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Apartment Investment and Management Company (NYSE:AIV)

Q2 2009 Earnings Call

July 31, 2009 1:00 pm ET

Executives

Lisa Cohn – Executive Vice President, General Council

Terry Considine – Chief Executive Officer

Terry Beaudin – Chief Operating Officer

David Robertson – Chief Financial Officer

Tony Dialto – Executive Vice President Property Operations

Robert Walker - Operations

Analysts

Jonathan Habermann – Goldman Sachs

David Todi – Citi

Michael Levy – Macquarie

Michelle Ko – Bank of America, Merrill Lynch

Michael Salinsky – RBC Capital Markets

Richard Anderson – BMO Capital Markets

Operator

Welcome to the second quarter 2009 Apartment Investment and Management Company earnings conference call. (Operator Instructions) Now I would like to turn the call over to Lisa Cohn, Executive Vice President and General Council.

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 we discuss 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 will speak to property operations and our redevelopment activities, David Robertson will review debt capital markets activities, investment management, second quarter financial results and guidance for the third quarter and full year 2009.

Operations leaders Tony Dialto and Rob Walker, and finance leader Ernie Freedman are also available to answer questions. I will now turn the call to Terry Considine, our CEO.

Terry Considine

During 2009 our general plan remains to serve customers effectively and efficiently on a portfolio diversified by geography and activity and work to improve its quality, reduce leverage and financial risk and simplify the business for many reasons, including lower operating costs.

Here are the headlines and how we are doing. First, customers; for the past several years we have focused on better customer selection and measured customer satisfaction. Today, bad debt remains below 1% and customer satisfaction remains high. For example, the average length of stay at our apartment communities is up about 10% to 20 months.

Second, portfolio quality; for the past several years we have been steady sellers of our lowest rated properties and we've invested heavily in property upgrades to our retained assets. As a result, the quality of our portfolio has improved steadily to a B, B plus. For example, over the past five years, average rents for conventional properties have increased by 43% from $726.00 a month to $1035.00.

Third, portfolio diversification; while upgrading our properties and increasing our allocations to the top twenty U.S. markets, we have continued to maintain appropriate geographic and price point diversification in order to reduce portfolio volatility. Today, this portfolio diversification has dampened the impact of the recession.

While the 75% of our business in the same store conventional portfolio is down about 3.5%, this decline is more than offset by the 25% of our business that is in redevelopment and affordable. As a result, our overall year over year property incomes have been relatively stable and are actually up by 1.5%.

Fourth, financial and risk and leverage; for many years we have structured our balance sheet with leverage provided primarily by low risk and very long term property debt and by perpetual preferred stocks.

With levered maturities, we typically face refunding risk. This year because of extraordinary turmoil in capital markets and in order to take advantage of current low interest rates, we have accelerated refunding of debt maturities for the next three years, essentially all maturities before 2012. Most of this refunding has now been completed at lower rates and lengthened maturities. Kudos to Patty Fielding and her team.

We continue the steady sale of our lowest rated properties and are using the proceeds to build our tax position for the future repayment of our term debt, essentially our only corporate obligation.

Fifth, business simplification and lower offsite costs; over the past few years we have invested heavily and perhaps over invested in offsite activities. This year we have been working to simplify our business and reduce the related costs. Year over year spending for off site costs including G&A is down significantly in part to reduce scale, and in part to simplification and efficiency.

The final headline is this. We're making steady progress towards our longer term goals even during the current recession and we are on track both with our plans and with what we have told our investors.

Looking forward, we expect to stay the course. In operations, we expect consumer demand for apartments to remain weak with same store results reduced by the earn in of lower rents, but overall results flat or only slightly down after offsetting better results from our affordable and redevelopment portfolios.

We expect earnings to become more predictable as we continue to de-emphasize transaction related income. We expect to continue to simplify our business and reduce our off site costs including G&A. We expect to continue our property sales in order to upgrade our portfolio and improve liquidity. We expect to build cash to de-lever somewhat by repaying our term debt so that our leverage is generally limited to low risk and long term property debt and preferred stocks.

One last note, while it is unusually difficult today to predict the course of the economy, many prognosticators predict some and perhaps a substantial increase in inflation above the almost 3% it has averaged for the past 20 years. If so, real estate, funding in part by low risk, long term fixed rate property debt and perpetual preferred stock may prove an effective hedge.

Now I'd like to turn the call to my colleagues for a more detailed review of the second quarter results. We'll start with Tim Beaudin who's done a great job in taking on increasing responsibilities for property operations, redevelopment, asset management, IT and more.

Timothy Beaudin

On today's call I will cover the following; first, second quarter financial results for the operating portfolio which as Terry mentioned in total is up over the prior year, second, an update on customer retention efforts, third, market conditions including an update as to current activity in July and fourth, an update on the conventional redevelopment activities.

Turning to our operating portfolio, our entire portfolio NOI which consists of same store conventional, conventional redevelopment and affordable business is up 1.5% in the second quarter and 1.2% year to date.

As for each of the segments, same store conventional was down 3.5% in the quarter and down 1.9% year to date. The redev NOI is up 10.4% for the second quarter and year to date. As for the affordable business, it has improved 19.3% for the second quarter and 11.9% year to date.

While the vast majority of our NOI reside in same store, we are pleased that the results in our non same store segments have more than offset the declines in same store properties.

Specifically the same store results, as I mentioned NOI for the second quarter is down 3.5% from the prior year or .5% below the lower end of guidance reflecting a 2.3% decline in revenue which was partially offset by expense reductions of .4%.

The 2.3% decrease in second quarter year over year conventional same store revenue was driven by one, a 1.3% in lower average rents which is a blend of 2.3% below average new lease rent and .1% higher average renewal rents, two, a 2.1% in lower occupancy at 92.8% and finally, a higher utility reimbursement of 1.1%.

On conventional same store expenses we continue to see the benefits of the earn in of our contract renegotiation efforts completed during the first half of the year impacting contract services. In addition, expense reductions were achieved by lowering utility costs, marketing expense, repairs and maintenance and taxes. These saving were partially offset by higher insurance expense.

As mentioned on prior calls, a key area of focus is resident retention. Through various programs and resident offerings we were able to maintain retention levels flat to last year. During the second quarter most markets saw revenue declines with the continued rise in unemployment. In particular, L.A., Phoenix, and Miami saw the steepest revenue declines versus prior year.

Markets that showed flat to modest revenue gains over prior year were Houston, Dallas, Washington DC, Palm Beach, Fort Lauderdale and Jacksonville.

While we came in below expectations for second quarter same store occupancy, we did see sequential improvement during the second half of the quarter with June same store occupancy averaging 93.2%, up .4% from May. This trend has continued into July with average daily occupancy finishing just short of 94% for the month, outpacing prior year seasonal gains.

Unlike the second quarter, we entered the third quarter with occupancy continuing to trend upward which has provided with the opportunity to take rent increases in various markets. We currently see this trend continuing through August. However, given our concerns regarding unemployment levels, we remain cautious as to the balance of the year.

Now for an update on the conventional redevelopment activity; during the second quarter we invested $19.2 million into our portfolio and completed work on nine projects. We produced 293 units and leased 529 first generation redevelopment units. Year to date through the second quarter we invested $39.6 million in completed work on 16 projects. We produced 549 units and leased 933 first generation redevelopment units.

As we have discussed on past calls, one major advantage of the AIMCO redevelopment program is our ability to throttle up or down on the activity level based upon the economic times. To that end, we have reduced our redev investment to $50 million to $75 million in 2009 and have made major reductions in staffing associated with the program. The majority of the 2009 investment is to complete projects started over the past two years.

That said, I would like to reiterate the large capital investment program we undertook since 2005 will help us to deal with these difficult times. Since 2005, AIMCO has invested nearly $900 million into the portfolio. As I mentioned previously, we continue to see the financial benefits of this investment in our year over year revenue growth as these properties stabilize.

I will now turn it over to David.

David Robertson

On today's call, I will cover the following subjects; first, our debt capital markets activity and the progress made extending our property debt maturities, second, property sales for the second quarter and July and our expectations for the balance of the year, and finally our financial results for the second quarter and guidance for the third quarter and full year 2009.

First, our debt to capital market activity; as Terry mentioned, we have been focused on reducing refunding risk by refinancing, extending or repaying debt scheduled to mature prior to 2012. At the beginning of the year this included our revolving line of credit, $400 million of term debt and $650 million of property debt, or more than $1 billion of debt in the aggregate.

During the first quarter we repaid $50 million of term debt, and refinanced $90 million of property debt. During the second quarter we extended the maturity of our line of credit through mid 2012 and refinanced or repaid an additional $315 million of property debt.

We also have plans in place to refinance or repay an additional $57 million of property debt during the third quarter. This will leave us with just $164 million of property debt maturing prior to 2012 comprised primarily of two loans that we plan to refinance maturity in 2011 and $350 million of term debt that we plan to repay from proceeds of property sales prior to its maturity in the first quarter of 2011.

Turning to property sales, we sold 20 properties during the second quarter for $291 million at a 7.7% cap rate and net proceeds to AIMCO of $105 million. Again, these properties sales were made from our lower rated properties and lower rated markets. Our retained portfolio continues to improve.

In July, we sold 7 additional properties for $116 million generating net proceeds to AIMCO of $41 million. This brings year to date property sales to just under $500 million with net proceeds to AIMCO of $160 million. Of this amount, roughly half has been used to fund redevelopment and other capital investments with the balance set aside to repay term debt or fund other cash needs.

In addition, we continue to market more than $2 billion of assets with approximately $615 million of this amount current under contract and another $565 million in negotiations. Pricing was relatively stable during the quarter and we are starting to see the slow return of institutional money and dedicated funds.

As to the financial results, second quarter FFO per share of $0.45 was $0.02 above the high end of guidance and $0.05 above the mid point of $0.40 per share primarily as a result of a positive $0.02 from property operations comprised of negative $0.01 due to lower same store property operating results, offset by a positive $0.03 due to better than expected non same store conventional redevelopment and affordable property operating results, a positive $0.02 due to lower G&A and a net positive $0.01 related to a number of other items.

Looking forward, we will continue our efforts to one, maintain property incomes across our several portfolios; two, simplify our business processes so that we can reduce off site spending including G&A; three, reduce risk at lowered leverage by raising capital through property sales to provide for repayment of our term debt; and four, concentrate our investment capital and better properties in fewer markets.

Third quarter 2009 FFO is projected to range from $0.36 to $0.42 per share and includes the following; a year over year same store NOI decline of 5% to 6% due to expected continued pressure on rental rates offset somewhat by improved occupancy, continuing improvement in our non same store conventional redevelopment and affordable portfolios, investment management income net of tax of $7 million to $8 million or approximately $0.06 per share, continuing reduction in OpEx spending including G&A, and diluted for property sales of $0.05 per share.

As we stated on previous calls, our most recent full year 2009 FFO guidance of $1.65 to $1.95 per share excluded FFO dilution from potential future property sales.

We are on track to meet that guidance, but are narrowing the range to $1.70 to $1.90 per share which includes a year over year same store NOI decline of 3% to 5%, and investment management income net of cap of $33 million to $35 million.

In addition, we now have a good estimate for the impact of 2009 property sales. Based on sales closed today or expected to close through year end, we currently expect dilution to total $0.15 per share for the full year. Taking this $0.15 of dilution into account, we expect full year FFO after dilution for property sales to be $1.55 to $1.75 per share.

With that, we will now open up the call for questions. Please limit your questions to two per time in the queue.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Habermann – Goldman Sachs.

Jonathan Habermann – Goldman Sachs

Interesting comments about starting to raise rent a little bit as occupancy is firming. Can you give us some further details about how much you're looking to increase rents, which markets, etc.?

Tony Dialto

Obviously relative to last year, rents still remain down but our occupancy has steadily improved and increased from a low in April. May was better than April. June was better than May. July is trending better than June, and as Tim pointed out we're just short of 94%. We see August the opportunity to maintain that.

So from that perspective, pricing power has returned in many markets across the board and I'd stay away from a range because it's more, the pricing increases will slow the decline if you will from what you see second quarter transaction rates were. So I think it's a positive development. It points to opportunity into the summer.

Jonathan Habermann – Goldman Sachs

Are you seeing more of a trading down impact where tenants may have left perhaps an A and they're trading down to a B? Is that most of your pickup at this point?

Tony Dialto

No, it's probably some of that, but I think generally speaking demand currently or traffic has picked up, and that has given us the opportunity to increase our occupancies and therefore given us the pricing.

Jonathan Habermann – Goldman Sachs

On the asset sales, can you give us a sense of timing for closing the $1.2 billion that LOI's are under contract?

David Robertson

We'll see, but as I mentioned, we sold about $500 million year to date. Of the $1.2 billion that we have under contract or in negotiations, half of that is under contract. Not all of that will close, but we expect a lot of it will close and those closings should occur over the next two to three months. Of the other $565 million that's in negotiations, some of that will fall out, but a lot of it will go under contract and close in subsequent months, and we have more than $1 billion of assets on the market, some of which we expect to go into negotiations and be put under contract later this year.

So it's hard to call when the closings will occur, but we expect substantial closings in the third quarter as well as the fourth quarter and probably on into the early part of next year.

Jonathan Habermann – Goldman Sachs

But what's closed to date, that's been factored into your guidance or are you anticipating further dilution as part of the guidance forecast?

David Robertson

The $500 million closed to date has been factored into guidance and we have assumed another $1 billion will close between now and the end of the year, so $1.5 billion roughly. That's how we get to the $0.15. Whether that number ends up being $1.75 billion or $1.250 billion won't make a whole lot of difference in the dilution this year because the impact is going to come from property sales that would have closed in November/December which won't have a whole lot of impact on dilution.

Operator

Your next question comes from David Todi – Citi.

David Todi – Citi

You had pretty lumpy expense growth rates across your markets in the quarter. Could you provide a little bit more detail as the pretty strong diversions and explain a little bit about the better performance in some markets?

Tony Dialto

Overall we've been very focused as you know on expenses and we talked about this in prior calls where we've had quite a bit of focus on renegotiating our contracts and improvements in contract services, repairs and maintenance, and quite a bit of improvement in our marketing efforts generating leads at lower cost. It's been probably been six of seven quarters where we've maintained this consistency.

In terms of some of the anomalies in terms of the growth rates in a particular market, I'll ask Rob Walker to comment as there may be some special issues.

Robert Walker

Just to add to Tony's comments, we had some favorable, if you're looking at some of the market data on Schedule Six, it's typically Miami comes to mind. We had some favorable settlements on real estate tax valuation deals that are in process on a couple of Miami properties.

This is part of our ongoing valuation appeal process across the portfolio that we go through pretty much on a constant basis to ensure that we have fair value, fair and equitable tax valuations for our properties in those markets. But it does create a little volatility in the individual markets from quarter to quarter.

David Todi – Citi

So we can expect some of those to pull back to more normalized levels then?

Robert Walker

Yes, potentially. We'll make further tax appeal valuation settlements in the coming months, but it's hard to predict exactly when those will actually flow through the numbers.

David Todi – Cit

Related to your redevelopments and how you see those, at what point do you pull redevelopment projects from the same store pool? Do you do that when they've been tagged for redevelopment or do you wait until construction has commenced before those come out.

Timothy Beaudin

Typically what we do, those come out of the same store portfolio when you start taking units down, get into the interiors and taking the units out of service. So they stay down out of same store during the redevelopment process where we're repositioning the property and they don't go back into same store until the property is stabilized for a 12 month period which is basically occupancies above 90% and then we move the entire history of that information back into same store so we've got a relative apples to apples comparison.

David Todi – Citi

So it takes a 90% threshold or is it 12 months or whichever you hit first?

Timothy Beaudin

12 months at 90%.

David Todi – Citi

Is there any way to quantify the NOI contribution from redevelopments in the past quarter in terms of the additional contribution?

David Robertson

The first quarter I think as Tim mentioned, we were roughly 10% up and then year to date NOI contribution from the conventional redevelopment activities.

Operator

Your next question comes from Michael Levy – Macquarie.

Michael Levy – Macquarie

Congratulations on the dispositions. It looks like a lot of progress is being made there. May I ask whether the improvement in capital coming into the market, do you discuss is resulting from the rising cap rates or is it from less uncertainty in the property market? I guess what I'm really trying to get at is where cap rates on $2 billion in assets that you have for sale might come in that, higher, lower or about the same?

David Robertson

I wish I knew for sure. As I mentioned, cap rates have been really pretty stable as of late. Going forward the biggest factors are going to be whether or not interest rates remain at current levels and whether or not property fundamentals pan out as people currently expect. If both of those occur, I would expect pricing to remain relatively stable.

When you think cap rates, they have been relatively stable, but of course you have seen some erosion in NOI and values have come down in line with those declines in NOI, but generally the transaction market has been increasingly healthy. In fact, I would say that the material change that we've seen in the last 30 to 60 days is that while our most active buyers are still the local and regional operators that are targeting $10 million to $20 million acquisitions, we have seen quite a bit of entrance of late in larger transactions, properties in the $50 million to $75 million range.

We closed a $70 million sale this week. As a matter of fact, it had several $50 million plus properties currently under contract. And I will tell you that the traffic at the larger properties has been impressive. We've got a number of large properties where we've seen as many as 20, 25 tours and offers from qualified buyers. So the market to market feels pretty good today.

Michael Levy – Macquarie

Would you be able to give any commentary on the magnitude of assets moving from being marketed to being put under contract over the past two months? It sounds like there's a whole bunch of stuff that was in the pipeline for being held under contract that has been sold, but just that move from being negotiated to being under contract now, how has that progressed?

David Robertson

When we met with investors in June, we had $1.1 billion of assets under contract or in negotiations. Since that time we've closed $320 million of sales which generated $115 million of proceeds to AIMCO.

In addition, we actually grew our pipeline of assets under contract and in negotiation to $1.2 billion or $100 million than we had in early June. So in aggregate, we've sold $320 million of assets and then we filled the pipeline by putting in an additional $400 million of assets either under contract or under negotiations. So we've made good progress.

Michael Levy – Macquarie

On the operations in southern Florida, if you could talk a bit about the expense improvements there and why the average rents didn't deteriorate as much as one might have thought given the weakness of that market?

Timothy Beaudin

As I mentioned to the prior question, we had some tax appeal valuations come through on settlements and they were favorable, a couple of our Miami communities, and so that reflects a sizeable portion of the better than expected expense performance.

Tony Dialto

On the rent side, I'd point to a couple of things. First, our focus on renewal, capturing renewals and doing so not only in Miami in particular, but across the country by trying to gain early renewals from summer expirations prior to coming into season. So that helped us a little bit in terms of not giving up in rate.

Also, we've had improvement in AVO in Florida in general and in southern Florida as well, in Miami in particular. Occupancies are up therefore the rate pressure is a little bit less.

Operator

Your next question comes from Michelle Ko – Bank of America, Merrill Lynch.

Michelle Ko – Bank of America, Merrill Lynch

Can you tell us more details around the guidance for NOI being down 5% down to 3% in terms of your assumptions for same store revenues and expenses?

David Robertson

When we were looking at the full year NOI guidance that assumed a revenue range being down 2.75% to down 1.75% on revenue. And expense growth is assumed to be basically flat to up a point.

Michelle Ko – Bank of America, Merrill Lynch

In terms of renewals and in place rent, can you tell us what the spread is between the two right now?

Tony Dialto

At this point through Q2, it's been about 400 basis points. July is tightening and we believe August will tighten as well as AVO picks up.

Michelle Ko – Bank of America, Merrill Lynch

In terms of dispositions, you've done such a good job this year, it seems like you'll probably be able to get done over $1 billion worth. I was wondering if you could give us an idea of how you think about next and do you think you could do $1.5 billion to another $2 billion, or how much do you have left that you can do?

David Robertson

We identify about $1.5 billion of conventional assets and $.5 billion of affordable assets that we have planned to sell, ideally this year. Whatever we don't get done this year, we hope to sell next. As I mentioned earlier, we're assuming that we get about $1.5 billion of the $2 billion done this year. It could be a little less. It could be a little more. Whatever doesn't get done, we'll slide into early next year.

Operator

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

Michael Salinsky – RBC Capital Markets

First question relates to disposition activity. I think you threw out $1.5 billion and you also lowered guidance $0.15. Just based upon that activity that you're looking for, any guestimates right now as to the amounts you're going to have to pay as a distribution via special dividend?

David Robertson

It's very difficult to quantify that until you get to the end of the year and figure out what your taxable gain is. What I can tell you is that a special dividend is likely to be required, but it will be a function of whether or not our taxable income exceeds our common and preferred dividends.

And if we do make a special dividend, it will be in the form of 90% stock so that we can retain the cash for corporate and other purposes.

Michael Salinsky – RBC Capital Markets

Any thoughts if it could be bigger than last year or smaller at this point?

David Robertson

I would expect it to be smaller than last year given what we said about sell activity this year. As you know, we sold $2.5 billion last year. We're talking about $1 billion less than that this year so that's where we'd end up. We'd expect the dividend to be smaller.

Again, as we said on the last call, we realize that having a number of special dividends during the year can cause quite a bit of confusion, so this year we committed to making one special dividend and one special dividend at the end of the year if necessary.

Michael Salinsky – RBC Capital Markets

You talked about the simplification of the AIMCO business model. Any thoughts on exiting certain AIMCO capital, transactional activities, downsizing the affordable portfolio. Also I'd be interested in where you expect to operate leverage in the portfolio.

Terry Considine

First, in the general simplification is that during the years following the technology recession, we spent a lot of money upgrading systems and providing support to operations and to the internal infrastructure of the company, and there's a tremendous amount of good work done. In retrospect, I may have overdone it a little bit, and so I'm just working back position by position to see what is the most efficient, simplest way of accomplishing the task.

You'll see some pretty good year to year reductions in G&A in this quarter and those will earn in during the balance of this year and I would expect to see further progress on that between now and the end of the year.

As to the activities, I think that we are making virtue of necessity in the tax credit business because that business is very impacted by the current economy and so I would expect to see a decline in our tax credit transaction activity until market recover.

In general, we're trying to emphasize recurring revenues that have a higher degree of predictability and a higher quality to them and I would expect transaction activities and transaction revenues to be de-emphasized.

As to the affordable business, I think you can see in Tim's report that having a diversified portfolio with a mix of activities results in reduced volatility and greater predictability. So in this quarter for example, or this year, and I think this will continue going forward, while our conventional same store portfolio is impacted by the recession, much of that is offset by the redevelopment portfolio and the affordable portfolios.

You think about it as a bond allocation inside a typical investment portfolio. It is stabilizing in this case. So going forward, I think the affordable assets which are primary Section 8 for the elderly, so in viewing demographic and a very predictable revenue stream have a stabilizing effect on our results.

Michael Salinsky – RBC Capital Markets

And the leverage?

Terry Considine

I think that on leverage we will see some gradual reduction in our leverage. I think that we are looking forward to building enough cash inside the company to take care of the term debt maturity in 2011. And once that's done and we have completed the property sales related to that, our leverage will be property debt with a weighted average maturity of about nine years and a weighted average interest cost of sub 6%, and perpetual preferreds.

I think those are relatively safe forms of leverage as measured against payment risk or measured against refunding risk or re-pricing risk which are the things that we focus on. So as we look forward, we want to balance the negative aspects of leverage in a declining economy with the aspects of leverage in a rising economy, particularly where there might be an acceleration of inflation.

Inflation has averaged in the last 20 years where it's been regarded as relatively benign, just under 3%. So if you look at that weighted average cost of very long term leverage and subtracted just that inflationary item from the fixed cost, you'll see that the effective cost of that leverage is quite attractive.

Michael Salinsky – RBC Capital Markets

It sounds like not a significant change from here just with the pay down.

Terry Considine

I think the pay down; first of all it's down a point or two with prior year already. I think it will be down again when we pay off the term debt, and then it will gradually decline a little bit with amortization on the property debt.

Operator

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

Richard Anderson – BMO Capital Markets

Just going on those comments on specifically on affordable, it kind of sounds like a reversal to me because I remember speaking to you about interest and simplifying the model and a part of that was reducing your exposure to affordable. In fact I have notes here that say just that from one of my meetings with you a couple of months ago.

Is it that you've noticed this offsetting positive this quarter that is causing you to maybe reconsider your marriage to the affordable business?

David Robertson

There clearly is a complexity that comes with the affordable and tax credit business and we have been focused on reducing that and as you know, over the last couple of years, we've sold a large number of affordable assets and reduced our tax credit redevelopment activity.

In addition, we continue to explore alternatives to reduce the amount of capital that we have invested and the tax credit business has become less attractive. Pricing has become very difficult and so we have a lot less that we're looking to do there this year and very little next year.

But we are in a somewhat unique position in the tax credit business in that we already own the affordable properties that we've identified for redevelopment. So we have the benefit of being able to wait out the current volatility in the market and come back into it once pricing stabilizes.

So we're doing less. We're looking at ways to reduce our capital investment but it does provide a good hedge. As we've always said, the benefit of affordable properties is that you have contractual rent increases that are generally tied to CPI. So that income continues to grow. The property is paid for. Most of the properties have a very long waiting list.

I want to make one other point on the cash credit income. I'm speaking specifically to the tax credits syndication income for the fees that we earn on new origination. Our outlook for the run rate of the amortization of deferred tax credit income doesn't change. If you look at Schedule 11, you can see that deferred tax credit income which is a recurring item will continue to be at the $18 million rate whether or not we're proactive in the tax credit business this year, next year or the following year.

Terry Considine

What I would add to that is I think that sometimes in conversations, perhaps we've lumped together all of the several activities that are conducted under the affordable business and what I was trying to speak to, I would just aggregate those.

I think as David pointed out, the new tax credit transaction business has largely gone away and that increased volatility is less attractive to us. The owning affordable assets, which just to be clear is about 5% of our portfolio, has been a steady Eddy business.

Richard Anderson – BMO Capital Markets

I guess I saw it as you completely going away from affordable or not completely, but materially, but I understand they're inter-related with the entire space.

David Robertson

You want to separate out from our point of view, new tax credit transactions, the more difficult business. We've learned greater volatility than we had expected going away pretty significantly.

Section 8 for the elderly, steady Eddy business, comprises only about 5% of our business today and probably gradually declining a little bit over time.

Richard Anderson – BMO Capital Markets

Is it right that that the term debt pay down has maybe dropped a rung or two down the ladder in terms of priority to de-lever. I was surprised to see how much secured debt you paid down in advance of getting the term debt done. Am I wrong about that?

David Robertson

Given that the rate on the term debt is only 1.78% today, it's an attractive price which gives us some flexibility over the timing of the repayment. That being said, we remain committed to paying it off prior to maturity and have $80 million of cash set aside to do so, though we are now seeing the repayment of the term debt against other near term cash needs.

As I mentioned earlier, based on the pace of property sales, we feel very comfortable with our ability to get that repaid prior to maturity.

Terry Considine

What I would add to that, David is exactly right. It remains a high priority, but it's not one about which we're especially concerned because of the progress we've made throughout the business including property sales. And that accumulating cash, one of the things we've looked at is to have balance sources and uses to make sure we don't have cash requirements elsewhere in the business, whether it's some property debt refunding.

You can see that's largely eliminated for the next several years, whether it's in redevelopment which has wound down, whether it's in the dividend end which we adjusted earlier in the year, and so we're in a pretty liquid situation and looking to build that liquidity.

Richard Anderson – BMO Capital Markets

So you $80 million accumulated toward that $350 million, is that right?

David Robertson

That's correct.

Operator

There are no further questions in the queue at this time. I would like to turn the call over to Mr. Terry Considine for closing remarks.

Terry Considine

Thanks to all of you on the call for your interest I AIMCO. I think that I'd like to close where we began which is that while we recognize that these are very difficult times in the economy and in the apartment business, our focus is staying on course and following our general plan, serving our customers effectively and efficiently, which we're doing well, improving the quality of our portfolio which is happening, reducing leverage and financial risk where we're on track and simplifying the business including lowering operating costs and G&A.

That's our mantra for this year and for the foreseeable future, and I think we're making steady progress towards our goals. Thank you. If you have any questions please feel free to call Ernie Freedman, David Robertson, or Alisa Coleson or myself.

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Source: Apartment Investment and Management Company Q2 2009 Earnings Call Transcript
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