Apartment Investment and Management Company Q1 2009 Earnings Call Transcript

Apartment Investment and Management Company (NYSE:AIV) Q1 2009 Earnings Call May 1, 2009 1:00 PM ET

Executives

Lisa Cohn – Executive Vice President, General Counsel, and Secretary
Terry Considine – Chief Executive Officer
Tim Beaudin – Chief Operating Officer
David Robertson – Chief Financial Officer
Tony Dialto – Executive Vice President, Property Operations

Analysts

David Tody – Citigroup
Rob Stevenson – Fox-Pitt Kelton
Jay Haberman – Goldman Sachs
Michael Salinsky – RBC Capital Markets
Bob Brown – Olympus Capital
Matthew Barnett – Jet Capital
Phil Wilhelm – UBS O’Connor
Steve Swett – KBW
Michael Lewis – JP Morgan
Andy McCulloch – Green Street Advisors
Rich Anderson – BMO Capital Markets

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009 Apartment Investment and Management Company conference call. (Operator instructions) Now I’d like to turn the call over to Lisa Cohn.

Lisa Cohn

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 may be 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 will review debt capital markets activity, investment management, first quarter financial results, and guidance for the second quarter and full year 2009; and Tony Dialto is also available for questions.

I will now turn the call to Terry Considine, our CEO.

Terry Considine

Thank you, Lisa, and thanks to all of you on this call for your interest in Aimco. The focus of this call is Aimco first quarter results, but because these are unsettled times I’d like to offer some general observations before turning the call over to my colleagues.

First, even in this historically difficult economy, apartments in comparison to most businesses are fairly stable. Today, both supply and demand are relatively predictable. In a quarter when GDP declined by 6.1%, Aimco same-store results year to year were slightly up due to the stable asset class as well as the hard work of Tim Beaudin, Tony Dialto, Rob Walker, and their teams.

Looking forward, we expect continuing pressures from the economy, and expect demand and revenue to decline gradually quarter to quarter for the next several quarters until job growth begins. We’ve made our plans with this mind and are working to mitigate bottomline erosion by improved execution.

Second, a special risk of this recession is refunding risk due to dysfunctional capital markets. Refunding risk is greatly reduced by Aimco policies that favor leverage that is non-recourse and long-term. About 85% of our leverage is property debt with a weighted average maturity of more than 9-1/2years, and more than 10% of our leverage is preferred stock which is perpetual and permanent capital. So on average, only about 4% of our leverage or about $200 to $300 million is subject to refunding in an average year. Even so, given market uncertainties, we have decided to refund in advance most property debt maturities through the end of 2011.

Patty Fielding has done excellent job in executing this plan, and David will report the details. I’ll just say that property debt markets are functioning, and we expect to be able to report on our next call that we’ve pre-funded most of our property debt maturities through 2011. Over the longer term, we’re comfortable with future refunding risks given that property income provides a 2 to 1 coverage of property interest expense, a ratio which increases with monthly principal amortization and which compares to say a 1-1/2 ratio on new loans.

Third, as a result, we see our refunding risk to be largely limited to the $350 million term loan which is about 5% of our total leverage and which is not due for almost two years. We plan to replay this debt from property sales proceeds. David Robertson, Harry Alcock, Lance Graber and their teams have sold $6.7 billion over the past 5 years, and we continue to be active sellers today with more than $600 million in gross proceeds now under contract. Pricing remains attractive to buyers who receive positive leverage from property interest rate that are below 6%.

Fourth, given the economic distress, David Robertson, Ernie Freedman, and I have looked again at our business model. We plan to continue our efforts of the past few years to reduce the complexity and risk of our business. For example, the number of our markets continues to be reduced so that today 85% of our conventional property net asset value is invested in just 20 markets, and more than 50% is invested is invested in coastal California, Washington DC, Boston, New York, Philadelphia, and Chicago. The quality of our properties continues to improve with average rents up more than 40% over the past 5 years. Transaction income continues to decline in importance. We expect it to be less than 10% of this year’s FFO. Our costs for G&A fall naturally as scale and complexity are reduced. We expect each of these trends, fewer markets, higher quality, lower transaction income, and lower G&A to continue.

Fifth, given the turmoil in capital markets, we’ve also reviewed our funding strategy. We plan to continue to fund our balance sheet with long-term non-recourse property debt and preferred stocks. Apartments are long-term assets, and we fix a large percentage of our capital cost with long-term and low-risk leverage. We expect our leverage including preferred stock to decline below 50% as property loans amortize. Over the longer term, inflation seems likely. History suggests that the economic costs of our long-dated perpetual leverage will be substantially reduced by inflation, which has averaged between 2.5 and 3% annually for the past two decades, and which many expect to increase with the recent substantial increase in federal obligations.

Sixth, we’ve also reviewed our dividend policy. We start with the conviction that cash dividends are a critical part of REIT shareholder returns. In setting the first quarter dividend, the Aimco board balanced cash return to shareholders and current profitability against redistribution requirements and early repayment of the term loan. The board settled on a first quarter dividend of $0.10, a rate roughly equal to re-taxable in order to retain cash to accelerate repayment of the term loan. The board reviews the dividend each quarter and will, I expect, adjust it up or down to provide shareholders a cash participation in the success of the business. If we are successful in making property sales, we’ll pay a special dividend based on the gain on sales.

In sum, while we recognize that the times are quite difficult, we have a plan. We’re sticking to it, and we’re focused on its execution. Now let’s turn to first quarter results. For a report on operations, I’d like to turn the call to Tim Beaudin.

Tim Beaudin

Aimco’s operation team had a solid quarter. Our focus on a more cost efficient and effective operating organization continues to yield savings somewhat mitigating a challenging revenue environment. While we saw some weakness in market occupancy, we continue to sequentially improve our customer service scores and renewal percentage of existing customers.

For the first quarter, conventional same-store NOI growth was up 0.2% over prior year, or 1.2% up above the upper end of guidance. This is comprised of a decline in revenue of 0.6% and expense reductions of 1.8%. The three components of this 0.6% decrease in first quarter year-over-year same store revenue are as follows: 0.1% in rate was a blend of 1.7% higher renewal rates, somewhat offset by 1.5% lower new lease transaction rates; 1.3% in lower occupancy at 93.5%; and 0.6% higher utility reimbursements and other income.

Sustainable expense reductions were achieved by lowering payroll costs, marketing expense, contract services, repairs and maintenance, and churn costs. These savings were partially offset by higher utilities and taxes. Most markets declined in revenue as unemployment continued to rise and housing prices saw further deterioration. In particular LA, Phoenix, Orlando, and Tampa saw significant declines in rate and occupancy. Markets that performed more favorably were Boston, Washington DC, Dallas, and Palm Beach Fort Lauderdale.

While we continue to be concerned about rising unemployment rates, our overall traffic for the first quarter was flat to prior year. We saw a significant increase in prospective residents shopping for the best deal contributing to lower sale conversion rates overall. However, where we obtained an application, our conversion rates grew 6.1% over the prior year quarter. We remain cautious about demand as we approach peak leasing season.

In this environment, we continue to remain highly focused on our two main objectives. Number one, improvements in service and retention of our resident base primarily through increased resident communication and various retention programs we’ve implemented. These efforts yielded sequential improvements in both service scores and retention month over month through the first quarter. Number two, cost control and continued aggressive vendor management. During the first quarter, most of our annual service contracts were renegotiated at lower run rates without sacrificing our community standards and service level.

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 quarter. Team member turnover continued its positive trend. Turnover was down 5.6% year over year to an annualized turnover rate of 25.7%. This has helped better position our operating teams in both staffing and training for peak season activities. David will cover our same store guidance in his remarks.

Now for an update on the redevelopment activities, during the first quarter, $20.3 million into our portfolio and completed work on seven projects. We produced 274 units and leased 405 first-generation redevelopment units. As we’ve discussed on past calls, one major advantage to our redevelopment program is its ability to throttle up or down the activity level based upon the economic times.

To that end, we’ve reduced our REIT investment to $50 to $75 million in 2009 and have made major reduction in the staffing associated with the program. The majority of the 2009 investment is to complete projects started over the past two years. That said, I’d like to reiterate the large capital investment program we undertook since 2005 will help position us to deal with these difficult times. Since 2005, Aimco has invested nearly $900 million into the portfolio. We expect to see the financial benefits of this investment as we stabilize these properties in the coming year.

I’ll now turn it over to David.

David Robertson

First, I’d like to wish Tom Herzog the very best and thank him for all his efforts during the transition. Ernie Freedman, our Deputy CFO, and I are fortunate to inherit the infrastructure and team that Tom built during his years at Aimco, and he has our thanks. On today’s call, I will cover the following subjects. First, our debt capital markets activity and the progress made extending our property debt and credit facility maturities; second, property sales for the first quarter and our expectations for the balance of the year, and finally our financial results for the first quarter and guidance for the second quarter and full year 2009.

First, our debt capital markets activity. As Terry mentioned, at a time when accessing debt capital is a challenge for many real estate owners, the multifamily sector continues to enjoy abundant debt capital, and it is attractively priced with interest rates on Fannie and Freddie 10-year non-recourse property debt currently below 6%. As I will discuss in a moment, this helps support our property sales activity as these low rates allow investors to earn attractive levered cash on cash returns at current market pricing, and while we have no reason to believe that these conditions will change any time soon, we decided to accelerate the refunding of our debt that is scheduled to mature over the next three years, both to take advantage of the current low rate and to reduce our exposure to any deterioration that may occur in the capital markets.

Starting with non-recourse property debt, at the end of 2008, we had 38 loans maturing over the next 3 years with Aimco’s share totaling $650 million. We made good progress during the quarter, and as of today have refinanced $90 million, have $460 million in underwriting for closing this quarter, leaving $100 million that will be refinanced at maturity in mid 2011. This morning, prior to this call, we amended our existing credit facility in order to extend the maturity by two years from May 2010 to May 2012 inclusive of extension options. We plan to conclude our marketing efforts this month and expect the size of the line to be approximately $200 million, with $180 million of formal commitments received to date. I want to thank Bank of America, Keybanc, and Wells Fargo for their support and participation in our facility. As previously indicated we plan to prepay our $350 million of term debt during the first quarter of 2011 with proceeds from property sales ideally this year if market conditions permit.

Turning to property sales, we had a light quarter with 10 properties sold for $83 million at a 7.1% cap rate and net proceeds to Aimco of $14 million. In April, we sold an additional 5 properties for $46 million at a 7.3% cap rate and net proceeds to Aimco of $18 million. Notable during the quarter was the sale of our last property in San Antonio as well as the sale of 5 properties in Indianapolis reducing our portfolio in this market to 9 properties. In addition, we continue to market a large number of assets, and as of today are under contract on about $600 million of properties, are negotiating contracts on another $500 million of assets, and have $800 million more in the market.

As I mentioned, the availability of debt capital from Freddie and Fannie will help support the sales of many of these assets. However, we have seen a significant increase in the number of buyers that are assuming our existing debt given the attractive loan to values and interest rates. We expect this trend to continue.

As for financial results, first quarter FFO per share of $0.42 was $0.09 higher than the mid point of guidance of $0.33, primarily as a result of $0.04 due to better than expected property operating results, $0.03 due to lower G&A, and a net $0.02 related to a number of other items. Looking forward, second quarter 2009 FFO is projected to range from $0.37 to $0.43 per share and includes the following: Year over year same store NOI decline of 2-3% due to continued pressure on renal rates and increases in operating expenses as we prepare for leasing season and investment management income net of tax of $10 to $11 million or approximately $0.09 per share. Our expectations for full year 2009 FFO are unchanged from last quarter at $1.65 to $1.95 per share.

Finally, you may notice that we added additional property and market detail for some of the supplemental schedules. If you have any questions about the changes, please do not hesitate to contact Elizabeth Coalson, Ernie Freedman, or me.

With that, we will now open up the call for questions. Please limit your questions to two per time in the queue. Operator, I’ll turn it over to you for the firs question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Tody – Citi.

David Tody – Citigroup

Can you just walk us through what your plan B is for the term loan, assuming that asset sales don’t quite meet expectations?

David Robertson

It obviously is not a binary issue. It’s not $350 million or zero, given the amount of assets that we have under contract today and the amount that we have under negotiation. So I think really the question is probably what if you can only retire a certain percentage of your term loan through asset sales, how will you deal with the balance, and that is the primary driver of the change in the dividend rate in that we plan to use the cash that we retain by not paying the higher dividend to help pay down the term debt.

David Tody – Citigroup

My second question is with regard to CapEx. They seem to have dropped in most of the buckets this quarter and on an annual basis imply much lower levels of spending. Is this something we can extrapolate forward or is this aberrationally low in the quarter?

David Robertson

Yes. Tim may want to add to this, but our plan is to spend roughly $1200 this year, which is what we outlined at the beginning of the year, and we did spend in the aggregate a little over $250 in the first quarter, so that would imply slightly lower total number for the year, but the plan is to spend proportionately more in the balance of the year so that we come out close to the $1200 number. Tim, do you want to add anything to that?

Tim Beaudin

I think, David, that’s correct. I would add on the redevelopment program in that capital bucket, obviously we have cut that back, and that will continue to see us complete projects throughout the year, and as we get toward the end of the year, we’ll make a decision on whether we’re going to add anything back into the redevelopment pipeline, but right now, we’re just going to watch and check on the economics and make a decision then.

Operator

Your next question comes from the line of Rob Stevenson – Fox-Pitt Kelton.

Rob Stevenson – Fox-Pitt Kelton

Tim, can you talk a little bit about the trend in occupancy, rental rate, and concessions as you move from January through the end of August and when and where you saw this big dips and where things have sort of leveled out?

Tony Dialto

As we discussed, and you’ll see it in Schedule 6, obviously some of the places where the markets performed better were Palm Beach Fort Lauderdale, Dallas, Houston, Orlando, and Philadelphia. LA and Orange County and Phoenix were being the challenge for us. There are many reasons that have been well written relative to the demand issues in those areas from the drop in home prices to the shallow market and unemployment, housing, hospitality, and tourism and all the things that have been affecting the area, but as we looked across the country, demand was relatively flat, but I would also tie this to one point if I could and sort of align it for you. Some steps we took relative to bad debt that has impact on how we looked our occupancies. We were very careful not to compromise our resident quality, and as a result, although we saw a slight uptick in bad debt, on an annualized it would be relatively the same as last year. What this translated into was significant increase in declined applications which no doubt had some impact on occupancies. As we look forward, notwithstanding the further declines in unemployment in the economy, we continue to be concerned about those markets like Phoenix and Florida and LA where the housing bubble was most acute, but we’ve taken steps from a retention perspective to do several things, one of which was to go out and try to mitigate the percentage of leases that would be coming due going forward in the summer and trying to lock those down early, and we had some significant success with that, so we think that overall that focus in addition to a pick-up sequentially month over month in retention rates and higher service scores position us well to be able to advantage of opportunities in the second half, again notwithstanding that there are unemployment surprises or the economy further deteriorates. So I think we’re cautious, but cautiously optimistic.

Rob Stevenson – Fox-Pitt Kelton

Just to be clear, there wasn’t one month or one 6-week period or whatever where you saw a big deterioration in operating fundamentals and then things leveled or you saw this step function as you progressed through the quarter where each month was successively worse. It was just basically relatively consistent throughout the quarter?

Tony Dialto

Actually, I think if you look back, overall occupancy started to decline even in the prior quarter across the board in a relative way, and there have been markets that have performed relatively well on the East Coast and Boston and other pockets, so I think as unemployment levels rose, we saw the deterioration in some of those markets, but there was no one period of time where we saw a spike. It’s been gradual.

Rob Stevenson – Fox-Pitt Kelton

On the dividend, Terry, can you just talk a little bit about the movement last quarter and what had you guys thinking at the $0.25 level and now this quarter the $0.10? Obviously, the term loan is the rationale to sort of cut further, but what wasn’t there 90 days ago that led you to the higher dividend level at that point in time?

Terry Considine

Rob, I think you’ve got it exactly right that the board is focused on that term loan. I think we see it as the element of risk inside our capital structure, and we’re mindful that the markets message about perceived risk, so that’s the driver. What’s different from January would just be that we’re motivated to get it behind us. I wouldn’t say there’s a significant change in our forecast or guidance for the year, our expected sales, any of that. It’s just that we’re ready to put it behind us.

Operator

Your next question comes from the line of Jay Haberman – Goldman Sachs.

Jay Haberman – Goldman Sachs

Terry, on your comments on inflation and obviously implications for future funding costs as well as cap rates, clearly you have the accelerated refinancings, but can you talk about perhaps the accelerate disposition of the $2 billion of assets and perhaps maybe accepting lower pricing now just to get those deals done and to boost liquidity?

Terry Considine

I think my belief about inflation actually cuts both ways about pricing. may of the people that are buying the properties today would agree with me that the next year to two may be choppy in operations, but long-term the assets are likely to maintain their value and the liabilities are likely to decline in value, so our customers and the price they are willing to pay is probably supported by expected inflation. Having said that, David, Harry, and Lance are focused on getting these property sales behind us for the same reason we talked about the dividend. We think that the term loan is the issue that we want to take off the table, and we’re highly motivated to get it done as soon as we can.

Jay Haberman – Goldman Sachs

And you said $600 million is currently under contrast, and with that, if closed, would that address the term loan or is that what you’re hoping to do for the full year?

Terry Considine

Our plan for the year is closer to $1.5 to $2 billion in gross sales. $600 million might generate $200 million of net proceeds.

Jay Haberman – Goldman Sachs

So it’ll get you halfway there roughly?

Terry Considine

Yes.

Jay Haberman – Goldman Sachs

With reference to Aimco Capital, I think you mentioned $10 to $11 million in net pick-up from I think $6 million in the first quarter. Can you just comment on what’s really driving that?

David Robertson

The pickup is just some transactions that we’ve planned. There’s nothing of particular note.

Jay Haberman – Goldman Sachs

The promotes similar to what you got last year?

David Robertson

We don’t have much in the way of promotes in the plan this year. I think I mentioned on the last quarter call that we’d be somewhere in the $8 million range for promotes this year. It will be largely in the second half of the year, but as you know, we have various other fees, refinancing fees, disposition fees, deferred asset management fees that come in at the time that we complete transactions, and so when you look at the first quarter number, that was largely a recurring number that you can assume as kind of a baseline for the balance of the year, but as we go through the year, we will expect to see incremental transaction-based revenues that will get added. There’s a little bit in the second quarter. I would expect more of that to occur in the second half of the year.

Operator

Your next question comes from the line of Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Dave, in the supplement there and you talked about it on the call, you indicate you’re accelerating your refinancing through 2011 to pull out additional capital and to address the term loan. It’s early now, but as you look ahead to 2010-11, what kind of channels are you going to look at to meet your funding needs there, and as a followup to that, what’s the unencumbered property pool at this point look like?

David Robertson

The whole point of accelerating the refinancings or the maturities that come up over the next 3 years is to not be in the debt markets for the next 3 years. If we get it done this quarter, then we’re largely out of the debt capital markets until 2012. We do have a maturity of a property of $100 million that will mature in 2011 that for economic reasons, namely prepayment reasons, it doesn’t make any sense to refinance it today, but it’s something that’s currently at about 50% loan to value very high-quality asset, primarily one asset in LA where we feel comfortable we’ll be able to roll that debt in mid 2011. By pushing out all the property loans beyond 2011, by extending our loan credit out to 2012, we’re largely out of the debt capital markets. Now, when you think about how we’re going to fund other needs, clearly given the dividend cut, we have sufficient coverage right now to use capital to cover a variety of needs, whether that’s paying down the line of credit, handling debt amortization, or funding CI, we are in a favorable sources and uses position today. So I don’t anticipate needing to access the debt markets to fund our operating needs or our capital investments.

Michael Salinsky – RBC Capital Markets

What does unencumbered pool look like today?

David Robertson

As you know, our strategy is to finance each property on an individual non-recourse basis, and as a result, we have very little in the way of unencumbered assets. It’s probably somewhere in the neighborhood of $75 to $100 million in assets, but those are really assets that I would just characterize as being in transition. For one reason or the other, they don’t have debt on them today.

Michael Salinsky – RBC Capital Markets

You cut the dividend down to $0.10 per share, and you’re also selling assets. What level of asset sales beyond the first quarter level will you need to pay a special dividend, and also at the $0.10 rate there, is there a prospect for paying a special dividend in the fourth quarter simply to maintain your payout levels for REIT status?

David Robertson

As Terry mentioned, we won’t know what our taxable income is still at the end of the year obviously, but we think that $0.10 a quarter roughly approximates that number, so we should be pretty close when it comes to paying out an appropriate level of cash to cover our baseline REIT taxable income, but property sales will be incremental to that, and I think given what we have in the quarter today, it is highly likely that we’ll pay out some special dividend. We won’t know the size until we get to the end of the year, but I will say that the plan this year is to try to do this later in the year and do ideally one dividend when we know what the total amount of sales and total cash that needs to be distributed is going to be.

Operator

Your next question comes from the line of Bob Brown – Olympus Capital.

Bob Brown – Olympus Capital

You mentioned these sales in the $7.1 to $7.3 cap rate range for property sales, and of course that’s higher than it has been a year ago. We’ve got a buyer’s market, so does it make sense to minimize property sales until the property sale markets recover somewhat, and I second question would be how does the $7.1 to $7.3 cap rate compare to the expected cap rate or NOI rate on the redevelopment properties—properties in pipeline?

David Robertson

I’ll let Tim answer the question on the redevelopment properties. First of all, as you know, properties don’t trade on cap rates. It’s just merely a way of expressing value, and we’ve tried to do in articulating cap rates. If you look at Schedule 8, we’ve defined what a cap rate means to us, and we’ve said it’s NOI after a 5% management fees and $300 per door of capital expenditures, and we think that’s a number or metric that is quoted by a large percentage of the brokers, so we’re trying to put out a metric where people can kind of apples to apples when they talk about where assets are trading. As far as what is the $7.1 to $7.3 mean, how do we think about value relative to the use of proceeds, we have a number of priorities that we’re focused on. The first is we’re focused on improving the quality of our portfolio, and as you know over the last 5 years, we have been net sellers of assets to the tune of $6 billion, and that has had a huge impact on the quality of our portfolio as we’ve concentrated our investment in the 20 largest markets in the US. Rents are up from $725 to north of $1000 today. That reflects a big change in the portfolio. So we continue to focus on improving the quality of the portfolio, but given the economic conditions today, we have a particular need to reduce our total leverage, reduce our recourse debt, and so even though we’re selling at prices today that are at higher cap rates and lower values than a year ago, when we look at the opportunity to deleverage our balance sheet and remove any risk by paying off $350 million of term debt, we expect that we’ll be rewarded in the public markets with our share price. How prices compare to expected redevelopment returns, I’ll have Tim address.

Tim Beaudin

I think, Bob, the issue we’ve had there, historically one of the big metrics we’ve used in our investment decision regarding redevelopment was that it was accretive to NAV, which obviously led to a spread between sales, cap rate, and the return we’re getting on the dollars invested, and that’s narrowed. We’ve used 7.5% and 8.5% ranges as where we were trying to get redevelopments done. David’s cap rates have shown that that gap has narrowed dramatically, so we don’t see the accretion to NAV. We’ve cut the program back, and in some cases, we’ve actually stopped some of the projects from going forward, and then also contributing to David’s comment that it’s another way for us to preserve cash in the near term, and we’ll stick with that for the foreseeable future.

Bob Brown – Olympus Capital

My follow-on question then would be on these property sales. If we’re in agreement that it’s a buyer’s market, would it make sense or is it the plan to continue to sell properties at these cap rates until the line of credit is taken care of and then maybe wait till the market returns to more of a balance between buyers and sellers before re-engaging in that sale program?

David Robertson

First, let me just address your comment about it being a buyer’s market. I think that while the bid-ask spread is very wide today, I’ll tell you we’re still finding buyers that will trade at our price, and so if saying it’s a buyer’s market means that today we only get one or two today are at a price that makes sense to us versus maybe 7 or 8 a year ago, then you’re right. It’s a buyer’s market, but the fact is we’re trading at prices that make sense to us, and fortunately makes sense to one or two buyers, and typically the buyers today are local operators that are adding one or two assets to their portfolio for the reasons that Terry mentioned earlier. As far as when would we stop selling, I think that your observation is on point, that we’re focused on paying off our term debt. We will sell enough assets to take care of that, and once that’s done, we will reevaluate, see where we are, see where our stock is pricing, see what other opportunities exist in the market, and decide if it makes sense to continue to sell assets or not.

Operator

Your next question comes from the line of Matthew Barnett – Jet Capital.

Matthew Barnett – Jet Capital

Your cash balance declined by $200 million from December. Can you walk through where that money went, and the second question I have is on the mortgage debt that you have, do any of them have cross default provisions?

David Robertson

On the cash balance, the cash balance at year end was inflated because of the property sales that occurred at year end. If it’s helpful, Ernie Freedman who is our Deputy CFO who could give you some more color on exactly where the $200 million went.

Ernie Freedman

At year end at 12/31/2008, we actually had $400 million outstanding on the term debt, so $50 million went to reduce the term debt to $350 million. As well, timing of the January payment of the dividend, which was a little bit of a larger dividend also occurred, and that was roughly a $80 million cash disbursement for us, and then there was timing of accruals that were made at 12/31/2008 that had payoffs in the first quarter. Those were the big categories where the cash reduction occurred.

David Robertson

To your second question on mortgage debt, almost all of our mortgage debt is single asset financing. We do have a cross pool with Merrill Lynch which I think we described in the K, and the total debt in that pool is about $400 million.

Matthew Barnett – Jet Capital

And any default on the mortgage, would that trigger a default on your term debt?

David Robertson

A default on the mortgage would not trigger a default on the term debt or the line of credit.

Operator

Your next question comes from the line of Phil Wilhelm – UBS O’Connor.

Phil Wilhelm – UBS O’Connor

My question is similar to a question that was asked a few questions ago regarding asset sales. Now that you’ve cut your dividend and you’ve retained cash flow of a couple of hundred million bucks a year and you’re getting extremely good prices or execution on your debt at the property level, why sell so many assets? It seems like your balance sheet is actually in outstanding shape.

David Robertson

As I mentioned, we’re going to take care of the term debt, and then we’ll see where we are. The fact is our stock price trades at a level that is well below our net asset value as you know. So we’ll have to see what the market looks like in a few months, and we’re looking at where is our share trading relative to NAV, what type of other capital opportunities do we have whether it be investments in new assets, investment in the portfolio, but your thinking is on point. We agree with it, but the first priority is to take care of our term debt, and that’s going to be the bulk of the sales that we have identified for this year, and if it makes sense to sell more, then we will.

Phil Wilhelm – UBS O’Connor

Do you think that the market just doesn’t understand your strategy because it seems to be as you’ve articulated it you don’t need to delever all that much. You’re more or less delivering because it will probably help the multiple and get us back closer to NAV, but could you comment on what you feel from just an operational standpoint, whether or not you’re over or under levered?

David Robertson

Terry has been doing this for a long time, so I’m going to let him share his views, but I do think that our balance sheet is while appreciated in some sense is not appreciated in others. I think that we’ve been telling the story about the non-recourse nature of our property that I think that investors and analysts appreciate that now. I think what is probably missed is the duration of the debt, the fact that we have a relatively small amount that matures in any given year, and of course as I mentioned earlier, we’ve pushed that out even further or are planning to by accelerating the refinancing of our mortgages, but I think the fact that our debt has an weighted average maturity of 9.6 years and you have $200 to $300 million rolling in any given year, I think that’s largely missed. Terry, do you want to add anything to that?

Terry Considine

I think you said it just right, David. Let me just take a minute on this because I think that it’s one of great questions that market has in understanding Aimco. I think that a lot of times we benchmark values against private market activity, and I think it’s only logical to also consider private market capital structures and what people have learned over time. So when I think about leverage, I think first about leverage in the context of inflation, and inflation has averaged between 2.5% and 3% for the past two decades, and there are a number of people who think it may well accelerate given the increase in federal borrowings and commitments. Now over time, rents rise with inflation and track it, and so that’s why apartment properties maintain their value in real terms, but at the same time, inflation works to discount the real cost of fixed liability, so the rationale for leverage is that you can increase returns on equity especially after adjustment for inflation. Of course, right now, we’re in a recession, and inflation has slowed and property values have fallen and may continue to fall. So the critical issue is how do you manage that risk of this or any other downturn while holding on for the long term when inflation makes leverage our friend, but at Aimco, as David said very well, we work to manage the risk of leverage by use of long dated non-recourse property loans together with perpetual preferred stocks, and as I mentioned earlier in my remarks and we emphasized in answers to all these questions, we plan to repay recourse borrowings and then let our property debt reduce each month by principal amortization until the property debt is underneath 50% LTV. So our exposure to leverage is limited. Any one year, our exposure is limited to just the properties, not the company, that secure the 4% or so of liabilities, or as David said $200 to $300 million a year which are subject to refunding, and this seems to us an acceptable risk compared to the possible long-term benefits.

Operator

Your next question comes from the line of Steve Swett – KBW.

Steve Swett – KBW

Tim, do you have an estimate for what the drag was in the first quarter from the redevelopment?

Ernie Freedman

Just a little bit under a penny in the first quarter.

Steve Swett – KBW

So, it’s really shrunk?

Ernie Freedman

Yes, and it’s going to continue to shrink for the rest of the year as that activity winds down.

Steve Swett – KBW

I understand that payment of a special dividend is somewhat up in the air depending on what happens, but is it your thought or the board’s thought to pay a special dividend in cash or would you look to pay that in stock?

Terry Considine

Steve, I think a lot of course depends in fact on the circumstances at the time, but in general, if we had $1.5 or $2 billion in sales, we might have $500 million of taxable gain, and we might expect to pay 10 or 20% of that in cash and the balance in a special stock dividend.

Operator

Your next question comes from the line of Michael Lewis – JP Morgan.

Michael Lewis – JP Morgan

In terms of the $430 million of property debt that you still expect to refinance this year, do you have any estimate of the excess proceeds that you might expect to pull out of that?

David Robertson

Our working thesis right now is that it will be roughly flat. We have some loans that are right around 65% LTV, some that are a little bit lower, and so our assumption is by the time we get all these done that we’ll basically roll the debt over at its current level in the aggregate.

Michael Lewis – JPMorgan

Terry mentioned in his opening comments about reducing the complexity of the firm as a focus and cited as an example being in fewer markets. Is there anything else we could expect to see along those lines of reducing the complexity?

Terry Considine

I think Michael the first is increasing concentration or focus on highly selective markets, and we have 85% of our capital invested in the 20 largest markets in the country, but we’ve got more than 50% in just something under 10—Coastal California, Boston to Washington and Chicago—so market quality is big issue. The second issue is simplification. We’re narrowing the range of properties that we operate as we focus in on a sweet spot as we see it in B assets or B+ in better locations. We don’t want to be at the very highest end, but we want to be a little bit above average in our product quality. Third would be that the transaction side of the business in both asset management and in tax credit activities is declining some by policy, some by market circumstances, and we would expect that this business to be less important going forward.

Operator

Your next question comes from the line of Andy McCulloch of Green Street Advisors.

Andy McCulloch – Green Street Advisors

On the leverage issue, I understand the level of leverage you guys have may be manageable because of the long dated maturities and how that reduces risk, but does it really put you in a position to play offense over the next couple of years without massive asset sales or issuing new equity because there’s going to a lot of distress opportunity over the next few years.

Terry Considine

Andy, I think that it’s unpredictable to me how distressed multifamily will become. It’s certainly true that there is a lot of turbulence in the capital markets, but multifamily because of the low-cost predictable source of debt that we have may not be quite as distressed as some people expect. At that time, we’ll have every opportunity to participate if we have through 1031s or property trades, if we are trading one asset for another that we think is an upgrade, but we will not be carrying a lot of excess cash in this speculation that markets are going to get substantially worse.

Andy McCulloch – Green Street Advisors

I’m not saying carry excess cash, but just reduce overall leverage.

Terry Considine

But the purpose of that would be able to do what, borrow more money in the future? I think there is a certain element of speculation in market timing, and I’d like very much the idea with each asset fixing our cost of capital, being hedged against future changes in interest rates, putting it on the shelf and moving on, and so if I were expert in predicting interest rates, I’d probably be employed somewhere else.

Andy McCulloch – Green Street Advisors

David, on the new revolver, can you give us any ballpark pricing on that and why the size is going to be so much smaller?

David Robertson

There are a number of reasons on the side. Obviously the availability of capital has come down and that’s played a part in it, but I think if you look at what’s it for Aimco that is driving a small revolver. One is just to reduce the scale of the company given the amount of assets that we’ve sold over the last 2 years and the assets that we plan to sell this year, we don’t know need the size of the line that we had before. The second would be how we are using the line today. Whereas before we may have used the line to take down an acquisition, today we really look at the line as a working capital facility, and the third would just be the increasing cost. Given that lines are more expensive today, having a big line that you don’t use doesn’t make a whole lot of sense, and so we try to right-size the line to a level that makes sense from an economic standpoint but provide appropriate flexibility to handle our interim cash needs, but I tell you the biggest driver for us Andy was not having to be in the capital markets next year putting a line in place. Knowing that we could work with our existing group today and push the maturity out to 2012 was something that we felt took a lot of risk off the table for the company. As for pricing, pricing on this line is going to be 425 over LIBOR with a 2% LIBOR floor, so all in, you are talking about a line with 6.25% cost.

Andy McCulloch – Green Street Advisors

Just one more question on asset sales. It sounds like the $600 million of assets under contract are about 65% to 70% LTV. What are the LTVs on the other $500?

David Robertson

I think they’re generally the same. If you look at the total assets that are listed, if you are suction on proceeds, once they’re ownership adjusted, you don’t just the proceeds divided by the gross asset value to get the leverage. When we talk about net proceeds, you’re getting the Aimco share, so we own on average 85 to 90% of the assets that we are selling, and so kind of a shortcut is to assume that Aimco’s proceeds would be roughly a third of the gross asset value sold.

Operator

Your last question comes from the line of Richard Anderson with BMO Capital Markets.

Richard Anderson – BMO Capital Markets

What would it take for the fixed charge coverage of 1.42 times to start testing that floor of 1.3 times?

David Robertson

First thing I’ll tell you as part of putting the new line of credit in place, the restructuring charge that we took in the fourth quarter actually gets backed out, and so we have in the release that the debt service coverage charge ratio was 1.63. That would now be 1.69, and that the fixed charge coverage ratio was 1.42, that would now be 1.47, so the new line actually gives us more room based on the new definitions when it comes to our coverages. Just doing the math knowing that the debt service coverage covenant is 1.50 and fixed charge is 1.30, it’s roughly 10% or 11% decline.

Richard Anderson – BMO Capital Markets

Why would you guys be making an $8.2 million investment in tax credit projects? I thought those were always funded, the equity came from sale of the tax credit to the investor. Are you filling a void there, or is that just a normal course of business?

David Robertson

No. Your understanding is correct. The cash comes in as the property is sold into a new partnership, and then we hold the cash and then put it into the asset over time, so we’re just disclosing how much we are actually investing to upgrade the quality of the tax credit asset, so you are right, the money initially comes from a third party investor.

Operator

This does conclude today’s question and answer session. Gentlemen, do you have any further closing remarks today?

Terry Considine

We’d like to thank everyone for their interest. If you have further questions, please feel free to call both David Robertson or Ernie Freedman or Paul Beldin, our Chief Accounting Office or Elizabeth Coalson or call me. We’d be delighted to answer your questions. Thank you for your interest.