Apartment Investment & Management Co. Q3 2008 Earnings Call Transcript

Nov. 1.08 | About: Apartment Investment (AIV)

Apartment Investment & Management Co. (NYSE:AIV)

Q3 2008 Earnings Call

October 31, 2008 1:00 pm ET

Executives

Lisa Cohn – Executive Vice President, General Counsel

Terry Considine – Chairman, Chief Executive Officer

Tim Beaudin – Executive Vice President, Chief Development Officer

David Robertson – Chief Investment Officer, Executive Vice President

Thomas Herzog – Chief Financial Officer, Executive Vice President

Tony Dialto – Executive Vice President, Property Operations

Analysts

Jay Haberman – Goldman Sachs

Rich Anderson – BMO Capital Markets

[Unidentified Analyst] – Citigroup

Dustin Pizzo – Banc of America Securities

[Bob Lentz] – LaSalle Investment Management

Lou Taylor – Deutsche Bank Securities

[William Atchison] – Benchmark

[Michelle Coe] – UBS

[Allan True] – Stone Tower Capital

Haendel St. Juste – Green Street Advisors

David Bragg – Merrill Lynch

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Apartment Investment and Management Company earnings conference call. (Operator Instructions) And now I’d like to turn the call over to Lisa Cohn, Executive Vice President and General Counsel. Please go ahead, ma’am.

Lisa Cohn

Thank you. Good morning and good afternoon. During this conference call, the forward-looking statements we make are based on management’s judgment, including projections related to 2008 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 we discuss today. Also we will discuss certain non-GAAP financial measures such as earnings 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 [Intel’s] website.

The participants on today’s call will be Terry Considine, our Chairman and CEO who will provide opening remarks; Tim Beaudin will speak to property operations and our redevelopment activities; David Robertson, who’ll review investment management and Tom Herzog will address financial results and 2008 guidance. I will now turn the call to Terry Considine. Terry.

Terry Considine

Thank you Lisa and thanks as well to all of you on this call. I appreciate your interest in AIMCO. These are challenging times. The financial markets are lousy and quite unpredictable. Some aspects have not been seen in decades and some are completely unprecedented. AIMCO shareholders have suffered and I can assure you I have shared their pain.

That said, these are not the first challenging times in my business career. ’73, ’75, ’80, ’82, ’90, ’91 and even the milder 2001 to 2003 recessions were hard times, too. Recessions test a business, its plans and their execution. And at the start of this call I’d like to recall briefly AIMCO plans and their execution. Then I’d like to turn to how we’re addressing the present potentially difficult time. My conclusion, just to get ahead, is that the AIMCO plan is sound, is prepared for what may be tough times ahead.

While this call deals with our third quarter, real estate is a longer term business. If we’re beginning a down cycle, I’d like to put in the context of what was accomplished during the up cycle of the past five years. My colleagues who follow will add more detail, but I’d like you to focus on five key facts.

First key fact, we own hard assets, brick and mortar whose replacement costs greatly exceeds current values. Our properties are in good markets, about 85% invested in the 20 largest U.S. markets and the balance in 22 other markets down from 70 five years ago. Our properties are well located within their markets, following five years of pruning and $6 billion of property sales, generally off the bottom of our portfolio. Our properties are in good repair after five years of outsized capital spending. Our average rent, same store and non-same store exceed $1,000, up almost 40% from $725 five years ago.

Our properties have a private market with value far exceeding the value implicit in our share price. And let me say we have a pretty good idea of what properties are worth today because during the past five years, AIMCO’s been one of the largest participants and sometimes the largest single participant in the national, multi-family transaction market. We have sold

$6 billion and purchased $1 billion worth of properties during this period. This year alone our activities constitute an estimated 8% of national volumes.

Second key fact, we have a good business. Our average daily occupancy or ADO is 95%. Our rents are at record levels. Our customer satisfaction and retention are also at record highs. Our same store net operating income has grown at 3.6% annually over the past five years.

Third key fact, we have an excellent team. This can be measured in customer satisfaction scores. It can also be seen in financial controls, forward-looking pipelines for customer demand, and systems demand in [schuman] capital. It can also be seen in the continuing decline in team turnover down by one-third over the past five years.

Fourth key fact, we have generated a lot of cash for shareholders. In the past five years AIMCO has returned to shareholders $2.2 billion, about 60% paid as dividends and 40% by the repurchase of almost one quarter of our shares outstanding.

Fifth key fact and one I know must be on your minds and on the minds of the market, our balance sheet is solid and built by design for hard times. AIMCO is liquid with well over

$650 million of dry powder. AIMCO recourse debt is less than 8% of total leverage.

$75 million is not due for another year and we have already set aside the cash for its repayment. We have no unfunded corporate debt coming due for two and one-half years, when

$400 million comes due in 2011 and we plan to pre-fund its repayment similarly, well in advance.

The balance of our leverage is property debt and perpetual preferred stocks. Our property debt is long term with an average duration of 9.8 years. This provides AIMCO with a weighted average maturity for all its debt equal to 9.3 years, about twice as long as the average for other REITs. During the next three years our lettered maturities average less than 6% annually. And our borrowings are non-recourse so our risk is limited to a particular property.

Our property debt maturity through 2011 are diversified across 51 properties, each property loan stands on its own. No one property loan can jeopardize the AIMCO balance sheet. Loan balance is amortized each year so at maturity they average about 50% loan to value or below, providing cushion to rollover our refund loan balances even if values contract. And our preferred stocks of course are perpetual and have no refunding risk.

So we believe that the past five years have prepared AIMCO well and we are making the adjustments that will be appropriate if the expected downturn in the economy spills over into the apartment business. First adjustment, we’re intensifying our focus on serving customers, emphasizing retention of the customers we already have. In hard times, people tend to stay put, remaining where they already live. And we begin this downturn with 95% occupancies and we will work hard to keep each and every resident we already have.

It will help this time that our residents will be less likely to move out to buy houses with teaser interest rates and no down payments required. It helps, too, that so little new competitive supply is being brought to market.

Second adjustment, we are focusing on intelligent cost control, cutting G&A rather than diluting the customer experience. Third adjustment, we are managing cash uses with extreme care. After several years of outside capital spending, we are easing back. As we’ve discussed in previous calls, we prefer redevelopment to ground up development because of redevelopment’s shorter cash cycle. This flexibility permits us to adjust redevelopment spending and we have done so.

For $320 million in 2007 to $250 million this year to just about $100 million next year, most of which is self funded. We have no development commitments.

Fourth adjustment, we are committed to being self funded, i.e., to manage the business so that sources and uses are balanced internally, relying on financial markets only to fund low LPV property debt. Fifth adjustment, we’ll continue recycling our capital by making property sales, but we will allocate cash flows each to pre-fund the 2011 maturity of our term loan and to build cash reserves until we can see clearly that the economy has reached a bottom and is recovering.

While none of us today can know all the challenges that may lie ahead, I am confident in our plans and in the men and women of AIMCO who are my teammates. The record is one of high achievement. In particular I’m grateful for the help of Tim Beaudin, Tom Herzog and David Robertson who share this call with me today.

Tim is a seasoned real estate executive who joined AIMCO about three years ago. During his time here he has overseen redevelopment, redevelopment property operations, and construction services. You will recall that one year ago, I asked Tim to chair the Property Operations Committee which oversees all property operations while we made a planned leadership transition.

After a successful year, that transition is complete and today Tim is responsible for property operations, redevelopment, construction services, information technology and asset management for conventional properties. He has a lot to do and I’m confident that he’ll do a good job. I’d like now to turn the call to him. Tim.

Tim Beaudin

Thanks Terry. As I make the transition to my new role at AIMCO, I’d first like to acknowledge the work Jeff Adler contributed over the past several years to the operations group. We will not only utilize the framework Jeff established, but also continue to collaborate with him as we move forward. Also, I’m pleased to expand my working relationship with Tony Dialto. Tony has been a senior member of the operations group for the past five years and has been managing the day to day activities of the entire conventional and affordable portfolios over the past year.

While the operation of the 50 plus redevelopment properties have been my direct responsibility for some time, we will be merging the operations group into Tony’s organization on a go forward basis. Tony is available on the call to address your questions on the portfolio.

As we look ahead, we have lots on our plate with the definitive plan for moving forward. On operations, we are implementing a consolidation of REIT operations into Tony’s group and streamlining of our overall operations profile. Our emphasis will be on blocking and tackling with a new, leaner organization focused on the fundamentals of our business.

First, we want to outperform our competition. We cannot make a tough market go away, but we can do better than our peers. We will coordinate our efforts across business lines. We will focus on the details to improve property performance, through a re-evaluation of our organization and staffing. And we will refine our marketing, both new and existing customers, as we look to retain our most profitable customers, those that have already chosen to make AIMCO community their home.

On redevelopment, we will be reducing our reinvestment levels and increasing our return thresholds. We have learned much over the last three years. We’ve built our redevelopment business and made major strides in refreshing AIMCO’s property portfolio. This year, given the uncertainties in the capital markets and the anticipated economic slowdown, we will be cutting back but we’ll maintain our core competencies and the ability to continue to enhance AIMCO’s properties as the market dictates.

On IT we will continue the evolution of AIMCO’s electronic infrastructure. We recently launched our new websites, known internally as e-customer. The name reflects the focus of our recent ITFers to better serve our customers and drive our business forward. These new websites with updated graphics and customer functionality are expected to result in improved customer contacts. We will continue to assess the technology infrastructure of AIMCO to insure we are providing a top tier customer experience and internal systems to support our business needs.

On asset management, we are assembling a new group within the company composed of experienced AIMCO professionals that will provide us a detailed asset strategy on a property by property basis. We see this group providing the opportunity for big wins as we drill down on property specific issues that will enhance AIMCO’s performance across the board and give us a proper level of assessment to use in conjunction with David’s portfolio through allocation strategy as we continue to improve the composition and performance of the AIMCO portfolio.

I will now review operating results. We continue to make progress on executing our plan for the year. Third quarter conventional same store NOI growth was up 4.3% over prior year. This is comprised of revenue growth of 2.3% and expense reductions of 0.6%. Year-to-date revenue is up 2.5% and expenses are up 0.8%, resulting in NOI growth of 3.7%. This is just over the mid-point of our annual guidance.

The three components of the 2.3% growth in third quarter year-over-year same store revenue are as follows; 1.4% in rate which is a blend of 3.7% higher renewal rates, somewhat offset by 2.4 lower lease transaction rates; 0.4% higher in occupancy at 95.1; and 0.5 higher utility reimbursements and other income.

Expense reductions were led by lower turn costs, lower marketing expenses and lower payroll which were partially offset by higher utilities, taxes and insurance. As shown on Schedule 6, the year-over-year results for the third quarter in our top 20 markets break downs as follows – the Pacific grew at 2.7%; the Northeast at 2.7%; Chicago 2.1; and the Sunbelt at 2.2%.

And excluding Florida that would have been 4.3% growth. Florida revenue growth remains slightly positive year-over-year. On a sequential basis, revenue gains in Miami, Broward County and Jacksonville were offset by declines in Orlando and Tampa.

Our affordable properties as well as our conventional, non-same store portfolio which is comprised of both acquisition and redevelopment properties, performed as expected for the quarter. Our customer experience scorers continued to perform above our targeted 90% plus range. Team member turnover continues its positive trend. Total annualized slight team member turnover was down 4% year-over-year to an annualized turnover rate of 31%.

Before looking at fourth quarter, I want to acknowledge the hard work and commitment of our team members for their tireless efforts towards getting our communities back up and running following Tropical Storm Fay and Hurricane Ike. As previously noted in our October 1 press release, Tropical Storm Fay damaged 53 AIMCO apartment communities, primarily in Florida, while Hurricane Ike damaged 62 AIMCO apartment communities, primarily in Houston and the surrounding areas.

We are thankful that we had no reports of injuries to any of our residents or four team members.

Property damage was primarily to roofs, exterior siding and landscaping. Cleanup efforts are completed. However, we are still working to bring approximately 200 impacted units online.

Looking forward to the fourth quarter, we have seen some softening in new lease traffic in recent weeks but we have continued executing the new leases on pace with our projections and resident retention remains strong and may strengthen further because of the economic uncertainty may limit resident mobility.

Our book of business through the end of the year is essentially in place and we expect fourth quarter year-over-year conventional same store NLI growth 2 to 3%. For the full year 2008, we tightened our expectations for the same store NLI growth from a range of 2.5 to 4.5% to a range of 3.25 to 3.75% which is unchanged at the mid-point.

Now for an update on redevelopment, during third quarter we completed 1,272 conventional units and 28 projects with a total investment of $58.6 million. We also started one new project and completed two projects. Year-to-date our total redevelopment investment is $194 million and we have completed 4,193 units. Additionally during the third quarter we leased 1,695 redevelopment apartment homes at rents averaging 26% above pre-redevelopment rents.

With that I will turn it over to David for a review of the portfolio investment management. David.

David Robertson

Thanks Tim. I will cover three subjects today. First, property sales and the quality of the conventional portfolio; second, cap rates, valuation and the investment market overall; and third, the investment management business.

First, property sales; we sell properties to support two primary objectives, to upgrade the quality of our portfolio and to raise capital to fund de-leveraging and investment activities. Property sales for the quarter totaled $818 million generating $350 million of net proceeds to AIMCO. Sales included 40 conventional properties totaling 9,500 units and 5 affordable properties totaling 1,200 units. In October we sold another 24 conventional and 10 affordable properties for $283 million, generating additional net proceeds to AIMCO of approximately $80 million, most of which will be set aside to pay off this $75 million of term debt coming due next year.

Year-to-date our progress has been substantial with 126 properties totaling 30,000 units sold for more than $2 billion, generating more than $800 million in cash proceeds to AIMCO. These sales have significantly improved the quality of the AIMCO portfolio. Of the 107 conventional properties sold, 67 were located in non-target markets and 40 were inferior locations within our target market. These sales allowed us to exit 5 markets including Las Vegas, Tucson, Salt Lake City, Hartford and Charleston, South Carolina.

We also significantly reduced our exposure to Midwestern markets, selling 12 properties in Indiana, ten in Ohio, and eight in Michigan. These sales have reduced our investment in these Midwestern markets to 26 properties, representing less than 5% of our conventional net asset value. These efforts have also significantly improved the quality of our retained portfolio. While the properties sold were located in neighborhoods with 2007 average home prices of $240,000 our retained properties are located in neighborhoods with 2007 average home prices of nearly $400,000.

And while the properties sold had average rents of $750, rents in our retained portfolio now average more than $1,000 per month, an increase of $70 since the start of the year. Importantly nearly 85% of our capital is now invested in our 20 target markets. In the coming months, we expect to continue to be active sellers, improving our portfolio through targeted sales while generating proceeds for de-leveraging and investment activities.

Turning to market conditions, with more than $2 billion of property sales to date, representing about 8% of multi-family sales in the U.S., we have significant first hand knowledge of the market. As our sales demonstrate, the multi-family investment market continues to be relatively liquid. Buyers remain active with many local and regional operators pursuing new acquisition opportunities. However, values continue to soften. According to data released this week by research firm Property and Portfolio Research, or PPR, NOI cap rates in the top 54 U.S. markets have increased from 4.8% to 5.8% since the late 2006 peak in values.

Absent NLI growth, this basis point increase would have resulted in a 20% decline in asset values. However, property NLI’s were up 7.8% during this period of time indicating that the net impact has been about a 10% decline in values. Our sale experience to date has been generally consistent with this data. Looking forward, PPR is projecting an additional 20 basis point increase in cap rates from the third to fourth quarter from 5.8% to 6%, which when offset by the expected increase in NOI is projected to result in a 3% decline in asset values.

So a few observations. NOI cap rates are clearly turning up and values are declining. However, as Tim mentioned, year-over-year conventional property NOI increased 4.3% during the quarter and is expected to increase 2 to 3% in the fourth quarter, mitigating the impact of increasing cap rates to a certain extent. As shown on Schedule 8 our 2008 conventional sales through September have been at an average, free cash flow yield of 5.8% which equates to an NOI cap rate of approximately 6.3%.

An important point to keep in mind is that we are selling off the bottom of our portfolio. As such, we expect our retained properties to be valued at significantly lower cap rates on average than the properties we are selling.

Finally, our investment management business. A large amount of sales activity during third quarter helps produce approximately $30 million of investment management income after taxes, about $16 million above our expectations for the quarter. This out performance was due to higher than expected promote income from sales which more than offset continued weakness in our tax credit syndication business.

Looking forward we expect to earn $6 to $10 million of investment management income after taxes during the fourth quarter and $74 to $78 million for the year. I will now turn the call over to Tom to review our financial performance. Tom.

Thomas Herzog

Thank you David. There are several items that I’ll cover today. First, our liquidity remains good and our balance sheet is sound. Second, our third quarter FFO exceeded the midpoint of guidance. Third, as announced on October 16, we declared a special dividend for the quarter. Fourth, I will provide guidance for the fourth quarter and full year and finally I will speak to a few items related to our expectations for 2009.

Please note that all prior period share and first share amounts reported in our earnings release, supplemental schedules and those we will discuss on this call have been retroactively adjusted for the issuance of common shares in connection with the special dividends paid on January 30 and August 29. Adjustment to prior paid shares and first share amounts for the special dividend declared in October will be made in earnings releases and financial information prepared subsequent to the December 1 pay date, as the number of shares issued in connection with the dividend will not be known until after the valuation date of November 20 and 21.

Let me start with the discussion of our debt, liquidity and coverages. We continue to maintain a solid balance sheet. Our corporate debts consist of the following, $75 million of term debt maturing in September, 2009. As David mentioned we will set aside the majority of the October property sales proceeds to pre-fund this obligation. $400 million of term debt maturing two- and- a-half years from now in March, 2011. We expect to retire the balance of the proceeds from sales of non-core real estate assets.

Our $650 million revolver maturing in May, 2010, inclusive of a one year extension option. Our outstanding revolver balance at quarter end was $5 million. We are in compliance and have cushion with all of our debt covenants. We are projecting a year end debt service coverage rate of 1.66 times and a compliance threshold of 1.50 times and a fixed charge coverage ratio of 1.46 times for the compliance threshold of 1.30 times.

We do not have any covenants tied to the market value of our stock. The other category of debt carried on our books is non-recourse property debt. AIMCO’s share of property debt outstanding at quarter end was $5.6 billion. As detailed in supplemental Schedule 5, our property debt has latter maturities to minimize cash re-funding risks.

AIMCO refinances property debt on a routine basis in the ordinary course of business. Our share of property debt maturities through 2011 is as follows, $89 million across eight loans maturing in the fourth quarter of 2008; $347 million across 12 loans maturing in 2009; $314 million across 22 loans maturing in 2010; and $118 million across nine loans maturing in 2011. The LPD’s for our maturing loans through 2011 averages approximately 50% LPD. During the past several years AIMCO has generally financed property debt to 50% LPD. Again, our property debt represents non-recourse loans with no single loan representing a material, re-funding obligation.

We have limited obligations to re-fund redevelopment commitments or to fund redevelopment commitments and have no development commitments. During the third quarter we refinanced property debt of an outstanding balance of $40 million, with an average interest rate of 6.52% and generated $66 million proceeds at a weighted average interest rate of 5.72%.

We redeemed $27 million of our $100 million outstanding series A community reinvestment at preferred stock at a discount of approximately $2.2 million. The gain generated from this transaction net of issuance cost of $0.7 million was deducted in our computation of pro forma FFO.

And we increased our dry powder during the quarter from $600 million to $660 million. Now turning to third quarter results, Q3 FFO before real estate impairment charges and net preferred redemption gains was $0.84 per share, inclusive of a $0.06 per share charge for casualty losses incurred in connection with both Hurricane Ike and Tropical Storm Fay.

AIMCO’s share of casualty expenses from the storms net of third party insurance coverages has been estimated to be approximately $5 million. And as we work through the final damage assessment and insurance claims, cost estimates for these storms may be adjusted in future periods.

Excluding these unpredictable casualty losses, FFO was $0.90 per share which exceeded the mid-point of guidance of $0.83. This positive variance of $0.07 included same store NOI, provided $0.02 higher revenues than expected. Investment management income net of tax was $0.16 favorable, primarily as a result of promoting [come] above expectations due to accelerated assets sales, partially offset by lower syndication fees and tax credit income.

These favorable variances were partially offset by higher non-recurring property management expenses and G&A expenses of $0.07 due to travel, legal and consulting expenses, and timing of certain personnel related costs; $0.02 in loan losses that were not contemplated in guidance; and $0.02 of other miscellaneous items.

On a sequential basis, Q3 FFO before impairment charges net of redemption gains and casualty expenses associated with Ike and Fay were $0.06 higher than Q2 as re-stated for the August special dividend. Higher FFO during the third quarter is due primarily to the following, $0.02 increases in non-same store NLI due to positive results in redevelopment and acquisition properties and $0.11 related to charges in Q2 associated with the write-off of certain hardware and [doplar] costs and certain litigation matters that were non-recurring in Q3.

These positive variances were offset by higher property management expenses of $0.03, a negative $0.01 per share due to the timing of property sales and the use of corresponding proceeds, and a net negative of $0.03 as a result of several offsetting items.

Share repurchase activity and special dividends, during Q3 we repurchased 2.9 million shares of AIMCO stock at an average price of $34.45 per share for a total of $100 million. Additionally in October under a [KenB15] program, we repurchased approximately 2 million shares of our common stock at an average price of $24.77 per share for a total of $50 million.

Since the third quarter of 2006, we’ve repurchased 23.7 million shares or about 24% of our common shares outstanding on June 30, 2006. As was announced on October 16, the board approved a special dividend for the third quarter which will total $1.80 per share and be paid in combination of cash and stock based on shareholder election and subject to a cash limitation of $53.2 million.

And now turning to guidance, Q4 FFO is projected to be $0.70 to $0.80 per share and includes the following. Same store year-over-year NLI growth of 2 to 3% and investment management income net of tax of $0.06 to $0.10 per share. We expect to meet the full year guidance that I provided in August which was an $0.08 increase from the guidance provided at the beginning of the year.

A full year FFO guidance of $3.06 to $3.16 per share before real estate impairment losses and preferred redemption gains and charges is consistent with the $3.33 to $3.43 per share reported last quarter after consideration of the following, additional shares issued in connection with the August special dividend which equates to $0.21 per share reduction and casualty expenses of $0.06 per share occurred in Q3 associated with Hurricane Ike and Tropical Storm Fay.

We are forecasting same store NLI growth of 3.25 to 3.75% which is unchanged at the mid-point. Projected full year investment management income net of tax is increased to $74 to $78 million. The increased of projected investment management income is offset by higher property management expense, lower non-same store sales net income, lower interest income, higher loan losses, and various other items.

Full year 2008 AFFO per share guidance of $2.10 to $2.20 per share includes the $0.06 charge for Ike and Fay and the retroactive impact on share count of the January and August 2008 stock dividends. Projected cash dividends are expected to be covered by AFFO excluding dividends paid on shares in connection with the January and August stock dividends.

When taken into consideration, cash dividends paid on these additional shares, total projected 2008 stock dividends are expected to exceed AFFO by approximately 5%. Keep in mind that our guidance does not contemplate potential additional asset sales or the corresponding use of proceeds. Also, we have not adjusted our guidance for the impact of shares that will be issued in connection with the special dividend to be paid on December 1.

A few words on 2009. We’ll provide formal 2009 guidance in the ordinary course of our Q4 earnings call. However, at this point we expect continuing softening in the economy next year and a reduction in transactioning coming in 2009, primarily as a result of lower promote incomes and continued softness in the tax credit business. Finally, as Tim mentioned, we are evaluating the size of our redevelopment program and will focus our redevelopment investment on the highest yielding projects that are substantially self funding.

We will not be providing any additional comments with regard to 20009 at this time. With that, let me turn it back to Terry before we open up the call for questions. Terry.

Terry Considine

Thank you Tom. Before taking your questions, I’d like to speak to a personal matter. From time to time over the past dozen years, a Considine family partnership borrowed substantial amounts to buy AIMCO shares at market prices and also to exercise AIMCO stock options, eventually accumulating 2.5 million shares. After repaying more than $30 million, the balance of the loan was about $50 million or $20 a share at the start of this month.

That balance was fully repaid during the past few weeks by the involuntary sale of the related shares. When the dust settles, I will plan to begin again to accumulate AIMCO shares. I have a deep confidence in AIMCO and generally take most of my pay in AIMCO equity. My family continues to hold about 3 million AIMCO shares or open units. We have skin in the game. With a lot at stake, I have confidence in the AIMCO team and in our plan.

We are well prepared for whatever challenges lie ahead. Now I’ll hand the call back to Tom. Tom.

Thomas Herzog

We’ll now open up the call for questions. I would ask you to please limit your questions to two per time in the queue. Operator, I’ll turn it over to you for the first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Jay Haberman – Goldman Sachs.

Jay Haberman – Goldman Sachs

You know, Terry, you mentioned the significant difference between the private markets values of your assets and the stock price. Can you just expand a bit more on just how aggressive you intend to be say over the next six to 1 2 months, whether it’s selling assets, paying down debt or selling assets, buying back stock?

Terry Considine

Jay, you’re exactly right. We see a significant difference between the private market values and the public market values. And David is perhaps the nation’s leading expert on that, given the scale of his activities with the help of Lance and [Harold]. We are looking at how best to take advantage of that arbitrage. There are certain constraints in tax rules, there are certain constraints in some of the debt instruments, but there’s the opportunity for continued property sales which we will evaluate to see how best to fund our activities going forward.

I think the first point I would make is that we are going to pre-fund our 2011 maturity of term debt and take that element of risk in the future completely off the table. And second we’re going to fund appropriate cash reserves to be ready for whatever downturn might lie ahead for the apartment business. Thereafter we’ll see what’s the best use of funds.

Jay Haberman – Goldman Sachs

Can you just remind us in terms of the incremental assets sales from here I know you’ve talked about a $3 billion plus number, is that still reasonable? Or has that shrunk since then?

Terry Considine

David.

David Robertson

Yes, I mean it is still reasonable. We have about 20% of our gross asset value continues to be located in non-target, we’re 15% non-target market and as we mentioned there are some locations within our target markets that we plan to sell over time. So we would expect to over time sell another $2 to $3 billion in assets.

Jay Haberman – Goldman Sachs

You mentioned promotes, David, being lower next year. Is that a function of the rise in cap rates or what’s really driving that? Is that simply you’re not hitting the hurdle rates on these assets that are being sold?

David Robertson

It’s a function of two things, one the mix of sales that have promotes versus those that do not have promotes. As you know we earn a number of different fees when it comes to transactions. We earn disposition fees, other types of general partner fees, and then of course promotes. So the level of activity drives that number. But as it relates to promotes, certain of the assets have very large promotes. We’ve sold a lot of those this year. We expect to have more in the future but not at the same level, at least in the next few years.

Operator

Your next question comes from Rich Anderson – BMO Capital Markets.

Rich Anderson – BMO Capital Markets

Terry, I guess this question is for you. The Jeff Adler decision, was that a decision on your part and in the interest of conserving G&A or was that a decision on his part that caused you to react and make these changes?

Terry Considine

Well I think it was a mutual decision, Rich, that Jeff is a very dear friend of mine whom I recruited to bring to AIMCO and where he made a tremendous contribution over the past several years, and from whom I’ve learned a lot. During the past several years he designed many of the operating systems and metrics that we use. His particular passion is for branding and customer segmentation and this is not a full time job at AIMCO. And so he had a choice between whether he concentrated on his passion part-time and part-time on the day to day or whether he could organize a consulting practice where he could indulge or pursue that passion full time.

With that in mind, we began a transition a year ago. If you think about it, we organized the property operations council, sometime in the fourth quarter of last year Tony Dialto was good enough to relocate from Miami to Denver to take on the day to day. Tim Beaudin chaired that property operations council. And the three of them worked as a team to work through all of the issues of property operations.

At the end of a very successful, very smooth year long and off, it was time for Tim and Tony to go on and for Jeff to pursue his interests which are in branding customer segmentation. I think he’s world class. I’m delighted by the fact that he and I worked this out, that we will be his first customer and that he will continue to play that role inside AIMCO.

Rich Anderson – BMO Capital Markets

Tom, does the low stock price as I’m sure you see it have any influence on future decisions in terms of a stock dividend?

Thomas Herzog

No, it does not. The stock dividend, Rich, and the stock price are completely disconnected as far as decision. I’d have you think about the stock dividend similar to a stock split and whether we had a share price of $10 or $100 a share, as long as those shares are distributed among all the shareholders, it really doesn’t have an impact. So the stock dividend decision becomes solely around taking care of the tax matter that results from a gains on sale generated by the sales of assets by David in the non-core market and the non-core assets in core markets.

And that’s a separate decision from the share price as it pertains to the stock dividend.

Rich Anderson – BMO Capital Markets

Isn’t it true, though, that to make the math work you have to go in and buy the shares back? How do you keep up? How do you close that loop, that circle I guess?

Thomas Herzog

You really don’t have to. Again I’d have you separate and I’ve gotten a lot of questions on this, Rich. I’d have you separate the thinking on the stock dividend versus the share repurchase. The stock dividend is an absolutely independent decision designed to take care of one sole matter, and that’s to eliminate tax at the corporate level so that our shareholders are not subject to double taxation. The share repurchase is a completely separate decision. As to the cash that we’ve retained as a result of the stock dividend, we can use for whatever purpose we deem best.

We might decide to be lever, which by the way is probably something that we’ll focus even more heavily on going forward. We might choose to repurchase shares. Or we can make other accretive investments. But there is absolutely no match between stock dividends and share – no required match between stock dividends and share repurchase. We could do a stock dividend and repurchase absolutely no shares at all. They’re completely independent decisions.

Operator

Your next question comes from [Unidentified Analyst] – Citigroup.

Unidentified Analyst – Citigroup

You’re planning to dial down redevelopment spending. Do you believe that will have any impact on maintenance CapEx spending? Do you expect that to accelerate as a result?

Thomas Herzog

I’ll go ahead and take that one. Maintenance CapEx we have been spending a significant amount of money in maintenance CapEx bringing our assets up to the condition that we desire. That’s been in the $16 to $1700 per door range. As we look forward to 2009, the maintenance CapEx is something that we probably plan to reduce. We’re not providing numbers at this point and that will be part of our 2009 guidance.

The decision around redevelopment is a different one. Those are older, well located assets that based on the returns that we’re able to generate for these assets in the current environment based on the interest rates on debt, the ability to self fund it and cap rate on those assets, that becomes a separate decision as to the size of the redevelopment program. And as Terry mentioned, considering current decisions, we’ll be reducing the size of that program next year. Not that we’re not committed to it long term. But next year and into the foreseeable future, we’re going to pull that back a bit.

But again I would consider that a separate decision from the recurring CapEx.

Unidentified Analyst – Citigroup

My second question has to do with the agencies and if you’ve had any discussions recently, are you detecting any change in tone relative to their view of affordable housing and HUD sponsored housing?

David Robertson

No. If you’re speaking about the agencies lending to those assets, there’s been no change that I’m aware of in lending to affordable properties.

Thomas Herzog

In general as it pertains to agency financing, we have seen no disruption at all with Freddie and Fannie, either in timing or underwriting. Of course spreads have widened out a bit, but we haven’t seen any disruption.

Operator

Your next question comes from Dustin Pizzo – Banc of America Securities.

Dustin Pizzo – Banc of America Securities

On their call this morning Camden discussed their third party outlook where they have NOI growth on average declining about 2% next year and then kind of moving back to flat in ’010 and I’m not expecting you to provide any ’09 guidance at this point, but where in your view could this forecast be either too optimistic or pessimistic just given the way you’re looking at the economy today?

Terry Considine

I think where I would start is that the apartment markets are very local markets, like most housing markets. And so for example if you look at the Kay Shiller experience in housing prices, you see an average for the country but it masks wide differences that year to year in the latest data I saw, I think it showed two markets up, one which was Boston while another had the bubble markets in Florida, Arizona and Nevada and California are down 30 to 40%.

So you have wide ranges across local markets. In the rental markets, the impact will depend on where a company has its assets located. Given the portfolio reallocation that David has achieved over the last several years, we are primarily in markets that I think will be better than average. When we look towards what will influence that, I think that this time - every economic cycle is different. And if you think of the ’02,’03 downturn it was a case where there was significant job losses and there was a significant out flowing of apartment residents to buy homes often with teaser rates of very low interest and nothing down and a sense that housing prices could only go up or were an extraordinary investment.

I don’t think that’s going to happen again this time. And so what I think is that the apartment market will perform better relative to the national economy, because we will have apartment renters more likely to stay in rental apartments for a longer period of time. I think that’s true for AIMCO, I think that’s true for our peers. So the net of all of that is that looking forward, I think it does appear that the economy is going into recession. It seems to me that it could be severe.

It seems to me that the impact on apartments will be less than in previous downturns, but we don’t know that and so while we’re going to do everything we can to batten down the hatches, to see that we maintain every resident that we have, to see that we have abundant liquidity, and to see that we live within our financial resources.

Dustin Pizzo – Banc of America Securities

Can you just talk a bit more about your disposition expectations for the fourth quarter? Just given the significance that’s promote income does play as a percentage of your total FFO and on a similar note of that $6 to $10 million of net investment income that you talked about, can you at all break out what is expected from promote income versus the tax credit business and other lines of business?

David Robertson

Yes, first in terms of disposition activity in the fourth quarter as I mentioned we already had fairly significant sales in October. We’ve already sold close to $300 million of assets in October generating about $80 million in proceeds. And we are active in the market and would expect to have additional sales in November and December.

The mix of these asset sales don’t generate much in the way of promote income. Again it’s not a function of the values that we’re getting on these assets. It’s purely a function of whether or not these assets have promote structures in them. And they do not. So as a result, we don’t expect much in the way of owed income in the fourth quarter.

So the mix in the fourth quarter is going to include some asset management fees, a fair amount of tax credit amortization, as you know we have about $7.5 million a quarter of tax credit amortization which relates to cash that we’ve already received from investors that is recurring that will continue on into next year. And that’s kind of a $28 to $30 million run rate. So between that, asset management fees, and some limited general partner fees from the assets that we sell, we expect to be in the range that Tom and I outlined of $6 to $10 million after taxes.

Operator

Your next question comes from [Bob Lentz] – LaSalle Investment Management.

Bob Lentz – LaSalle Investment Management

When you look at the downside to getting to the 15 limit, how far did your EBITDA have to fall before you get there?

Thomas Herzog

It’s a decent amount. We’ve got cushion of about 0.16 times and actually we do have that number if I can drag it out of my schedule. I’m going to have to pull that out. I don’t have that readily available.

Bob Lentz – LaSalle Investment Management

If you don’t include the promote income in the EBITDA, what would the coverage ratio be?

Thomas Herzog

We’re projecting that – well, this gets into a 2009 projection and we’ve got a number of different components that play into 2009. But excluding the promote income along with the other components with 2009, we’re not projecting to have a difficulty with our coverages. The extraction of that one particular item would be an item in isolation that – but I don’t have that number specifically in front of me.

Bob Lentz – LaSalle Investment Management

Was there a difference - you gave the debt service at the end of the year, was there a difference from debt service in the current quarter to the end of the year? Or are they about the same?

Thomas Herzog

Yes. The debt service coverage in the current quarter’s higher than what I gave you. It’s at about a 1.71 or 1.72 times. And we’ve got – if you look back to Q4 of 2007 versus what we have in guidance for Q4 of 2008, you’ll see a decline in the Q4 number due to the timing of tax credit fees and transaction fees and therefore I gave you the year end coverage numbers, because they’re more conservative.

Bob Lentz – LaSalle Investment Management

And just to ask again, you couldn’t estimate the change in that ratio based on the promote income? Just to give us a sense of – because that income seems to be going away somewhat in 2009?

Thomas Herzog

Yes. At the same time there are other components in 2009 that will have an offsetting impact. And again, we’ve been doing all kinds of different analysis and different scenarios as to our coverages. And at the current time I feel comfortable that we’ll be fine in our coverages. But I hate to pull that one out in isolation.

Operator

Your next question comes from Lou Taylor – Deutsche Bank Securities.

Lou Taylor – Deutsche Bank Securities

Terry can you give a little color on the just kind of ongoing dividend, regular dividend? I mean, given the asset sales the extra distributions, is that a run rate you’re going to be comfortable with for the next couple years? Or do you think it’s going to be modified, just based on the special distributions?

Terry Considine

First just let me note that’s a board decision and not mine alone. But I think the way we in management think about that is that a dividend is based on profitability of the enterprise. And

[Audio Impairment}

We really don’t have those nailed down yet, in part because it’s quite uncertain as to what the economy’s going to do. But as we look at those two parts, we’ll formulate a recommendation for directors and live inside our resources.

Operator

Your next question comes from [William Atchison] – Benchmark.

William Atchison – Benchmark

Going back to the $814 million portfolio sale, the size and the timing with a lot of it falling in September was a little bit of a surprise. Were any of the deals triggered by buy sell agreements with any of your partners or the desire of any your partners to raise capital to get out of the agreements?

Terry Considine

No, we’ve been in the market on a regular basis throughout the year as you know. We’ve had $900 million of sales close in the second quarter, but the $800 million in the third and another $300 million or so in October. So it’s purely us kind of being consistently in the market throughout the year. It has nothing to do with the desires of any of the limited partners. No buy sell agreements, etc.

William Atchison – Benchmark

Then on the cap rate, you listed a 6% cap rate on that. Is that trailing? Is that forward? Is it in place? Is it a nominal cap rate? Is it an economic cap rate? Is there a management fee in there? What kind of cap rate is it?

David Robertson

These are trailing 12 month cap rates. And are you referring to our cap rates or the PPR cap rates?

William Atchison – Benchmark

The cap rate that the $814 million portfolio sold at.

David Robertson

Yes, that is a trailing 12 month cap rate with a 5% management fee.

William Atchison – Benchmark

And is that before or after CapEx?

David Robertson

It is before CapEx.

Operator

Your next question comes from [Michelle Coe] – UBS.

Michelle Coe – UBS

I was just wondering if you could tell us for some of those assets that you sold in third quarter and in October, can you give us a sense of the cap rates that were sold at the sum of the specific market?

Terry Considine

Yes. I probably can. If you looked at the third quarter – just give me one second and I’ll pull it up on the schedule here. But if you look at the third quarter where we had a kind of blended cap rate of 6, 7, you look at the markets we were selling at we had a lot out of Houston and kind of the mid-6s, a lot out of Indy and kind of the low 7s and mid-5s in Baltimore. Those are the low 7s out of, mid-7s out of Michigan. We had a couple assets in Minneapolis around 6%. That gives you a flavor. So obviously it’s very local.

Michelle Coe – UBS

And also can you tell me if you’ve seen any deterioration in the New York City market?

Given the financial sector impact?

Terry Considine

Operations or in values?

Michelle Coe – UBS

In terms of rental rates and occupancy.

Tony Dialto

We’re currently very highly occupied and obviously we’ve seen some things written where, based on different neighborhoods in New York City, there is some concern going forward. We’ve seen a little bit of evidence more on the commercial side than on the apartment side. So currently other than the seasonality, we’re not really seeing a fall off. A little bit of rate impact I think is really more – a little pressure on rates. The smaller units, people looking for smaller units rather than larger units. That type of thing.

Operator

Your next question comes from [Allan True] – Stone Tower Capital.

Allan True – Stone Tower Capital

With respect to those properties that the last two questions have centered on, were they sold with in place financing?

Terry Considine

Roughly 15 to 20% of the properties that we sell the buyer ends up assuming the existing financing.

Allan True – Stone Tower Capital

So I guess if they – 85% of the properties that were sold then in the cap rates you just quoted, took on new financing?

Terry Considine

Yes. Buyers are putting on new financing, primarily through Fannie and Freddie but also through some of the larger transactions, buyers are using regional banks.

Allan True – Stone Tower Capital

I noticed in your ’07 10-K it seems like it’s got $527 million of mortgages and amortizations, $643 in ’09 and 10 respectively, so I guess you guys have been able to refi most of the 455’s so far this year that you had to refi or pay in terms of amortization? Should we be – is it similar loan to values that you’re paying off the $527 and the $643 in ’09 and 2010? And what are the quality of those properties look like? Is that comparable refinancing to this year? And then lastly do you all intend to refinance your maturing corporate revolver?

Terry Considine

Let’s start with the property financings. One of the things I want to be careful when you pick up the numbers, take a look at the AIB column of the maturing property debt rather than the amortization. And within that, I think what you’ll find is we’ve got about $350 million maturing in ’09, about $314 million maturing in ‘010 and then another $118 in ‘011. Those, as far as LPD’s are ranging probably a little bit less than 50% LPD on average. And we typically finance at a 60% level.

So for us those have been routine refinancings that have occurred as those loans come due, or at times in advance. So it’s kind of business as usual for us on that front.

As far as the revolver, that one has an extension through May of 2010 and yes as that revolver comes due or in fact in advance of that, we will be remarketing that beginning next summer and working with our banks and potentially adding new banks to the syndication list. And it is our intent to update that revolver but also remind you that at the current date we have approximately $0.00 outstanding on the revolver balance.

Allan True – Stone Tower Capital

And I guess you intend to maintain that sort of balance almost in advance of the – well what’s kind of the intention there?

Terry Considine

The intention is to have a $0.00 balance on the revolver at the time that we’re seeking to remarket it. Along with having set aside funds – we’ll be at least working toward having set aside funds on all of our term debt.

Operator

Your next question comes from Haendel St. Juste – Green Street Advisors.

Haendel St. Juste – Green Street Advisors

Dave, can you clarify for me those cap rate changes in PPR that you were quoting earlier, those were through third quarter? And year-over-year through say September 30ish?

David Robertson

Yes. The update that came out this week from PPR and it’s the 5.8% cap rate is the third quarter cap rate.

Haendel St. Juste – Green Street Advisors

So the sales in October, can you give us a sense as to how much wider that number would be if you were to then incorporate the pricing from the early October sales?

David Robertson

Yes. The 5.8 is the PPR number. It’s not our number. Our number for the third quarter was 6.7%.

Haendel St. Juste – Green Street Advisors

I guess what I’m getting at is the subsequent change in pricing that you’ve seen from what you’ve sold during 3Q compared to what you sold earlier this month.

David Robertson

You know, Haendel, we are seeing upward pressure obviously on cap rates. The sales that closed in October were obviously negotiated 60 to 90 days ago, right? So to your question I don’t know that the increase would have been largely reflected in that number. Those sales – I’ll just tell you to give you an idea, we sold assets largely in at least the October sales largely in Columbus, Cincinnati, South Carolina, Indy, Norfolk, Fort Collins. And the cap rate on those sales was kind of mid-7s and obviously that’s pretty good pricing on those – coming out of those markets.

So I think your real question is do we think that the 20 basis point projection from PPR for Q4 will prove to be correct? Based on what we closed in October, obviously we probably got a better execution than that. What kind of executions we’ll get in November and December, we’ll have to see. We’re in the middle of negotiating those right now.

Haendel St. Juste – Green Street Advisors

Given your current activity in the marketplace, do you have a sense of what that might be?

David Robertson

I don’t have a sense of what it might be, but it is becoming more difficult. And so it’s very hard to quantify where we’re actually going to come out on pricing. But again if the market is liquid, there are plenty of buyers. Are there as many buyers as there were earlier this year? Of course not. It is more challenging. But we still are able to have a meeting of the minds when it comes to pricing.

Haendel St. Juste – Green Street Advisors

I guess the change in bid asks you’ve seen in the last couple weeks, last couple months, how would you answer that in terms of what it might have been a month or two ago versus what you’re experiencing today?

David Robertson

You know, it’s not so much a big change in the ask because you know there are fewer buyers that are – who are submitting bids near the ask. You have fewer people participating at or near the ask price. I would say what has changed is that the going through the due diligence process, the buyers are more rigorous. They’re looking for anything that they can identify that would in their minds justify a re-trade. And so there’s probably a little bit more negotiation as we go to contract on the transactions. But as far as the spread, we haven’t seen the spread.

I think in some markets, and Del you probably have wider spreads in markets where we’re really not actively trading assets. If you listen kind of the markets where we’re trading, we typically are selling to buyers that are trying to get some positive leverage. They’re buying at a discount to replacement costs. And so you’re really negotiating what type of spread to their debt do they really need to get a deal done.

We are on the buy side as well as you know as we look to recycle capital within our target markets. And I think we have seen that the bid ask on some of those transactions have widened out because buyers remember the very low 4 cap rate transactions of a year ago and it’s tough for them to move off of that pricing from time to time.

Haendel St. Juste – Green Street Advisors

Tim I’m looking for more color at how you’re looking at your redevelopment hurdle rates. I guess firstly what are those new hurdle rates and how do you arrive at them?

Tim Beaudin

Well, I think part of the focus comes down as Tom mentioned is really the cost of that historically we had a strategy that made redevelopment self financing. You know, as the markets have gotten tougher and tighter and the handwriting has gone that way as well as just being more conservative with our investment. And that’s cut it back. But I would have to think that the rates for the most part, we need to move 50 to 100 basis points north of where we were.

So we were saying 7.5 to 8.5 so I’d have to think now we’re in the 8 to 9% range before Tom gets comfortable that he’d want to go out and finance those properties and that they have positive leverage and value creation against both debt and the rising cap rates.

Haendel St. Juste – Green Street Advisors

Is the $100 million a good run rate to use over the next say year or two? Is that a number –

Terry Considine

I think guys on the redev, I think it continues to be – we’ve always said and we continue to believe that there’s opportunities in some of these better located assets to improve rent. The biggest decision about the redevelopment reduction has really to do with capital markets and just being more conservative. I think the $100 million is a good number. We have substantial carryover from our ’08 pipeline into ’09 so we’re just not going to see – you’re going to see a lot of completions next year and not a lot of new starts as we re-evaluate.

And again just as we’ve been able to stop redevelopment fairly quickly as we started to throttle it back in these tough times we also can start it back up. So if the capital markets start to loosen up and we see opportunities, then we’ll step back down on that gas pedal and we think we can do that fairly quickly. So we are going to keep infrastructure in place that we have that flexibility.

Operator

Your next question comes from David Bragg – Merrill Lynch.

David Bragg – Merrill Lynch

Just wanted to revisit the investment management income line again if I [recall] correctly at the end of the second quarter for the year was $55 to $65 million and now it’s $74 to $78 and as you’ve discussed it’s driven by higher promotes, but can you just talk a little bit more about how the asset sales played out during the quarter that drove the higher than expected promote level?

Terry Considine

How did they play out? Well as you know we’re in the market with a large number of assets and so when you look at the 40 conventional properties that were sold during the quarter, they represent a sub-set of the assets in the market. So the way that it plays out is we have a mix of properties in the market, some which have promote some which do not, and the assets that generated the $17 million of promotes during the quarter were part of the 40 obviously.

Just to make it clear, the process of selling an asset is no different whether there’s a promote or not. You’re in the market with assets, you get bids – it actually is a little bit of more involvement some ways when you have a promote, because you’re going to your partner on the transaction to make sure that they’re comfortable with the pricing that you’re getting in the market.

David Bragg – Merrill Lynch

So therefore the expectations for lower promote levels going forward is a function of some of those sales with promotes associated with them or some of the assets with those promotes associated with and being pulled forward into the third quarter.

Terry Considine

Let me answer it this way. The assets that we’ve sold year-to-date have been based on the markets that we wanted to exit or assets we wanted to exit within certain flow markets. And when they sell that gain, that will generate promotes. As far as we look forward, we had a good number of assets that had sizable promotes that ended up being sold year-to-date.

As David mentioned earlier in the call, there will be fewer of those going forward. There are still some in the portfolio. But there will be fewer going forward. But the selection of assets to sell has been market driven in conjunction with our market allocation that we’ve been underway on and not been driven by selecting assets for the fact that some of them have promotes.

Operator

Your next question comes from Craig – actually no I’m sorry, he has disconnected from the queue so we will conclude. Do you have any closing remarks at this time?

Terry Considine

Well, just this that first I thank you for your interest in AIMCO. Second, I hope you’ve had your questions answered. If you have any questions that occur to you after reflection and ruminations feel comfortable calling Elizabeth [Polson] or Ernie [Friedman] or Tom Herzog our Chief Financial Officer or me. I’ll be glad to give you as direct an answer as we can.

We feel that we’ve had a terrific year-to-date and yet we recognize that the stock market at least is telling us that there could be stormy waters ahead. And we’re doing everything we can to make logical preparations for what the future may hold. So thank you again and the call is concluded.

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