Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Lisa Cohn – EVP, General Counsel and Secretary

Terry Considine – Chairman, President and CEO

Tim Beaudin – EVP and Chief Development Officer

David Robertson – Chief Investment Officer and EVP

Tom Herzog – CFO and EVP

Tony Dialto – EVP, Property Operations

Miles Cortez – EVP and Chief Administrative Officer

Analysts

David Bragg – Bank of America

Rich Anderson – BMO Capital Markets

David Tody – Citigroup

Michael Bowman – Citigroup

Rob Stevenson – Fox-Pitt Kelton

Michelle Ko – UBS

Jay Haberman – Goldman Sachs

Anthony Paolone – JPMorgan

Fred Taylor – MJX Asset Management

Steve Swett – KBW

John Young [ph] – Evergreen Group [ph]

Alexander Goldfarb – Sandler O`Neill

Connor Fannuity [ph] – Deutsche Bank

Apartment Investment and Management Company (AIV) Q4 2008 Earnings Call Transcript February 6, 2009 1:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the fourth 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 proceed.

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 2009 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 maybe discussed today. Also, we will discuss certain non-GAAP financial measures such as funds from operations. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release, published on Aimco’s website.

The participants on today’s call will be Terry Considine, our Chairman and CEO, who will provide opening remarks; Tim Beaudin, who will speak to property operations and our redevelopment activities; David Robertson, who’ll review investment management; Tom Herzog will address financial results and 2009 guidance; and Tony Dialto will also be available for questions. I will now turn the call to Terry Considine, our CEO. Terry.

Terry Considine

Thank you, Lisa, and welcome to all of you listening in. I appreciate your interest in Aimco. In this call, my colleagues and I will report on last year and we will look forward to the new year and beyond.

In 2008, Aimco executed successfully our business plans notwithstanding a weakening economy and turbulent capital markets. The transition of property operations to Tim Beaudin and Tony Dialto was successful in implementing improved cost control and operational discipline. The quality of our business measured by numerous metrics such as customer satisfaction, team engagement, risk management, and productivity improved year-to-year.

David Robertson and his team sold $2.6 billion of properties, an estimated 7% of the entire national market generating $1 billion in net cash proceeds to Aimco. By every metric our portfolio quality has improved substantially since the end of 2007. David will offer more details later on this call.

Thanks to the hard work of Tom Herzog and his team, our capital structure withstood the assaults of the financial crisis with abundant committed credit and limited refunding risk, and before one-time charges, we met the FFO guidance that Tom provided at this time one year ago.

However, since our last earnings call in November, the financial markets and the economy have continued to deteriorate. Just this morning, we learnt that the January job losses were almost 600,000 and that the unemployment rate has increased to 7.6%. Most observers predict more pain to come, and as we make our plans for the next two years, were preparing with clear memories of prior hard times. We recognize that government rescue efforts may prove the right prescription but they create costs and uncertainties and are unlikely to be instantly effective. We want to be prepared if unemployment increases even beyond current expectations. We want to be prepared if we faced two or more years of hard times, and we want to be prepared if the recession years are followed by substantial inflation.

And as we wrestle with these serious and near-term problems, we want to keep a clear focus on longer term values. Apartment demographics are quite strong in the years ahead and the development of new supply has very nearly stopped. When the hard times end and they will, we expect business to be again quite good.

Before that happy time, we have taken a careful look at the Aimco business and have made the hard decisions required by hard times. We focused first on safety, both liquidity as measured by available cash on hand and more than $650 million in undrawn credit facilities, and also a reduction of entity risk by reducing corporate debt to $350 million of term debt due in March 2011. We expect to prepay this debt from property sales proceeds and from cash retained from operations.

We have balanced sources and uses of cash by 75% reduction in redevelopment spending together with a reduction of other capital expenditures by an organizational restructuring resulting in a $70 million production in cash G&A, and by dividend adjustment from $0.60 quarterly to $0.25 quarterly or $1 per share annually.

We are also intensifying our focus in serving customers, emphasizing retention to the customers we already have. We enjoyed 95% occupancies during 2008, and we will work hard to keep each and every resident we already serve. We are committed to maintaining and improving product quality and the customer experience and had a CapEx level of $1200 a unit. We are spending the money required to do so.

We expect fewer move outs to purchase homes because of fewer FHA [ph] loans and higher down payments. And we expect reduced competition from new buildings as new development has ground to a halt. In sum, we expect 2009 and 2010 to be challenging years. We have made thoughtful and disciplined changes to continue to upgrade our portfolio to become a more effective and more efficient operator, and to reduce our financial average and our reliance on external financings.

I will now turn the call over to Tim Beaudin. Tim.

Tim Beaudin

Thanks, Terry. Terry has already noted 2008 was a good year for Aimco’s operation team. We ended 2008 with record occupancy levels, improved customer service scores, and more cost-efficient and effective operating organization, and increasing operating margins. These improvements have positioned us well for a challenging 2009.

I will now review operating results. Fourth quarter conventional same store NOI growth was up 4.2% over prior year. This is comprised of revenue growth of 1% and expense reductions of 4%. For the year, revenue was up 2.1% and expenses are down 0.1%, resulting in NOI growth of 3.5%. This is at the mid-point of our annual guidance.

The three components of the 1% growth in fourth quarter year-over-year same store revenue are as follows; 0.6% in rate was the blend of 1.7% higher renewal rates, somewhat offset by 1.1% lower new lease transaction rates; 0.2% in higher occupancy at 94.7%; and 0.2% higher utility reimbursements and other income.

Sustainable expense reductions were achieved by lowering churn [ph] costs, contract services, repairs and maintenance, marketing expenses, payroll, and insurance costs. These were partially offset by higher utilities and taxes. As shown on Schedule 6, the year-over-year results for the fourth quarter in our top 20 target markets break down as follows; Northeast revenue grew at 1.9%, Pacific grew at 0.3%, and the Sunbelt grew at 0.3%. Florida revenue was down 1.3%, and Chicago was down 0.8%.

Our affordable properties as well as our conventional, non-same store portfolio, which is comprised of both acquisitions and redevelopment properties, performed as expected for the year. Our customer experience scores continued to perform above our targeted 90% plus range. Team member turnover continues its positive trend. Total annualized site team member turnover was down 4.4% year-over-year to an annualized turnover rate of 33.1%.

Looking forward, 2009 indicators changed dramatically in the fourth quarter of last year. Growing unemployment levels continue to be our main concern. However, in January, we have seen year-over-year increases in traffic shopping properties in many markets. We do, however, see significant pressure on rate as renewal customers are showing a willingness to move as they search for a better deal before renewing.

With that said, we anticipate continuation of rising unemployment will impact rental demand in the coming months. Markets of particular concern will remain where the housing bubble was pronounced and the shadow supply remains high; Florida, Phoenix, Los Angeles, and Orange County. However, Boston, Washington DC, and Texas are showing some relative strength.

In this environment, we will remain highly focused on two main objectives, increased retention of our existing resident base primarily through additional and more focused communication and service touch points, and cost containment through continued aggressive vendor management and renegotiation of service contracts with service providers who are eager to stay ahead of the business downturn.

For 2009, our expectations for same store NOI growth range from 0 to a minus 5%, reflecting revenue growth of 0 to a minus 2.5%, and expense growth of 0 to 2%. For the first quarter of 2009, we anticipate NOI growth of a negative 1% to 2%.

Now for an update on redevelopment activity for 2008; during the fourth quarter we invested $48 million and completed work – completed all work on six communities. For all of 2008, we invested $243 million and completed work on 13 communities. In the fourth quarter, we produced approximately 600 units and leased nearly the same.

For all of 2008, we completed approximately 4800 units and leased nearly 5000. We have made a substantial investment in the portfolio with redevelopment over the past several years, and expect to see the financial benefits as we work through second-generation leases within these communities.

As we have identified in prior calls, one of the benefits of redevelopment program is the ability to adjust spending, up or down, based upon either operating results or changes in the economy. As the financial markets deteriorated in the fourth quarter of 2008, we prepared to reduce our investment goals and related staffing for 2009.

We are forecasting an investment of $50 million to $75 million in 2009, the majority of which was to complete existing projects. In addition to conventional, we completed $118 million of redevelopment work on tax credit properties in 2008. We are currently forecasting additional work of $30 million to $45 million in 2009.

I will now turn it over to David.

David Robertson

Thanks, Tim. I will cover the following subjects today. First, property sales for the fourth quarter and full year 2008; second, the degree to which the sales have improved the quality of our conventional portfolio; third, our expected top results in 2009; and I will conclude with our results and expectations for the investment management business.

First, property sales; as part of our ongoing strategy to upgrade the quality of our portfolio and generate cash to fund de-leveraging and investment activities, we sold approximately $800 million of properties in the fourth quarter generating approximately $300 million of net proceeds. Sales included 49 conventional properties totaling approximately 12,000 units and 16 affordable properties totaling 2,000 units. Of the conventional properties sold, 34 were located in non-target markets and 15 were in inferior locations within our target markets including Jacksonville, Orlando, Tampa, Atlanta, suburban Philadelphia, Dallas, and Houston.

As Terry mentioned, full-year 2008 property sales total $2.6 billion and generated more than $1 billion in cash proceeds. These sales had a very positive impact on the quality of our portfolio. Of the 130 conventional properties sold, 81 were in non-target markets and 49 were inferior locations within target markets. 31 of the properties sold were in Michigan, Indiana, and Ohio; and we sold an additional five Indiana properties in January. As a result, we now have just 19 properties remaining in these Midwestern markets.

We exited 6 markets during the year including Las Vegas, Salt Lake City, Hartford, Columbus, Tucson, and Charleston, South Carolina. Importantly, these sales increased the allocation of capital to our target markets from 80% in December 2007 to 85% in December 2008; and rents in our retained conventional portfolio increased 11% from an average of $931 in the fourth quarter of 2007 to $1032 in the fourth quarter of 2008.

Looking forward, we plan to sell most of the $1.5 billion dollar balance of conventional properties located outside of our target markets as well as a significant number of affordable properties with the majority of these sales occurring in 2009 if market conditions allow.

Based on activities so far this year, we expect that a majority of our buyers will continue to be local operators. However, we are seeing an increase in demand from larger regional and national operators targeting portfolios $100 million to $300 million in size. For example, we completed a $250 million, 17 property portfolio sale in the fourth quarter.

Finally the investment management business; income net of tax totaled $9 million for the fourth quarter and $77 million for the year, which was within the guidance provided last quarter. This represents an increase of $17 million from 2007, which was largely due to a $30 million year-over-year increase in promote income, offset in part by a $10 million decline in tax credit syndication fees.

Looking forward to 2009, we expect investment management revenue to be $40 million to $44 million below 2008 as promote income returns to historical levels, and we continue to experience weakness in the tax credit syndication business. However, we have offset the reduced revenue in part by adjusting the size of a team in anticipation of lower transactional activity, reducing expenses by $5 million in 2009. As a result, we expect full-year investment management income net of taxes to be in the range of $36 million to $40 million in 2009 with about half of this amount recurring and basically in the bank [ph] and the balance spread across a large number of potential transactions.

Now, I will now turn the call over to Tom to review our financial performance. Tom.

Tom Herzog

Thank you, David. There are several items that I’ll cover today. First, fourth quarter and full year 2008 results, excluding non-recurring charges were in line with guidance. Second, we initiated an organizational restructuring during the fourth quarter that resulted in a charge to FFO in 2008 and will significantly reduce costs going forward. Third, Aimco’s liquidity and balance sheet are in sound condition to weather what we expect to be challenging year for our industry and the economy as a whole. Fourth, I will address the adjustment to Aimco’s regular dividend. And finally, I will provide first quarter and full year 2009 guidance.

Please note that all prior period share and per share amounts reported in our earnings release, supplemental schedules, and those I will discuss on this call have been retroactively adjusted for the issuance of common stock in connection with the special dividends paid during 2008 and on January 29, 2009.

Fourth quarter and full year 2008 results; Q4 FFO before operating, real estate impairment charges, and net preferred redemption gains was negative $0.21 per share. Included in our results is $0.77 of non-recurring charges net of taxes. These non-recurring charges include $0.49 per share related to an impairment of Aimco’s Lincoln Place, and Treetops properties, which were written down by approximately 40% and 15% respectively, as a result of the decline in land values and the expected time in Aimco’s redevelopment plan.

$0.08 per share in connection with the impairment of our investment in Casden Properties LLC, an entity organized to buy, re-entitle, and develop land parcels in southern California. $0.16 per share in restructuring charges, which I will discuss further in a moment; and $0.04 in other fourth quarter non-recurring charges. Excluding these non-recurring charges, fourth quarter FFO was $.56 per share, which was $0.01 below the midpoint of guidance of $0.57 per share.

Full year 2008 FFO per share, before the effect of the fourth quarter non-recurring charges, was $2.36 per share which was at the midpoint of guidance we provided last quarter and consistent with the midpoint of guidance we provided one year ago.

Restructuring and general and administrative reductions. In connection with the 2008 property sales and expected reduction in redevelopment and transactional activities, Aimco initiated an organizational restructuring during the fourth quarter that resulted in a total charge of $22.8 million or $20.5 million net of tax. The charge included costs related to severance, abandoned office space, discontinued redevelopment projects, and terminated acquisitions.

As a result of the restructuring, Aimco plans to complete the reduction of approximately 300 jobs on or before March 1, 2009. Additional adjustments may be made in 2009 as we continue to adjust our cost structure relative to the size of our portfolio. Staffing levels on site at Aimco’s communities have not been affected by the restructuring.

Turning now to our debt, liquidity, and balance sheet. Aimco continues to focus on maintaining a sound balance sheet with balanced sources and uses of cash, ample liquidity, manageable non-recourse property debt maturities, and coverage ratios adequate to satisfy bank debt covenants.

We expect to balance annual sources and uses of cash as a result of reduced redevelopment, investment, and capital expenditures; organizational restructuring resulting in reduced costs; and a dividend adjustment, which I will discuss further in a moment.

The weighted average maturity of Aimco’s non-recourse property debt is 9.6 years with approximately 12% of Aimco’s share of outstanding loans maturing over the next three years as follows; $274 million across eight loans maturing in 2009, $280 million across 20 loans maturing in 2010, and $102 million across 10 loans maturing in 2011. For the total of 38 loans representing $656 million, Aimco expects to accelerate the refinancing of a number of these loans in the first-half of 2009.

With regard to corporate debt, Aimco fully prepaid $75 million of term debt during the fourth quarter, which was due in September 2009. The remainder of all of our term debt is due in March of 2011. Last week we prepaid $50 million of that term debt lowering the balance due to $350 million. We expect to reduce our corporate debt obligations further by using the proceeds from properties sales and retained cash from operations.

Aimco’s debt service coverage and fixed charge coverage ratios were 1.62 and 1.42 times at year-end respectively. Aimco expects to maintain such coverages in excess of bank compliance levels of 1.50 and 1.30 times. Our $635 million revolving credit facility matures in May 2010 and has no outstanding balance. Net of letters of credit of $56 million Aimco has available capacity of 579 million on this facility.

And finally Aimco had $72 million available capacity on our non-recourse secured credit facility, which inclusive of two one-year extension options, matures in October 2012.

With regard to Aimco’s regular dividend, as we announced in our earnings release this morning, Aimco intends to adjust regular dividend from $0.60 per share per quarter to $0.25 per share per quarter for an annual amount of $1.0 per share, effective with the dividend expected to be paid in the second quarter of 2009. This adjustment is in response to current market conditions and Aimco’s decision to retain cash for deleveraging and accretive investment activities. This adjustment allows Aimco to retain approximately $43 million in cash on a quarterly basis or more than $170 million annually.

Now turning to guidance, full year 2009 FFO is projected to range from $1.65 to $1.95 per share and includes the following assumptions; same-store year-over-year NOI flat to negative 5% based on flat to negative 2.5% revenue, occupancy of 93.5% to 94.5%, and operating expense growth of 0 to 2%, investment management income net of tax of $36 million to $40 million approximately half of which is expected to be earned from recurrent asset management activities and deferred tax credit income.

Overhead expenses are expected to approximate $132 million and are comprised of corporate G&A expenses of approximately $80 million, property management expenses of approximately $36 million, and investment management expenses of approximately $16 million. As to redevelopment and capital expenditures, we expect to invest $50 million to $75 million in conventional redevelopment projects, $30 million to $45 million in tax credit redevelopment projects and CR and CI are estimated at 800 and 400 per door respectively.

At the midpoint of guidance, full year of 2009 FFO is projected to be $0.56 per share lower than 2008. The primary drivers of this decrease include; $0.09 due to lower same-store results, $0.33 decline in investment management revenue primarily as a result of lower promoting income, $0.08 reduced interest income due to lower rates, and $0.31 due to several items, most significantly a decline in FFO associated with the 2008 sales of non-core assets versus the use of proceeds, which included repurchases of stock, delevering of the balance sheet, and other corporate uses. These negative variances are offset by $0.25 reduction in corporate overhead expenses.

First-quarter [ph] 2009 FFO is expected to range from $0.30 to $0.36 per share or $0.18 per share less than first-quarter 2008, primarily as a result of $0.01 due to the same-store NOI decline of 1% to 2%, $0.02 due to lower investment management income net of tax, $0.03 due to lower investment income, $0.14 due to the diluted impact of sales and corresponding use of proceeds, and several other items including corporate overhead savings that led to a positive variance of $0.02.

Our guidance does not contemplate potential additional asset sales, the corresponding use of proceeds, or the accretive or dilutive impact to FFO.

We will now open up the call for questions. I would ask you to please limit your questions to 2 per time in the queue. Operator, I will turn it over to you for the first question.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from David Bragg of Bank of America. Please go ahead.

David Bragg – Bank of America

Yes, thank you. Could you talk a little bit more about the dividend decision and your thoughts on the cash versus stock opportunity?

Terry Considine

Well, David the dividend decision was based on our desire to retain cash for the purposes that we have described, while also providing certain cash returns to our shareholders. We have used our special dividends in the past as a way solely to provide dividends, pay deductions to avoid double taxation at the REIT level, as we talked about, I know, a number of times. But a reduction to a dollar is really based on – really a marker in amounts that allows us to retain a certain amount of cash yet provide a return to our shareholders.

David Bragg – Bank of America

Great. And how would you think about the idea of the comments, applying a certain amount of that to stock as many other REITs or a few other REITs have done?

Terry Considine

Well, my take on that is we view the special dividend as a way solely to take care of our tax objectives. As we are selling assets and those sales produced gains, it causes our taxable income to exceed the amount of cash dividends paid. So for us the special dividend is solely to take care of a tax issue, so that we avoid the double taxation. And as far as us utilizing the special dividend to retain a higher total dividend that is not our objective. We want our normal recurring cash dividend to represent a normal dividend and use of a stock dividend solely for the tax purposes that I have described and that I will continue to do it.

David Bragg – Bank of America

Okay, just shifting over to operations then, could you talk about the job loss assumptions that drive your flat to negative 2.5% revenue growth outlook?

Terry Considine

Tim.

Tim Beaudin

Look, I think that we – there has been lot of forecasts out there as far as where the job growth is going to go and Tony and Rob Walker spend a lot of time market-to-market, specifically going through each of our properties, getting comfortable with what our starting point was, coming into 2009 and what our opportunity was. And so we have been very specific on that. Obviously, assumptions are made about where we thought the unemployment rate was going to be for the year. If it deteriorates beyond that, which some people think it may do that could prove to be more challenging. Tony, have you anything you want to add to that?

Tony Dialto

Just that, we only know what we currently know in terms of what we are seeing. There is quite a bit of information out there about where unemployment rates will go down across most markets but in many places right now we are actually seeing some demand in activity that is above the last year's level. There are rate pressures, but our anticipation is that it could get worse but at the moment it is sufficiently bad and we plan for it.

David Bragg – Bank of America

Okay, thanks.

Operator

Thank you. Our next question comes from Rich Anderson of BMO Capital Markets.

Rich Anderson – BMO Capital Markets

Hi, good afternoon and good morning.

Terry Considine

Hi, Rich.

Rich Anderson – BMO Capital Markets

I guess I will ask the (inaudible) in the press release question, I do appreciate that the disclosure on the 33% reduction to Terry's comp, but I guess I have two questions; first can you first define for me what target comp is, and second, and again without any pre-judgment can you talk about your thought process for senior management compensation in light of the underperformance of the stock over the past year.

Terry Considine

Rich, Terry, I will be happy to address that. We address comp in a systematic way by looking at prices paid for similar positions in the market, and at the beginning of each year we set targets of performance. And so in 2008, we had a dozen KPI, key performance indicators that were connected to same-store results that were connected to budget achievements that were connected to property sales, volumes that were connected to team engagement, customer satisfaction, and so forth. And so at the end of that year there is a fairly objective calculation of what was achieved and there is a subjective review by me of what other factors are to be considered. And, in general, we paid in 2008 about two-thirds of the variable comp that might have been earned with the 100% performance. As we started 2009, we lowered the potential by about a third to reflect the fact that the company has smaller, that the times are more difficult, and so forth and that variable comp, which is a very significant factor in executive compensation depending on the position is wholly dependent upon the results to be achieved in 2009, and it is based again on a series of objective key performance indicators.

Rich Anderson – BMO Capital Markets

Okay, and then – thank you for that, I appreciate that. The follow-up question is maybe for Tom or anybody, but can you think of any combination of, I guess, realistic event when you consider the staggered nature of your debt maturities and importantly the non-recourse nature of your debt that would require the company to ever have to consider a forced liquidation scenario.

Tom Herzog

Rich, I will take this, this is Tom. Good question. When we look at – at the corporate debt that is coming, I will just go through the pieces. The corporate debt that is coming due, we have got $350 million coming due in March of 2011, and we have a plan around retirement of that debt that was described. When we look at our property debt, we have got this sufficiently laddered with a long-term average maturity of whatever was 9.5 years or so. We have got $275 million coming; just rough numbers, now just $275 million in ‘09, $275 million in ‘10 and these are AIV numbers, and 100 in ’11. We are seeking to accelerate refinancing of the property debt to the extent that that is possible and we are optimistic that we will get some of that done. So, as we look forward to the next three years or so, we feel quite good about our liquidity. But this may be a time when having a significant amount of non-recourse property debt is working quite to our favor and certainly with the laddered maturities, provides us a great deal of flexibility. And if we do have some one-off loans that are difficult to refinance then, of course, because they are non-recourse and they are spread across a number of different loans, I think I've mentioned 38 loans over the next three years that provides us the opportunity to sit down with those individual lenders and work through those. So, we are not feeling a great deal of pressure in respect to (inaudible). We are taking it very seriously and taking actions that we consider prudent, but I think we've got a good game plan around maintaining liquidity.

Rich Anderson – BMO Capital Markets

Good.

Terry Considine

At the same time, one other point that I think that is important is we have taken great actions to make sure that our sources and uses of cash are balanced and, of course, who knows what the future holds, but with the things that we had mentioned earlier in the prepared remarks have helped us balance out our sources and uses, which is quite important as you can well imagine and we feel good about that as well.

Rich Anderson – BMO Capital Markets

Okay, great. Thanks very much.

Terry Considine

You bet.

Operator

Thank you. Our next question comes from Michael Bowman of Citigroup. Please go ahead.

David Tody – Citigroup

Hi, guys. This is David Tody speaking.

Terry Considine

Hi, David.

David Tody – Citigroup

My first question has to do with the impairment in Casden, can we take this to mean that property or land values or your assessment of land values in California have fallen below 2002 levels, and could you provide a little bit of color around your thinking on that?

Terry Considine

Well, let me touch on that bit, not necessarily below 2002 values. You know, when we entered into that arrangement we had assumed a certain value in those assets and over the last period of years there have been a number of soft costs involved in continuing to entitle and work those assets, and as a result, of course, those costs are capitalized by that joint-venture and probably values have taken a round-trip from that point in time, when we assessed the value of our interest in the entity it, in our view, required an impairment, which we took. So, it isn't necessarily the values have dropped since 2002 but based on the book value to date and our assessment of the recoverability of that investment, we determined it prudent to take that write-down.

Michael Bowman – Citigroup

It is Michael Bowman speaking. I just wanted to come back to the comp for a second, was there any thought, Terry maybe even at your level or even at the senior levels of management to, in terms of the incentive, the bonus part of the compensation to be fully tied to both absolute and relative out performance to your peers to sort of align the compensation with investors?

Terry Considine

Mike this is Terry. I would say that there is a lot of alignment provided by shareholding, and first, I own several million shares of the company and so when people talk about the paying experience by the shareholders, I understand that. That is also true of the entire management team. We have very substantial equity holdings across the senior management and that provides significant alignment. A fair amount of the comp is paid in equity, which adds to that alignment. So – but we have a balanced approach rather than tie all of it to the market, which is as we have experienced, subject to certain volatility and even manic behavior.

We also tie a lot of it to, as I say, keep performance indicators that are internal to the company that are along the lines of budget achievement, property operations, plan achievements, customer satisfaction, team development and engagement, property sales volumes. This year there will certainly be one around property debt reduction and term debt reduction, cash flow generated and internal things like that.

Michael Bowman – Citigroup

Is stock price or performance one of the factors in the mix?

Terry Considine

No, not on the internal factors. The connection to stock price is directly to receiving compensation in equity, which is a very direct connection and in required shareholdings, which is another direct reduction.

Michael Bowman – Citigroup

But the factor in determining the bonus payments, there is no benchmark and no factor in the matrix to deal with –

Terry Considine

There are, there is a clear connection to shareholder returns resulting from shares held by management and by payment of compensation over three or four years and in shares. So there is a complete connection there. Independently it is providing a balance. There is a calculation based on plan achievement.

Michael Bowman – Citigroup

Okay. Thank you.

Terry Considine

Next question please.

Operator

Thank you. Our next question is from Rob Stevenson of Fox-Pitt Kelton. Please go ahead.

Rob Stevenson – Fox-Pitt Kelton

Good afternoon guys.

Terry Considine

Hi, Rob.

Rob Stevenson – Fox-Pitt Kelton

Maybe this is for you Tom, but when you think about the planned $50 million to $75 million of redevelopment spending this year, what are you guys assuming the return on that winds up being and, I mean, how do you sort of balance that versus taking not doing that and taking the balance of that money and doing a stock buyback with your stock yielding on the reduced dividend 15% now plus whatever the implied cap rate is. It seems like, you know, buying back $7 million to $11 million shares with that money might be a better return, both for the company and for shareholders.

Tom Herzog

That's a good point but there is a portion of that 50 to 75, which represents completion of in process projects where it makes sense to finish those out. As far as balancing that against share repurchase, there are all kinds of different alternatives that we would have to invest excess proceeds and certainly share repurchases are one that we would consider after we have taken care of our leverage in a way that we feel appropriate. As to the targeted returns on redevelopment, I'll turn that to Tim to address that.

Tim Beaudin

I think, you know, we continue to work towards on those projects completing on it, is that we still hope to be in 7.5% to 8.5% range, I think to Tom's point on a number of those projects because of the way that we were – we had financing tied directly to getting the projects completed. They were self-funding with the lenders. We need to finish some of those to take the money back of the table to – that was part of that transaction and also to meet our obligations to the lenders. So, we're going to continue to finish those projects out. To your point though there are a couple of the existing working in process projects that we probably will discontinue. We won't discontinue it, finishing all the common areas. We will probably not get completed on some of those or some of the interior units where we don't have the materials ordered or we haven't already paid for them. So we're doing some what you said but we also have some obligations we need to complete and the couple of projects are just, you know, they are in three yard line and we're going to take them the rest of the way.

Rob Stevenson – Fox-Pitt Kelton

Okay. Then as a follow-up Tim, can you talk about the couple of your core markets where you expect to have the weakest results in ‘09 and which ones are the couple that you expect of the relatively strongest ones?

Terry Considine

I am going to let Tony speak to that specifically. So, let us have Tony Dialto.

Tony Dialto

‘09 is currently shaping up pretty similar to how we finished ‘08, you know, we still see significant challenges in Florida and Arizona and in LA, and we see at the moment opportunities in the Northeast and Boston, Washington, Philadelphia. Texas remains frankly fairly strong relatively speaking and again, you know, anything of course is possible, you know, rate pressure will probably come of course the entire portfolio. I've seen some – I have seen a lot written about and frankly publicly about, you know, renewals and deals and we do not have to resort so for to any type of concessions on renewals. And so, I think, relatively speaking the way we finished the year in the markets that were strong even though they may be weakening of bit were simply the stronger markets and the ones we struggle in will remain.

Rob Stevenson – Fox-Pitt Kelton

All right, thanks guys.

Terry Considine

Thank you [ph].

Operator

Thank you. Our next question is from Michelle Ko of UBS. Please go ahead.

Michelle Ko – UBS

Hi, I was wondering if you could give us a sense for what the cap rates were for the $800 million in asset sales in 4Q. Maybe if you could give us the weighted average for all of this, all the assets, or maybe a high and low range to give us a sense for what the A, B or C asset sold for.

Terry Considine

Yes, David.

David Robertson

Yes, I think it is listed in the schedule, and if you – maybe we just have the free cash flow yields. I think the free cash flow yield blended for the quarter was about 6.25 that equates to a cap rate in kind of the 7.1, 7.2 range. If you break that out between conventional and affordable, you're looking at a 5.30 cap rate on the affordable assets and 7.70 cap rate on the conventional assets. The reason the affordable cap rate is so low is that those properties have embedded opportunities to increase rents over time. Kind of some color on the 7.70 cap rate. It is made up of a portfolio transaction that traded right about that number in October and then a number of sales in November/December which traded at a similar number. The markets, you know, there is a big range. We are selling, as I mentioned, we are selling out of secondary markets, where you are going to see cap rates as high as kind of in the 8s, some of the stronger markets in the low 7s. I think the important point is to think about how pricing is being set today because that continues to evolve. Today, buyers are really looking at their levered year one cash-on-cash returns, and for higher quality assets and better markets, you are looking at year one levered cash-on-cash returns in kind of the high-single digits. As you go into secondary markets that moves into low-double digits. And as you get into tertiary markets, c properties, the returns get very high.

Michelle Ko – UBS

Okay. Also in terms of, you know, you made some commentary about renewals and, you know, is getting more difficult and people are willing to move if they see you know, lower rents somewhere else. How you have been able, you know, not to give confessions so far?

Terry Considine

Tony.

Tony Dialto

Thanks. Well so far that is true in terms of you have seen people shop quite a bit more, but the fact we're renewing at about the same rate that we anticipated and expected from year-over-year basis. So at the moment, we are not under that pressure other than it is being talked about so much in the press that it is generating the question. That may come to pass down the road, but at the moment we seem to be avoiding.

Michelle Ko – UBS

Are there some markets where, you know, you're getting more pressure on –

Tony Dialto

You know, the markets that struggle Florida, Phoenix, LA, and it is on a property-by-property basis depending on, you know, even in some of the better geographies depending on your supply and demand, but I expect that, you know, we'll see as the year unfolds whether that becomes more dramatic or not.

Michelle Ko – UBS

Okay, great. Thank you.

Terry Considine

Thank you.

Operator

Thank you. Our next question comes from Jay Haberman of Goldman Sachs. Please go ahead.

Jay Haberman – Goldman Sachs

Hi guys, how are you?

Terry Considine

Hi, Jay.

Jay Haberman – Goldman Sachs

Tom, just to clarify on your comment on the sustainability of the dividend, you know, does this take into account the additional asset sales that you are planning over the next couple of years. It sounds like you are going to try to ramp it up a bit in ’09. I'm just wondering if that comment still holds.

Tom Herzog

Well, Jay, the $0.25 a share is the ongoing quarterly cash dividend that we put in place. If we have additional sales in 2009, which we expect that we will, at some point a special dividend may be required again to trade the dividend pay deduction necessary not to pay tax and as there are special dividends as you guys understand the math, those also then start to increase the dividend yield over time. So, obviously over time any company that is paying special dividends that causes a rising dividend yield, then one is going to have to go back and revisit that from time to time. But for now we have reduced the dividend to a rate that leaves us room where at the current date $1.0 share per year feels like the right place to be.

Jay Haberman – Goldman Sachs

Okay. And just back to the question on the asset sales. I know it has sort of been referenced to the last quarter but could you comment on pricing your expectations as you look to sales in 2009. How much has the market change, I guess, quarter-over-quarter?

Terry Considine

David.

David Robertson

Obviously we are at the very beginning of the quarter and so it is impossible to say how much they are going to change. I will say that we continue to see pressure on pricing. That being said I mentioned there are a lot of active buyers. We continue to be able to transact. I think the big wild part is the cost of debt as long as we have a stable functioning mortgage market with all rates in the mid 6s that serves as a kind of a stabilizing force on pricing because, as I mentioned, buyers today are really looking at year-one cash on cash returns. So as long as they have stable debt that kind of leads to relatively stable pricing.

Jay Haberman – Goldman Sachs

And you mentioned portfolio deals as well. Can you give us some sense of pricing there, perhaps versus one-off?

Terry Considine

Yes. I think portfolio deals – look there are a lot of portfolio buyers that would love to get 10% discount or 15% discounts. That is why you don't see a whole lot of them happen. I think that my comments would indicate that I think the larger buyers are beginning to be more realistic about pricing. I think most sellers are willing to take some discount on a portfolio sales given the simpler execution, lower transaction costs and related items. I think the portfolio transactions that get done are going to see discounts of probably 5% versus where you would have one-off trades.

Jay Haberman – Goldman Sachs

Okay. And there was also a comment made about move outs to single family that should remain low in this cycle. I'm just curious with all the economic stimulus and obviously focus on homeowners, you know, how you could see the change as you move into the balance of the year, second half of the year?

Terry Considine

Tim.

Tim Beaudin

Well, I think as the – there have been a lot of discussions I heard this morning where they are talking about giving a tax credit for that area. I think from our perspective, the demographics still remain good for our target customers as far as the number of kids in high school, in college, on record numbers and that tends to be crowd we attract. So, we are very focused on that. I think the professional management of properties still comes into play. It is not as easy, probably put your finger on that one but there are number of people, you know, there is a lot of this grey market out there, but you know getting your sink unplugged is not quite as easy as it is, probably when it is at a professionally managed property. So, you know there is going to the pressure there but you know, we think that we'll do fine.

Jay Haberman – Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question comes from Anthony Paolone of JPMorgan. Please go ahead.

Anthony Paolone – JPMorgan

Okay. Thank you. Tom the dollar dividend, how does that compare to what you think your tax might be or how are you planning that?

Tom Herzog

Tony, the dollar dividend gives us room to have a certain amount of help without having to consider a special dividend or ordinary taxable income is lower than that. So it gives us some room there.

Anthony Paolone – JPMorgan

Okay. And then you know, as we get into page 16 and you showed FFO for 2008, just trying to tie it with the midpoint sale of your guidance for ‘09 just on an apples to apples basis. So if I look at, I think, the dollar – is it the $1.64, I guess I should be looking at, ex the charges and so forth and inclusive of all the shares.

Tom Herzog

Just trying to catch up here, Tony. The $1.64 is the total amount of FFO for the year before the operating real estate impairment losses based on the new share accounts included in the January 29th dividend.

Anthony Paolone – JPMorgan

I guess, just trying to think apples to apples with either the $1.89 or the $1.64 relative to the midpoint of your guidance. It doesn't seem like much of a decline, yet your assets management income is coming down. Your NOI is going to be off a bit and just trying to tie that together.

Terry Considine

I got you. What you're saying is when I take our 2009 guidance and compare it to the 2008 actual and tell you the change.

Anthony Paolone – JPMorgan

Yes.

Terry Considine

Yes, I can do that. Let me walk it down. We're going from, let me just get my variance here for just a moment. We are coming on a guidance of $1.80 at the midpoint and we are at absent the one-timers. I know, this gets confusing. Let me walk you through this, if I may. We are showing the $1.64, which is the FFO after adding back the operating impairments. Then we have to add – then we are adding back the adjustment for the one-timers, impairment of Lincoln Place and Casden Properties and Treetops, the restructuring charge. And then we have about $0.04 of other one-timers that I'm glad to describe if you are interested in that detail. If I add all those back that comes to $0.77 a share, put together $2.36 absent the one-timer. So what you're really doing is you are comparing $2.36 in 2008 to $1.80 in guidance in 2009. That is a $0.56 decline. I will walk you the pieces, $0.09 of that is due to in anticipatory reduction of same-store sales at the midpoint and that is at a negative 2.5%. We have got conventional retail. I got – I am going to give you all the pieces to see you got it all in case you are modeling to it. We got $0.07 due to a reduction in re-debt rate. That is a positive number. We have the total transactional in asset management revenue of a reduction of $.33. We have interest income, which is a decline $0.08 due to the reduction in rates. We have interest expense of a decline of that guide for $0.06 and that is due to reduce cap interest and higher balances in part due to the redevelopment expenditures that have been made. We have the tropical storm Fay and Ike of $0.04. That is a good guide that we have add back that was a bad guide of course in 2008. We have $0.36 due to sales dilution and that is comparing the FFO yield on the assets we sold against the use of proceeds across a variety of different areas as we sold non-core assets, we delivered, we repurchased shares, and we had a number of other corporate uses. Feeling good about where we repositioned the portfolio, but had a dilutive effect. And then we have $0.25 good guide for the various components of overhead including G&A. If you add all that stuff up that brings you back to $1.80 a share going from $2.36 a share on a normalized basis, which is the $0.56 variance. Probably more detail than you are asking for.

Anthony Paolone – JPMorgan

That is super helpful. Thank you very much.

Terry Considine

You bet.

Operator

Thank you. Our next question is from Fred Taylor of MJX Asset Management. Please go ahead.

Fred Taylor – MJX Asset Management

Yes. Thank you for walking us through the debt schedule, on the $50 million repayment of the term loan, was that a pro rata part pay down or did you purchase in the open market?

Terry Considine

Now we – that was pro rata pay down.

Fred Taylor – MJX Asset Management

I just didn't see it come through. Okay, I'll double check that. And then on the – both for you on the property debt as well sort of others out there buying properties from you, you mentioned you are talking to existing lenders. Do you tend to roll over new with existing lenders and who do they tend to be, banks, insurance companies, and is the tax-exempt financing markets still there for you as well as those who want to purchase from you.

Terry Considine

Well, I will touch on that briefly, I am going to pass it to David, but certainly there is a certain amount of debt that is assumed in the current market.

Fred Taylor – MJX Asset Management

Right.

Terry Considine

A lot of financing, of course, is occurring through Freddie and Fannie, but not all of it.

Fred Taylor – MJX Asset Management

So when you sell, they are assuming the debt on the property.

Terry Considine

To a certain percentage of that market. David, why don’t I turn it to you.

David Robertson

Yes, I'll add a little bit to that that we have a fair amount of attractive debt on properties that we are selling.

Fred Taylor – MJX Asset Management

Sure.

David Robertson

So it is going to the property by property whether or not a buyer decides to assume the debt, and it is going to be a function of the amount of leverage that is currently on the property as well as the rate, and when it is attractive we will, you know, those buyers will try to assume the debt.

Fred Taylor – MJX Asset Management

Got it.

David Robertson

And most of our debt is with the agencies, but you know, the number of the insurance companies and community banks are active and are willing to roll over the debt as well.

Fred Taylor – MJX Asset Management

Okay. So you are pretty much going back to existing long-term relationship lenders, who have known you and know the property.

David Robertson

Yes, and I will say that most of our buyers have similar long-standing established relationships.

Fred Taylor – MJX Asset Management

Okay. Thank you.

Operator

Thank you. Our next question is from Steve Swett of KBW. Please go ahead.

Steve Swett – KBW

Thanks. Most of my questions have been answered already, but Tom in talking to the lenders about rolling over some of that secured debt, I think you said early are there costs related to doing that, such as prepayment penalties or are you just looking at instances where the rates may be similar to what the new rates would be or lenders that would be amendable.

Terry Considine

Well Steve, good question. We are working with the lenders to avoid prepayment penalties as we would go through that process. Sometimes, we might incur some but in general we are negotiating our way through that.

Steve Swett – KBW

Okay. And then my second question, the $33 million in overhead spending, is that associated with the three buckets you identified, the G&A, the property management, and the investment management.

Terry Considine

Yes it is.

Steve Swett – KBW

Okay. Thanks.

Terry Considine

Yes.

Operator

Thank you. Our next question is from John Young [ph] of Evergreen Group [ph]. Please go ahead.

John Young – Evergreen Group

Thank you. I wonder if you could give us a little bit more information about what you're seeing in the last month or six weeks in the refinance markets.

Terry Considine

Last month in six weeks and refinance, let me speak to the last quarter. During the last quarter, we noted significant refinancings at amounts that exceeded the amount of the debt coming due similar to what we've seen for the last few years. Underwriting standards are more stringent but certainly the debt markets are still open. Freddie and Fannie are still very much in business with us and during the month of January, we have continued to move forward on numerous different loans. We have not closed as much in the last month because we loaded up and completed our refis at year end which is typical, and we are rebuilding the pipeline of our refis right now.

Operator

Thank you. Our next question is from Alexander Goldfarb of Sandler O`Neill. Please go ahead.

Alexander Goldfarb – Sandler O`Neill

Yes. Hi, good afternoon.

Terry Considine

Hi, Alex.

Alexander Goldfarb – Sandler O`Neill

Just going to Lincoln Place, if first I can, can you just on the write down is it – was that more capitalized cost like litigation and soft cost like that or more land values that was driving the write downs?

Terry Considine

Alex, I am on a view Lincoln Place this way is that you acquire it for a certain price. There are hard and soft costs that can go into an asset that create the total basis for that asset and then based on our plans we need to look at the recoverability of that asset based on the carrying amount that exists today versus where land has gone in Southern California during the past, especially the past four months or so, along with our plans and timing, and especially our timing for redevelopment that has resulted in us determining that an impairment is proper on that asset. So, I don't differentiate the components of it and think in terms of impairing one component or another.

Alexander Goldfarb – Sandler O`Neill

Okay. And then as far as the future for the asset, one are you continuing to capitalize on these redevelopment projects like Lincoln and Treetops, are you expand things; and then the second part, just on Lincoln, in particular, what are your thoughts for this property, it is still in litigation, is it – can you go back to the town, is it something that you had looked to, you know, sell if the market were to firm up where buyers would be willing to pay for a piece of land that big.

Terry Considine

I will take the first part of that question and I am going to turn to Miles Cortez, who has been working on the Lincoln Place field. The capitalization of interest and taxes and insurance, the answer is yes. We would continue to capitalize it as required by GAAP. If we are still undergoing procedures necessary to get the asset ready for its intended purpose, which we are. So the answer is yes, but on the reduced carrying amount of the asset. As to our future plans for the asset, Miles let me turn that to you.

Miles Cortez

Hi, Alex. We are in the preliminary stages of the revised development plan that contemplate in this condition on a resolution of the litigation with the former tenants and an agreement with the City of Los Angeles and discussions are ongoing with both of them right now, in fact we will be participating in their court-ordered settlement conference in a couple of weeks.

Alexander Goldfarb – Sandler O`Neill

Thank you.

Terry Considine

You bet.

Operator

Thank you. Our next question comes from Connor Fannuity [ph] of Deutsche Bank. Please go ahead.

Connor Fannuity – Deutsche Bank

I was wondering if you could quantify the size of your asset for special dividend in ’09 based of your estimate on asset sales.

Terry Considine

Yes. The estimate of the special dividend is solely a function of the gains on sales that result – that in conjunction with our ordinary income would exceed the amount of our total cash dividend.

Connor Fannuity – Deutsche Bank

Right, do you have any idea on an estimate on that or –

Terry Considine

The quantification of that at this point would not be possible. It depends on the success of our sales program of non-core assets and the gains generated by that.

Connor Fannuity – Deutsche Bank

Okay. Thanks.

Terry Considine

You bet. Next question.

Operator

Actually ladies and gentlemen, there are no further questions in the queue at this time. I would like to turn the call over to Mr. Terry Considine for any concluding remarks. Please proceed.

Terry Considine

Well, thank you and I thank you all for your interest in Aimco. Let me just close by saying that we recognize these are difficult times and we are trying to make hard and disciplined decisions to see that we weather this storm, and we look forward to happier times in the future. Thank you very much.

Operator

Thank you. This does conclude today's conference. At this time you may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Apartment Investment and Management Company Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts