4% and AFFO growth of 5%, each ahead of our beginning of the year expectations. As for the balance sheet, year-end leverage to EBITDA was 6.7 times consistent with our beginning of year guidance. And during 2016, we lowered our weighted average cost of debt capital by closing $394 million of fixed rates amortizing property loans that have a weighted average term to maturity of 9.4 years and a blended interest rate of 3.19%. We also took advantage of the favorable interest rate environment and put refunding plans in place for $89 million of our 2017 property debt maturities. We expect to refund the remaining $171 million of 2017 maturities consisting of seven loans with a weighted average loan to value of 33% in ordinary course. Finally, in December we restructured our bank line extending its maturity to January 2022 and lowering our borrowings. At year end, our $600 million line was largely undrawn and we held an unencumbered pool of communities valued at $1.6 billion. In short, 2016 was a good year for Aimco. Given these positive results and our expectations for 2017, our Board of Directors approved a 9% increase in our quarterly dividend to $0.36 per share. As we look ahead, prospects for the Aimco business remained good. Concurrent with yesterday's release, we provided guidance for 2017 and financial forecast for 2018. It is important to remember that the 2018 forecast is our financial model based on third-party [ph]. Our 2018 guidance and actual results are likely to be somewhat different. Today where we would track at your ago forecast for 2017, we see many consistencies but also four important differences that are reflected in our 2017 guidance. First, lower same-store NOI growth. Second, increased contributions to 2016 lease-ups. Third, a slower pace for certain redevelopments based on caution about market. And fourth, increased capital replacements spending. When comparing 2016 actual results and our 2017 guidance, the important differences are same-store. We anticipate same-store revenue growth between 3.25% and 4.25% reflecting an expectation of slower lease rate growth in 2017 compared to 2016. We anticipate expenses to increase by 2.5% to 3%, a faster increase than in 2016. These increases drive our expectations of 2017, net operating income growth will be between 3.5% and 5%. We anticipate the increased 2017 NOI contribution from the lease-up of Indigo, One Canal and Vivo [ph] to be $0.13 per share, up $0.12 year-over-year. We expect the contribution from non-core earnings to decline by $0.10 to $0.12 per share compared to 2016 as we continue our gradual exit from the low income housing tax credit business and as we complete certain redevelopments that have generated historic tax credits. Finally, we expect reduced outside costs that come with our simpler business model. As the complexity and the scale of our business change, we expect these costs which include property management, investment management and G&A to decline by $0.02 from 2016 to 2017. As a result and at the midpoints of the ranges of our guidance, we 2017 funds from operations and adjusted funds from operations to be $2.44 and $2.12 per share respectively. Now as to our model for 2018, based on third-party projections we are forecasting increasing AFFO to a range of $2.17 and $2.31 per share driven primarily by the same four factors influencing 2017's result. First, same-store NOI growth of 3.5% to 5%, similar to what we expect for 2017. Second, the stabilization of our 2016 lease-up properties which are forecasted to contribute an incremental $0.03 per share to 2018's results. Third, a further decline in non-core earnings of upto $0.11 per share. And fourth, further reduction of outside costs by about $0.01. I reiterate that this is just a model and we will provide formal guidance at this time next year. So to summarize, we see over the next two years that the steady execution of our strategy will result in continued operating income growth and improved portfolio with higher average rents and wider free cash flow margins, a simpler business with higher quality earnings, lower leverage, reduced outside costs and increased FFO and AFFO per share; all accomplished without the need to access equity capital markets. With that we will now open up the call for questions. Please limit your question. Operator, I'll turn over to you for the first question.

Thank you. [Operator Instructions]. Juan Sanabria of Bank of America.

Good morning guys, thanks for the time. I was just hoping you could speak to assumptions around 2017 new and renewal rates, particularly given the deceleration we saw in the fourth quarter to defend occupancy or to keep -- regain occupancy. So any light you could shed on that would be fantastic.

I'd be happy to. Now as we thought about our expectations for '17 we really thought about the range of potential outcomes. And so as we set our guidance range for revenue which is three in a quarter at the low end and four in a quarter at the high end, that's really framed by three factors as you all know. First, it's the impact of our earnings from our 2016 lease and activity, and that will generate about a 1.9% revenue growth in 2017. The second factor is occupancy, and so we have modeled -- and as we've thought about the range of potential outcomes to be flat at the low and midpoint of our guidance range; and in order to hit the high end of the guidance range we would probably have to have an incremental pick up in occupancy year-over-year. And then finally to address the specific question you asked on our expectations for 2017 lease rates; we expect a range of potential outcomes on a blended basis to be between about 2.7% at the low end of our guidance range and at the high end our blended lease rate would have to be about 4% which would be consistent with what we saw in 2016.

So would the spread I guess be compressing as the year grows and particularly since you said lease between new and renewals, is that the expectation?

Juan, I think our expectation is based upon the ability to set both new and renewal rates on an asset by asset basis where it's really tough to generalize overall what we might do. I mean obviously we'll see the overall impact as we report our numbers but at this point as we're approaching the year, we're going to take those asset by asset basis.

Okay. And then just last one for me, if you don't mind. Any color you can give on the trajectory of that same-store revenue growth throughout '17; is there a trough in the second half and a pickup trough in a limit point and then a pickup into the second half or is it -- a steady deceleration, any color you could provide there would be fantastic.

You know Juan, there is so much volatility quarter-over-quarter driven by factors that I would have a difficult time projecting at this point that I think our expectations really just for the year and as we see the year developing, we'll provide additional color.

Thank you.

The next question comes from Nick Joseph with Citi.

Thanks. Terry, as part of a two-year outlook, you put down your NAV at $52. I'm just looking at Street consensus numbers, it's around $46. So I'm wondering what in your opinion is the Street missing in terms of value versus your internal view of value?

Nick, thank you very much for the question. I think the team has published a very detailed analysis and calculation of our net asset value per share, it's posted as you know on our web page. There are many analysts who have similar net asset values per share and we think theirs are more accurate. And for those who have different ones, I think they should compare them to our publication and form their own opinions as to which is right.

Is there anything when you look across those analysts that you think maybe aren't getting full value, that is being missed right now?

You know how modeling goes, each people -- each analytic team has its own assumptions and some of those are objective and those should be agreed across all models; and some of those are subjective and they are entitled to their opinion.

Okay. And then -- so just taking your NAV at $52, stock trade about 15% discount today; you've talked on this call about the balance sheet, limited capital commitments, you have a reasonable dividend payout ratio; so what are your thoughts on share buybacks today?

It's something we keep in our toolkit and can consider when -- under what circumstances it might be appropriate but our focus at Aimco is on operations and not what some see as financial engineering. And our focus in 2017 will be to be better operators in challenging markets, to be better redevelopers, again in challenging markets; and to manage a safe balance sheet and just focus on the execution of our long-term plan.

Thanks.

And next we have a question from Jordan Sadler of KeyBanc.

Hi, it's Marshman [ph] here with Jordan. Terry, at the beginning you kind of talked a little bit about redevelopment and some of the risk that you see; broadly speaking, what would you have to see really for you to slow the redevelopment pace or what would give you pause as far as the redevelopment program?

I'm very enthusiastic about our redevelopment program. It's led by very capable executive, Paddy Fielding, a long-term Aimco-ite. She's got terrific new tenants [ph] across the country. They have an emphasis on high quality and distinctive design that have been rewarded by customer acceptance. And so broadly, I'm quite enthusiastic about what we're doing in redevelopment. One of the things I like in addition to that is that redevelopment is safer than new development because you can stop. If the market at any particular time and any particular location is not meeting our expectations we can tweak it, improve our product or even just default to the base case of the occupied unit before redevelopment. So as we look at turbulent markets where there is competitive new supply, we very much like the safety feature that we can slow down or even stop if we're not getting the returns we expect. And of course we can increase elsewhere if we're getting the returns there and have that opportunity.

I appreciate the comments there. And then just kind of focusing on the Bay Parc Plaza deal you started this quarter; Miami has been a weaker market than some of the others and you've referenced it is facing some heavier supply this year. So I guess what gave you the confidence to move forward with the first phase of that project? And then also how are you thinking about the timing on the second phase which I believe is more focused on the units itself?

I assume it's just a same song different verse, we looked at the particular property in the particular context and the particular ideas to upgrade that property. Again, we have a talented team addressing it. And they've outlined various improvements in the first phase to the common areas in the second phase to inside the units and we will closely track the spending, closely track the market acceptance in returns. If we achieve what we expect or better, we'll go full speed ahead. If for any reason we're disappointed, we'll make adjustments or even stop.

Does the capital spend assume any additional starts this year? And then just separately, remind us again what target returns are on redevelopment?

Paul can help you with that numbers but we have a wide range for redevelopment spending in our forecast to reflect just the uncertainties we see looking forward.

Also specifically around our starts, we have an expectation that we'll start between three and five of the larger scale projects that would be listed on schedule, tenant are supplemental. And then as always our expected returns are typically around at least a 9% free cash flow internal rate of return.

Great, thanks for taking the question.

The next question comes from Nick Yulico of UBS.

Thanks. First one is on the tax credit income in the 2018 forecast. What is -- what would drive that number higher? Is it starting some new projects where you've got some additional historic tax credit benefits? I mean I'm just trying to understand exactly how much variability there could end up being in your 2018 tax credit number?

Sure, Nick. Just to make sure that I'm responding to your question, you're asking about the potential variability and the historic tax credit benefit?

Yes, for 2018, you have the 2016. Well, just add that entire non-core earnings of '16 to '22. What's the sensitivity to that being higher potentially?

Sure. Let me walk through the various elements. First, starting with the first line item in our non-core earning category, that's the amortization of our deferred tax credit income. As you know that that's just the burn-off of our legacy, a low income housing tax credit business where we haven't had a new syndication in that business for a number of years. So this is really just the bleed off of projects that we've largely completed and under gas that we're required to amortize roughly over the delivery period of the associated credit to the investors. And so you see that decline from $18 million in '16 to about $6 million in 2018. The next line item is our non-recurring investment management revenues. As we've talked about at length, that's a piece of our business that is declined and really is all but done, at this point we don't have any expectation for any of those types of transactions in either '17 or '18. Next our historic tax credit benefits; where in 2016 we benefited by about $14 million of those benefit and that was generated through the redevelopment activity by Paddy her teams primarily at Sterling and at Park Towne Place. And so what we expect in 2017 is to earn historic tax credits as we complete the third tower at Park Towne Place that John mentioned earlier today. And in the variability in 2018 is driven by the decision to start the fourth tower at Park Towne Place. So we do start that later this year, we would start to recognize tax credit benefit, historic tax credit benefits for that project in 2018. And so then the final piece of variability in that line item is really driven by whatever the potential new starts might be in future, and to the extent that those have the opportunity to earn historic tax credits, we'll certainly take advantage of that.

Okay, so that's helpful. Just to be clear so that the range on the historic tax credit benefits; does the range reflect the possibility of starting the new projects or no? In a new project where you could get more tax credit income?

The range for 2018 only reflects the opportunity associated with the four tower at Park Towne Place.

Okay, that's helpful, thanks. And then Terry, I guess just a bigger picture question; on dispositions you have been selling generally some older assets. What is the thinking on perhaps selling -- taking maybe a stake in some of your redevelopment you've done; the Venice project or others which you could sell at a much lower tax rate than where you've been selling assets which could perhaps help a little bit in the earnings accretion of your redevelopment program which seems like the redevelopment program right now is more of a NAV focused value creation?

Nick, thank you very much for the question. You're correct we're mostly focused on net asset value creation per share. We call the combination of that with cash dividends, economic income, that's our basic long-term or total return measure and we're less focused on trying to generate earnings in a particular period. We look at our cost of capital but we also look at its impact on our portfolio quality, and we think in most cases it might -- it would be short-term advantageous but long-term disadvantageous to raise capital at a low cost but by at the sacrifice or dilution of our holdings of our highest quality assets. There are times in prices where we've done so, you'll recall that at Palazo [ph] for example, we sold 47% interest to an institutional partner, a decade ago, and they've been a good partner and we've regarded that as a good transaction. So it's something that's inside our tool kit but it's one that we would approach cautiously because we're quite focused on the quality of our portfolio.

Okay, so it sounds like we should think about the redevelopments that you've done, where you saved $300 million of value creation that -- that's just going to stay -- those projects could stay entirely on the balance sheet and you're not going to look to harvest some of that value creation to recycle capital or even return to shareholders, is that the way to think about it?

I think so. I think what I would say in general is that looking forward we expect more of the same. The business environment will fluctuate but we feel we have a good plan and a good team to execute in '17 and '18 what we've done for the past many years and we'll focus on in terms of capital recycling, we're more likely to sell off the bottom. We find attractive cost of capital there, John mentioned in his remarks that our expected return on the assets we sold in 2016 was 6.6% and that provides a cost of capital that supports the 300 basis points spread to its investment, we think that's a good return, that's what we'll continue to focus on.

Thanks, Terry.

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

Thank you. Just a question on the methodology of your outlook, it seems like last time you were relying more on the recent [indiscernible] metrics forecast and this time around they are more of an internal forecast of where you think rents are going to be. But I'm just wondering which markets you saw a big differentiation between your forecasts and the third-party providers?

John, this is Paul. Our process for preparing the 2018 forecast was honestly substantially identical to what we did for 2017. And that is for our expectations of new leased rates we relied on third-party data providers, average of recent actual data at our submarket level. For renewal leases we assumed increases of 4.5%, that assumption is consistent with what we'll use in 2017. And then the only variable that we diverged is on our expense assumptions, and where last year in our model we assume that it would grow at the projection of inflation as provided by economy.com. We still did that for 2018 but then we took 15 basis points off that because the expectation was a growth rate of about 2.9%. And so looking back at our history, it's been a long, long time since we had a growth rate that high, and so we thought that might be overstating the potential for expense growth for 2018.

And then as far as 2018, you're using recent metric as far as rental growth? And if so, just wondering which markets do you think will improve in '18 versus 2017?

John this was a high level analysis that we've been together in aggregate. So what we think is the important takeaway is that at least looking at the data provided by the third-party providers, they are expecting market rent growth of about 3% at our submarkets in 2018.

Okay, got it. Just one follow-up; Philadelphia was one of your stronger markets last year and you're projecting it to be sort of a weaker market in '17; is that the market forecast or is that what you think you're actually going to achieve in your portfolio?

John, this is Keith. It's a bit of just some caution knowing that there is a lot of new supply coming into Center City, and some of the impacts that we've seen coming through with that.

Honestly, for '17 when we talk about our expectations for '17, that's our guidance. Those are expectations that are built upon both our bottom up sales of our budgets and our valuation as considered by a third-party data providers and whereas information that's provided for '18 is purely mathematical based upon third-party data providers.

Okay, got it. Thank you.

The next question will come from Rob Stevenson of Janney.

Good afternoon, guys. Paul, how front-end loaded is your disposition guidance for '17? Is it basically that plus the slowdown in same-store that's accounting for the $0.03 at the midpoint drop from fourth quarter FFO to first quarter?

Thank you for the question, Rob. Our expectations for dispositions next year is actually very much backend loaded. And so in in our earnings release we provided a walk of our 2016 FFO to 2017 FFO. And in that walk we showed $0.09 loss in FFO from the impact of property sales, and $0.08 of that $0.09 is due to dilution from our sales in 2016 and $0.01 is due to expected dilution of our 2017 sales. And so that the quarter-over-quarter midpoint projected decline from fourth quarter FFO to the first quarter midpoint is really being driven by its seasonality factors. If you think about it, it is the impact of coming off fourth quarter were typically we have lower turn cost because we have fairly lease expirations, lease expirations are lower in the first quarter as well but still higher than the fourth quarter generally. But more impactful is the impact of utility costs, both in the general sense and that our utility costs are lower in the fourth quarter than in the first but specifically in 2017, it's a bigger impact because we expect in 2017 a return to normalized weather and therefore normalized utility costs in Q1.

Okay. And then what are you guys assuming for '17 for recurring but non-revenue producing CapEx per unit for the portfolio?

Recurring but non-revenue producing?

Yes, the IFO [ph]?

Yes, we expect to spend about $1,100 per unit on our capital replacement spending which falls in that category.

Okay. And then are there any material changes to the same-store portfolio as we had into '17? Any particular markets impacting?

Yes, just so everybody is on the same page. When we said our 2017 same-store expectations, it's based upon our portfolio at the end of the year. And so as we look out into 2017, we are adding to the same-store population, Lincoln Place, Ocean House, Preserve at Marin, the three stabilized redevelopments that John mentioned, as well as MESO [ph] which was an acquisition we made in 2015 in Atlanta. We also expect to remove say three to four to five properties due to the redevelopment and then one potential property -- one potential conventional property due to sale. And so you know that if you look at those eight properties in aggregate, we expect about a 20 basis point impact to our same-store growth rate.

Okay, thanks guys, I appreciate it.

Next, we have a question from Rich Anderson of Mizuho Securities.

Thanks. So just looking at the '18 guidance, the same-store is sort of as you mentioned a mirror image of '17 but the difference in the guidance is -- if you said -- if you talked about this before, I apologize; but higher dispositions, and it makes me think that you're kind of showing your cards a little bit there in the sense that if it's a better time to sell then maybe cap rates are compressing, and it's a little bit of a better time in '18 versus '17. Are you kind of chomping at the bit to say '18 could actually be a better year than '17 but just not willing to say it yet?

Rich, this is Paul. I'll start by talking about the dollars involved on the dispositions and maybe I'll turn over to Terry to comment on potential of the environment. In the third quarter call we talked about the fact that we're increasing our 2016 disposition guidance to get a little bit of a head start on our needs for 2017 and John and the team were very successful in accomplishing that. So if you were to normalize our expected dispositions by pulling the year end -- a portion of the year end 2016 sales, put those back in '17 as we originally expected a year ago, you know, there would be no change from our expectations for sales in 2017 versus 2018.

Okay.

Rich, what I would add to that -- this is Terry, is that if you think about our pair trade discipline, it has the effect of neutralizing our opinions about whether -- one time will be better or worse because that assumption will be embedded in our sales activity but also our investment activity. So we're not particularly trying to be market timers, we raise our capital by selling lower rated assets at an attractive cost, reinvesting them in higher quality assets at a higher return.

Okay, I'll start trying to be a psychologist. And then sort of a general question, don't know if you'll be all answer off the cuff but do you have any sense of what your portfolio depends, what amount of your portfolio depends on H1B or student visas or any kind of legal immigration -- is that something that you track and have some sort of knowledge on?

I do in general but not always in particular, but immigration is a very important contributor in my opinion to the country, and certainly to the rental apartment business. And we have a number of properties where we have -- and welcome high quality customers who are immigrants.

Alright. And do you have any opinion about -- you know, whether that's a good thing to have that kind of dependency on it, you know, in this day and age?

Well, I think broadly as I say it can be a good quality customer; people with high income, high education, good jobs and so forth. If you're discussing what are what are the potential impacts of the Trump administration, those are not yet known but it will be a fact that we'll deal with.

Okay, fair enough. Thank you.

The next question comes from Drew [ph] of Robert W. Baird.

Good morning. A quick question on Paul on the refinancing activity in the first quarter. It looks like the secured debt that was raised [indiscernible] caught 180 basis points. In terms of your debt costs assumptions for 2017, will they just mirror a movement in the tenure since then or has anything happened with spreads?

Thanks Drew for the question. For the refinancing activity that we completed in the fourth quarter, those were deals that we rate locked in the October timeframe. So if I'm thinking back to rates at that time, we're probably at the 180 to 220 type of -- 200 type of point. As we think about our expectations for 2017, the indications we have seen is we've been talking with our partners in the secured debt world is that spreads have remained about the same, there is always a little bit of a range depending upon the location of the quality of the asset and the need for our partner to allocate capital to that particular market. And so I think broadly we would say that our spreads for 2017 are expected to be between about the 130 and 150 range.

Okay, that's helpful. And then an operations question, would you consider 96% to maybe be an occupancy high watermark or might there be benefits in pushing that a little bit further depending on how the year unfold; how are you thinking about that?

Drew, it's Keith. I'll walk through that. There is definitely the opportunity to go both ways on that and so what we will do is we will manage it market by market and so if we're in a market that we're seeing some acceleration in news lease rates and it's getting stronger, we may be more comfortable that the occupancy could dip a little bit in trade for higher new rents. In markets that we're seeing deceleration or we're seeing some more pressures, we may make a decision that says listen, let's moderate a little bit on the renewal side, let's retain customers and that may ultimately in turn, turn into a higher radio. So we won't manage it globally as a macro decision but we'll manage it building by building and market by market.

Great, that's helpful. Thank you.

And next we have a question from Dennis McGill of Zelman & Associates.

Hi, thanks for taking the question. First question, I just wanted to tell, there are couple of comments you had on the '17 outlook and how that relates to '18? On the one hand you're dependent on third-party providers for '18 which I understand but it sounds like they were too optimistic for '17. And then you talked to the difficulty and understanding the phasing of '17, just given the volatility in the market. So as you thought about putting out an '18 outlook, it seems like a difficult time to do that based on the volatility that you're seeing in the marketplace and the volatility of the forecast from the third-party; so how should we interpret your views today as far as how the exit point of '17 looks into '18 if you had to take a fresh look for yourself regardless of the third-party data providers?

Dennis, this is Terry. And our exit point at the end of '17 will be in our '17 guidance, that reflects our judgment, our opinion. '18 as you say at this point is based on third-party providers who at least right now have been seen as perhaps too optimistic. I've read your material with interest and I recognize your concern and caution about what lies ahead, and I don't think it's clear that you're wrong, you may well be right. But what I would ask you to consider is that we're not passive takers of what the market provides, we're not ants on a log drifting downstream, we're in active hands-on management team and we believe that we can absorb what variance there may be in the market and continue to produce the kind of returns we've discussed.

Okay, that's fair, I appreciative it. And then second thought around the NAV calculation. If you take that $52 and you think about observing the cash yield, I think the math would be somewhere around 4%, a little bit later if you include all CapEx. I understand that it's a different way of looking at it but then in a rising interest rate environment you think about that versus alternatives; how would you phrase us to think about that differently versus what seems like what would be a tight cash-on-cash yield spread?

I think that what's implicit or what's explicit in the net asset value calculation is the price at which properties would trade in the broad real estate markets. And those prices can certainly change, some of the factors that will increase factors going forward might be rising incomes, some of the factors that might depress valuations going forward might be changes in the risk free rate; those are obviously factors that can go in both directions. And so we're not trying to say that net asset value is a guaranteed number which will never change, that's not at all the case, we're trying to connect the value of the private real estate markets. Is that a response?

Yes, I think that makes sense. I appreciate it. Thanks, Terry.

The next question comes from Conor Wagner of Green Street Advisors.

Thank you. On Lincoln Place, I know that's going to enter the same-store for this year and it's going to be a big contributor in Los Angeles. How has rent growth been trending there? I mean how do you foresee it contributing in '17?

Conor, this is Paul. Just to analyze a bit more color on the impact of Lincoln Place coming into the same-store pool. And as we look at our prospects for Lincoln Place in particular relative to the LA market as a whole, and translating that impact to the entire portfolio. We're not getting either a lift nor a detriment from the addition of Lincoln Place to the same-store pool.

Great, thank you. And then John, have you seen any change in the transaction market in recent months? And how did the sale of the four assets in the fourth quarter go? Were they re-traded at all or was there any pullback from the buyers or the buyer pool?

No, I think all four of those deals, the four properties that close are really two transactions; three of them were joining opportunity to land, there we operated as a single property and went to a single buyer. Those transactions were cut kind of mid-year and we did not see re-trade activity of any significant sort on either one of them; the fourth asset there was one at suburban Philadelphia. And in terms of the market overall, I would say that you know [indiscernible] last week, I think there are some caution there, I think the bid pools and then our discussions with brokers out there last week, bid pools are a little thinner, I think they are particularly thinner at the A price point. There is still a lot of interest in the capital out there chasing deals but a lot of that capital is focused on value-add and the B-C price point today.

So then based on that John, do you think you would have an opportunity to execute a paired trade at a tighter spread given that you're trying to sell that value add and buy more of the A property?

Well, I would qualify one, the assumption that you make that we would want to buy more A property, let's start there.

Higher rate property, perhaps.

Okay. So an essential element in the fair trade is certainly a higher rent. And as we have been very successful over the last several years in selling out of the bottom of our portfolio, our bottom 10% rents have moved up, and so it's tough to find a property in our portfolio today that's got rents under $1,100 a month. So the trade up math there and our free cash flow analysis and that's really the primary metric in that fair trade analysis is the free cash flow generated on both sides of the trade, the sell and the buy. That math gets tighter or that math gets harder, the tighter that spread is. So I would close the loop maybe by saying that we are not particularly interested in buying top of the market in terms of top price points today, we are very cautious as we look at trade opportunities, and I think that's manifest in the fact that other than closing Indigo that we tied up a year and a half ago, we haven't we haven't done a new acquisition deal in 18 months or more. And so we're cautious and I think that that is somewhat reflected in the general market as a whole.

Great, thank you very much.

And the next comes from Buck [ph] of Raymond James.

Good morning, sorry I was on mute there. My question was actually pretty similar to the one just before that but maybe just rephrasing it; so you're about 50% A and 50% B and C now, looking ahead two years is that pretty much the mix you envision the portfolio being going forward or would you think you'd want to skew it still migrating closer to the A price points overtime?

I think as we look at it today we're pretty comfortable in that 50-50 mix. If anything we see a little more opportunity right now on the B side for revenue growth in the coming year as we've laid out in our guidance. You know, there may be a little drift down from the A price point but I think our focus is really going to be on B/C product as we look at potential acquisitions; and you'll see some drift that will come from redevelopments as they are [indiscernible] and other things that will push our average rate [ph], you're going to see that continued move.

And as you're looking at concession activity or just competitive behavior from lease-up properties right now where are you seeing maybe just the most acute pressure from concessions and what's the potential or where do you think there is the most potential that it could evolve into something that's maybe a little bit more irrational behavior from developers?

I'll start maybe then maybe Keith or somebody else would like to jump in. That those big four lease-ups, the easy ones -- let's go to Indigo which is in downtown Redwood City with a limited amount of new supply around it, there is some that South San Mateo [ph] market is getting new supply but it's not downtown San Francisco. And so we are not seeing the concession activity, in fact yesterday we were on one of our lease-up and revenue calls related to Indigo, its primary competitor property is putting out renewal notices at $500 to $800 increases to the residents. And so we feel pretty comfortable about our rate and our lease-up pace there. At One Canal we continue so see good pace there, you know it's winter and so pace is certainly slowed from the summer last year but they were over 90% leased and we're right on-track with our underwriting and feel very good about One Canal. Yes, there is some new supply; there is a new Avalon [ph] Tower just a few blocks away that's in lease-up but we have not seen major pushes there in terms of additional concessions or anything else and what can think they are tighter today than they were before. And the Philadelphia properties, we're going to watch Park Towne and be cautious about it and go from there as we look at that fourth tower but we've got a third tower coming on in the first two of upgrade.

Thank you.

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. If we've left you with a question or do feel comfortable contacting me or Paul Beldin, our Chief Financial Officer; or Lynn Stanfield, our Head of Investor Relations and FP&A or her trusted right hand, Elizabeth Colson. We'd be glad to answer them as best we can and for those of you that will be headed to Florida, in about six weeks we look forward to seeing you there. Thank you so much.

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