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Apartment Investment and Management Co. (NYSE:AIV)

Q3 2009 Earnings Call Transcript

October 30, 2009 1:00 pm ET

Executives

Lisa Cohn – EVP, General Counsel and Secretary

Terry Considine – Chairman and CEO

Tim Beaudin – President and COO

David Robertson – President, Chief Investment Officer and CFO

Tony D’Alto – EVP, Property Operations

Ernie Freedman – SVP, Finance

Analysts

Michelle Ko – Bank of America-Merrill Lynch

Michael Levy – Macquarie

Jay Habermann – Goldman Sachs

Rob Stevenson – Fox-Pitt Kelton

Dustin Pizzo – UBS

Rich Anderson – BMO Capital Markets

Michael Bilerman – Citigroup

Giarno Garul [ph] – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Apartment Investment and Management earnings conference call. My name is Andrea and I will be your coordinator for today’s call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded.

And now, I’d like to turn the presentation over to your host for today’s call, Lisa Cohn, Executive Vice President and General Counsel. Please proceed, ma’am.

Lisa Cohn

Thank you, Andrea. 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, who will speak to property operations and our redevelopment activities; David Robertson, who will review debt capital markets activity, investment management, third quarter financial results and guidance for the fourth quarter of 2009. Also in the room to answer questions are operations leaders, Tony D’Alto and Rob Walker, and finance leader Ernie Freedman.

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

Terry Considine

Thank you, Lisa. And thanks to all of you on this call for your interest in Aimco. It’s just one year since the global economy turned down quite sharply. In retrospect, here is what I see as most important for investment in Aimco. First, property net operating income has been fairly stable, especially when one considers our several portfolios. Second, while FFO is down, its quality is better. FFO is increasingly earned from better properties with higher margins. Year-over-year reductions in FFO were due primarily to lower transaction-based income. Non-recurring income now contributes less than 4% of FFO. And dilution due to property sales has been largely offset by lower offsite costs, including G&A.

Third, property debt refunding risk never large because of our nine-year weighted average maturity is now further reduced. Fourth, term debt, essentially our only corporate obligation is on track to be repaid early, and importantly, at par. Fifth, consistent with our discipline, property sales have been made from our weakest assets. One result is that average rents have increased almost 50% from $730 five years ago to $1,180 estimated at the end of this year. Today we have customers with higher incomes, properties with better locations, and financial results with higher margins and greater predictability.

Sixth, offsite costs, including G&A, are lower year-over-year by more than 40%. In sum and notwithstanding the economy, Aimco is on track to execute its 2009 business plan to maintain top line, control costs, upgrade the portfolio, wind down redevelopment, extend property debt maturities, pay down term debt, and reduce offsite costs, including G&A. So one year later, Aimco is simpler, safer and more focused.

Looking forward, here is some of what we consider in planning for next year. First, we expect the economy to remain weak. We are encouraged by yesterday’s third quarter GDP report, but we do not know that growth is sustainable, nor do we know when the economy will begin to add jobs. That said, I expect apartments will do better than the economy as a whole due to very strong demographics and severely limited new supply.

Second, rents may or may not have bottomed. Across our conventional same-store portfolio, transaction rents have been flat for the past 90 days or so. We will have to wait to see what lies ahead. But even with the bottom to rent [ph] declines, the earn-in of gain to lease will depress our top line making year-over-year comparisons negative for the next several months.

We will have to work to find offsets, but we do expect to find substantial offsets in many small items such as other revenue and further efficiencies. Our focus is on improved execution, not a new strategy. We do plan to sustain capital spending to maintain and upgrade our properties. We do not expect transaction-based income to be an important contributor to 2010 FFO.

Third, interest rates are expected by many to remain low while the economy is weak. We plan to use the next several months to pre-fund 2012 to 2014 property debt maturities, both to lock in current interest rates and to limit refunding risk in the event of a future repeat of last year’s crisis.

Fourth, property values seem to have stabilized after their sharp decline. For the past seven years, we have been net sellers to the tune of more than $1 billion a year. When property values were high, we sold and returned money to shareholders, buying back 25% of our shares. Next year we plan to buy as much as we sell, recycling capital to improve market allocations and to upgrade locations. We will continue to make property sales from our lowest rated properties.

Fifth, we have identified further cost savings in offsite costs, including G&A. Some are being made in this fourth quarter. Some, for example, are transitioned to lower cost, off-the-shelf technology will be made over the next year or so.

I’d like to take a moment to discuss the Aimco team. Aimco has a disciplined talent process. We work hard and systematically to recruit and develop talented individuals. One consequence is that leaders inside Aimco often have abundant opportunities outside Aimco. Aimco (inaudible) hold important leadership positions throughout the real estate industry, including as CEOs of private and public businesses. I see this as good, not bad. By plan, we have a deep bench ready to step forward.

On Tuesday, we announced David Robertson’s departure at year-end, and Ernie Freedman to advance to Chief Financial Officer. These changes were not surprises to me. I have been a fan of David and a supporter of his career for more than 15 years. He is interested to become a CEO and he will be a good one. He had stayed at Aimco through this year in part to be sure that he leaves Aimco in good shape. It is. Of course, we will miss his special gifts. But his departure is an opportunity for others and one for which we are well prepared.

Our team leaders going forward have been part of Aimco leadership for many years. If you do not yet know him, I encourage you to spend time with him whether at NAREIT in a few weeks, at an investor day here early next year, or property tours or meetings here in Denver.

The senior team includes Tim Beaudin, President and Chief Operating Officer, responsible for property operations, asset management, redevelopment, construction services and human resources; Ernie Freedman, now Chief Financial Officer and with responsibility for IT too; Lisa Cohn, General Counsel and responsible as well for risk. Lisa is working with Tim on HR and will become responsible for it at some time in the new year. And of course, Miles Cortez, our Chief Administrative Officer, who takes on our (inaudible) challenges.

Each of these senior officers lead the team of talented individuals, many of whom will step forward in the future to take on increased responsibilities and some of whom will one day become senior officers at Aimco or elsewhere. Their progress is a good thing, something we plan for and celebrate. So as we look to the future, we are quite cautious, but also optimistic that we have the right properties, the right balance sheet, and the right people to navigate whatever that future may hold.

Now to review third quarter operating results, I’d like to turn the call to Tim Beaudin. Tim?

Tim Beaudin

Thanks, Terry. On today’s call, I’ll cover the following. First, third quarter financial results for the operating portfolio; second, marketing conditions, including an update as to current activity in October; and third, an update on conventional redevelopment activities.

Turning to our operating portfolios, our total portfolio’s NOI was consisted of same-store conventional, conventional redevelopment and the affordable business is up 0.1% year-to-date and down 1.2% for the third quarter. After each of the segments, same-store conventional was down 3.3% year-to-date and down 5.4% in the quarter. The redev NOI is up 11.5% year-to-date and up 16.4% for the third quarter.

As for the affordable business, it has improved 8.7% year-to-date and 6% for the quarter. While the redev and affordable business segments are substantially smaller than the same-store portfolio, we are pleased that the positive operating results offset the reductions in same-store results.

Specifically to same-store results, as I mentioned, NOI for the third quarter is down 5.4% from prior year or 0.1% better than midpoint guidance, reflecting a 2.9% decline in revenue and expense growth of 1.1%. The 2.9% decline in conventional same-store revenue was comprised of 3.5% in lower average rents, 0.2% in lower occupancy at 94.8%, somewhat offset by 0.8% higher utility reimbursement and other income.

During the third quarter, we were able to grow average daily occupancy to 94.8%, which was 200 basis points sequentially higher than the second quarter. On a year-over-year basis, third quarter new lease rates were down 8% while rental rates or renewed residents on average are about flat to the prior leases.

Within the third quarter, rents have generally remained flat from July to September with some strengthening in certain markets, which has allowed us to tighten the gap between lease rates and renewals in those markets. Specifically, over the last 30 days, we have taken new lease rent increases in Washington DC, Boston, Philadelphia, Miami, Dallas and San Diego. However, we continue to see pressure on rents in Phoenix, LA, Tampa, Orlando over that same time period.

Overall, we have continued to hold occupancy coming out of peak leasing season and will end October with a monthly ADO of above 95%, which has continued to provide pricing power in a number of markets. However, we remain cautious overall in an economic uncertainty.

On conventional same-store expenses, we continue to see the benefits of the earn-in of our contract renegotiation efforts completed year-to-date impacting contract services. In addition, expense reductions were achieved by lowering term costs and administrative costs. These saving were offset by planned higher marketing costs and higher taxes and insurance expense.

As mentioned on prior calls, the key area of focus continued to be resident retention. Through various programs and resident offerings, we were able to improve resident retention during the third quarter, which finished at 65.2%, up 60 basis points on a year-over-year basis. We have seen sequential improvements in residential retention throughout the third quarter, with September finishing at 67.2%, which is up 400 basis points from September 2008.

Now for an update on the conventional redevelopment activity. During the third quarter, we invested $9 million through our conventional redevelopment activities and completed work on five projects. Year-to-date in the third quarter, we have invested $48 million and completed work on 21 projects. We will, through the end of this year, complete all urban projects and anticipate limited redevelopment activities, as we move into next year.

We continue to see the financial benefit for redevelopment in year-over-year revenue growth as these properties stabilize. We made significant strides in stabilizing this portfolio over the summer and with ADO of 94.9% for the month of September, have now eliminated most of the drag associated with our redevelopment efforts in the last few years.

I’ll now turn it over to David.

David Robertson

Thanks, Tim. On today’s call, I will cover the following subjects. First, property sales for the third quarter and October, and our expectations for the balance of the year; second, the progress made extending property debt maturities and repaying our term debt; and finally, our financial results for the third quarter and guidance for the fourth quarter and full year 2009.

First, property sales. During the quarter, the multi-family transaction market improved and pricing stabilized, and in some markets, even increased, supporting the sale of 28 properties for $367 million and generating net proceeds to Aimco of $125 million. We also had a good October, selling an additional seven properties for $124 million and net proceeds to Aimco of $28 million. This brings year-to-date property sales to $865 million, with total proceeds to Aimco of $273 million.

As Terry mentioned, we continue to sell off the bottom, upgrading the quality of our portfolio as we exit non-target markets and sell our lower rated assets. For example, average rents for conventional properties sold during the third quarter were $753, nearly 30% less than average rent in the retained conventional portfolio.

We currently have $800 million of assets either under contract or in negotiations. And we plan to sell approximately $450 million of this amount to fund repayment of our term debt, bringing total sales in 2009 to approximately $1.3 billion. Any additional sales will be used to fund investments in our existing portfolio or the acquisition of higher rated assets in our target markets. Based on carefully managing our taxable income, we do not expect to pay a special dividend at year-end.

Turning to our debt capital markets activity, since the end of the second quarter, we have repaid $140 million of our term debt, leaving us with a balance of $210 million today. Given the debt of our property sales pipeline, we currently expect that the term debt will be repaid in full during the first quarter of 2010 or one year ahead of its maturity date. We have made similar progress extending our property debt maturities.

At the end of the second quarter, Aimco’s share of property debt maturing through 2011 totaled $221 million. Through refinancing and repayments completed during the third quarter, combined with refinancings in process and planned property sales, we have reduced this amount to $164 million comprised primarily of two loans that we plan to refinance at maturity in 2011. So in short, the balance sheet is in good shape.

Now to financial results. Third quarter FFO per share of $0.41 was within our guidance range for the quarter and $0.02 above the midpoint, primarily due to lower offsite costs including G&A. Looking forward, we will continue our efforts to maintain property income across our several portfolios, simplify our business processes so that we can reduce offsite spending including G&A, reduce risk and lower leverage by raising capital through property sales to complete repayment of our term debt, and concentrate our investment capital and better properties in our target markets.

Fourth quarter 2009 FFO is projected to range from $0.32 to $0.40 per share and includes the following; a year-over-year same-store NOI decline of 7% to 8%, due primarily to a decline in rental rates and increases in property taxes and insurance expense, partially offset by improved occupancy; $0.06 per share of non-recurring charges, including severance costs and prepayment penalty expense related to the early refinancing of property debt; investment management income net of tax of $8 million to $12 million or approximately $0.06 to $0.10 per share; and continuing reduction in offsite spending including G&A.

Full year 2009 FFO is projected to be consistent with the guidance provided at the beginning of the year in range from $1.61 to $1.69 per share, which includes a year-over-year same-store NOI decline of 4% to 5%; continuing improvement in our non-same store conventional, redevelopment and affordable portfolios, which approximately offset the projected same-store NOI decline; investment management income net of tax of $31 million to $35 million; and dilution from 2008 and projected 2009 asset sales of $0.15 per share.

A few final thoughts. I want to thank Terry and my colleagues for eight great years here at Aimco. And I want to congratulate Ernie on his promotion to CFO. I have had the pleasure of working closely with Ernie this year, and I am confident that I am leaving our financial activities in extremely capable hands.

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 first question.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Michelle Ko, Bank of America-Merrill Lynch.

Michelle Ko – Bank of America-Merrill Lynch

Hi, good morning. I was wondering if you could talk a little bit about your acquisition plans for next year. You are saying that you are going to buy as many assets as you are selling. I was wondering if you could assess a rough range in dollar terms. And then also, are there particular markets where you want to gain exposure?

Terry Considine

Michelle, this is Terry Considine. I think that’s an excellent question and one that we will address it with particularity when we give guidance on our first call. In general, we would look to sell, perhaps -- or to buy, rather, perhaps 5% to 10% of our existing plus $7 billion capitalization and to fund it with sales of lower rated properties of 5% to 10% of our existing capitalization.

Michelle Ko – Bank of America-Merrill Lynch

Okay, great. And if I could ask one follow-up question, I was just wondering if you could talk about the IRRs you expect on acquisitions.

Terry Considine

I think that the IRRs on acquisition today are probably in the low-double digits on a levered basis. Probably 8% or 9% on an unlevered IRR and 12% or so on a levered basis. I think they will be funded by sale of assets with comparable IRRs. So we see that the recycling of capital will be more to upgrade our portfolio and to bring it into compliance our asset allocation policies rather than to see significant increases in IRRs.

Michelle Ko – Bank of America-Merrill Lynch

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Michael Levy of Macquarie. Please go ahead.

Michael Levy – Macquarie

Thank you. Just want to get some clarity on the pipeline and the planned sales for the rest of the year. Would it be correct to assume that once the $450 million in planned sales go through the net proceeds of these sales and the cash on the balance sheet will be sufficient to repay the term loan?

Terry Considine

Yes, that’s the case. That’s why we set the marker out there at $1.3 billion for the year. We clearly could sell more given the size of the pipeline. But as of today, we don’t have any use for the proceeds. So as we identify acquisitions going into next year, we would expect to continue to be a seller of the assets we previously identified using the proceeds to fund those acquisitions.

Michael Levy – Macquarie

That’s what I thought. And that -- would it also be correct to assume that that’s why it seems like the sales pipeline -- the size of the sales pipeline has been reduced? That is, the last time you filed an 8-K, the sales pipeline totaled $1.4 billion and now it seems like the size of the pipeline is lower, even accounting for the sales of September and October.

Terry Considine

Correct. Given where we are with the term debt reduction, we are basically picking out any deals that we don’t need at this time.

Michael Levy – Macquarie

Perfect. Just on the operations, can you just please help me understand what’s driving the strong improvement in average rents in New York City?

Tony D’Alto

Order occupancy for one --

Terry Considine

This is Tony D’Alto, who is the Head of Property Operations, speaking, Michael.

Tony D’Alto

Higher occupancies for one, we’ve been able to take rate increases because we have been pretty much dealing mostly with the renewals. We don’t have a lot of available product. And then our price point, our declines were much less earlier on than the market.

Michael Levy – Macquarie

All right, that’s helpful. I’ll get back in the queue with any other questions that I have. Thank you.

Operator

Our next question is from Jay Habermann of Goldman Sachs. Please go ahead.

Jay Habermann – Goldman Sachs

Hey, good morning, everyone. Terry, just a follow-up on the question on acquisitions. I think you mentioned roughly selling 5% to 10%. Is that beyond the dispositions that you currently have under the letters of intent for the $800 million? So for 2010, are you looking at an incremental $700 million?

Terry Considine

Jay, as David said, we have a pipeline of pending transactions, which is roughly twice of what we need to settle up the term debt. And so some of that will be used for the term debt and some of that will be applied against our sales total for next year.

Jay Habermann – Goldman Sachs

So I guess what I was getting at though was, what sort of the pool of the non-core that remains.

Terry Considine

David and I will take turns at this. But what I would say is that there will always be a pool that remains because we constantly sort for the lowest rated assets. And as we’ve done for many years, we will sell off the bottom. And that bottom keeps getting higher.

David Robertson

And Jay, with regards to the $2 billion of assets that we identified at the beginning of the year as once targeted for sale, given that we will have sold $1.3 million, we will have $700 million left that we would expect to sell at some point in 2010 or ’11 to fund acquisitions.

Jay Habermann – Goldman Sachs

And do you think that gets you closer to your goal of reaching that disposition of your non-core?

Terry Considine

Jay, I think that it will largely complete the liquidation of non-core identified as of that point in time. But the dynamic processing will be constantly culling [ph] and ranking the properties we hold and selling off the bottom.

Jay Habermann – Goldman Sachs

Okay. And sorry if I missed it, I did get on just a few minutes late. But can you speak to the range for the fourth quarter what some of the bigger items are? I’m assuming you are not expecting occupancy to drop 150 basis points.

Terry Considine

The range for the quarter is $0.32 to $0.40 per share. Let me turn it over to Ernie Freedman to discuss the details.

Ernie Freedman

Yes, this is Ernie. And with that specifically ranged in the $0.08 range, so the midpoint was 30%. David has mentioned his range for investment management is $8 million to $12 million because of the key transactions that are yet to close in the fourth quarter, but we want to give a range there in case some of those do not. And the other $0.02 on either side of that is just for normal operating activities for things may or may not come in for us.

Terry Considine

And Jay, if you missed it, the guidance for the fourth quarter includes $0.06 of non-recurring charges for severance and prepayment penalty related to the early refinancing of property debt.

Jay Habermann – Goldman Sachs

And did you guys speak to the impairments? Sorry if I missed that as well.

Terry Considine

We did not speak to the impairments. We have $21 million of impairments during the quarter related to four assets. Basically we have four properties that were either acquired or redeveloped during 2007. The values were set then at that time. Obviously values have declined since 2007. As we move those into the sales bucket, accounting requires us to take the impairment at that time. I will point out though, during the quarter we had about $75 million of gain on sale. So on a net basis, you are looking at something north of $50 million on the portfolio during the quarter.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from Rob Stevenson of Fox-Pitt Kelton. Please go ahead.

Rob Stevenson – Fox-Pitt Kelton

Good afternoon, guys. Tony, what was bad debt expense during the quarter? How is that compared to last quarter and the year-ago period?

Tony D’Alto

It’s 0.1 better than prior year. And for the quarter, I believe we were basically flat and we’ve been running at that range sub 1% all year?

Rob Stevenson – Fox-Pitt Kelton

Okay. And then I guess a question for David. On Aimco capital on the investment management business, the comments I guess from Terry earlier in the call about basically sort of having less exposure to that business going forward, you guys talk about -- is that just a matter of the current economy or is that a sort of plan to continue to wind that business down to some extent?

David Robertson

Well, I’ll address it first and I’ll let Terry add to it. But it’s a function in part of values and inventory of transactions. And given the decline in values, we are in lower promote income, lower general partner fees, given what’s going on in the tax credit business today, the markets of different turmoil. So we don’t have much activity there. So as a result, we have recurring income that is now about 75% of total transactional income. We haven’t prepared guidance for 2010, but I think the outlook would be for something along the lines of that type of number. But the -- in out-years, it will be a function of what happens to value. I’ll let Terry add to that.

Terry Considine

No. I completely agree with what you’ve said, David. The only thing I might add is that at this time in the economy, we are putting more rates on our direct investment and it somewhat reduced to weigh on our asset management activities. This seems that that’s where the better returns are.

Rob Stevenson – Fox-Pitt Kelton

So it’s a function of the business environment more so than any sort of strategic move away from that business?

Terry Considine

Correct.

Rob Stevenson – Fox-Pitt Kelton

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from Dustin Pizzo of UBS.

Dustin Pizzo – UBS

Hi, good afternoon, guys. Dave, were there any notable I guess quality or location [ph] differences of the assets you sold in the third quarter versus the second quarter, given the 50 basis point increase in cap rate there, while the rents look like they are fairly comparable?

David Robertson

Yes, the rents were a little bit below. The average rate for the third quarter sales were a little bit below those in the second quarter. And as you know, it’s always (inaudible) look at cap rate because of the mix of assets being sold. But generally the pricing was consistent. There was one asset in particular that had a property tax reassessment just prior to the sale that’s not captured in the trailing 12-month number. So it throws off the average cap rate. If you pull that property out of the computation, the average cap rate during the quarter was 7.6%, which as you know is consistent with what we saw during the second quarter.

Dustin Pizzo – UBS

Okay. And assets for the balance of the year, I’d imagine, they are fairly consistent with what you’ve done thus far?

David Robertson

Correct. The assets that we sold in October, for example, were at an average cap rate of 7.7%.

Dustin Pizzo – UBS

Okay, thank you.

Operator

Thank you. Our next question is from Rich Anderson of BMO Capital Markets. Please go ahead.

Rich Anderson – BMO Capital Markets

Thanks. Good morning to everybody. A question for maybe Terry or anybody. Five years from now, where do you Aimco? Do you see yourself bigger, smaller, or do you feel like you have right sized the company at this point?

Terry Considine

Rich, that is a terrific question, one that the Board asked me, one that I think about myself a lot. And what I would say is, first, that there is -- the future is less clear to me today than perhaps at any time in the last 30 or 40 years that I’ve been doing this. And so I approach it with a lot of caution. What I do think is that we have our balance sheet in shape and that there is a significant opportunity for us to recycle capital and to make progress by upgrading our assets, upgrading our locations, and in operations improving our executions. In terms of size, I’ve never been focused on being the largest company, although there have been years when we owned more apartment units than any other company. But rather than being the best in execution and providing the best service to customers, the best jobs for team members and the highest returns to shareholders. And so I would guess that given the long-term bias towards growth in the US economy, unless we have the downturns that some worry about that five years from now that we will find ourselves larger, that our assets will be more concentrated in the top 20 markets, that we will be clearly focused on BB+ assets, which we define as having rents in the second quartile in the particular local market, and that we will continue to and try to improve our execution against those goals.

Rich Anderson – BMO Capital Markets

Okay. And then as a follow-up, do you think you will be there in five years? And what would you -- how would you comment on succession now that David moving on and apparently throwing a bit of a wrench into your succession plan strategy? Can you comment on those topics?

Terry Considine

Sure. It’s a fair question, and here is how I see it. I like what I do. I like the people within my work. So long as those continue and so long as the Aimco directors and my beautiful wife Betsy agree, I expect to continue to work here at Aimco. But remember that Aimco is no one-man band. First, our governance is by a very engaged, very qualified, very independent Board of Directors. On important matters, I do not act on my own. Second, the Aimco management team is very deep. The senior leaders are very good, and we have many comparably able people behind them. Where we see gaps, we work to develop or recruit young talent to fill those gaps. There is no doubt, as I said in my earlier remarks, that David’s departure leaves a gap. David has been both a dear friend and trusted colleague and my identified successor. So we have some work to fill that gap. The Board and I have reviewed it. We have thought to what we would do in the interim, but we haven’t quite reached the final conclusion about what we will do in the longer term.

Rich Anderson – BMO Capital Markets

Okay, perfect. Thank you.

Operator

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

Michael Bilerman – Citigroup

Hi, Terry. I just wanted to continue on that topic. You’ve been Chairman and CEO of the public company since 1994, given the fact that you did have David in this succession role and a desire. We’ve seen other companies at that point that split the Chairman and CEO role, and that doesn’t mean that you are not affiliated with the company anymore, but at some point, it provides that opportunity for talent to step up within the -- in the organization rather than see the Aimco talent go somewhere else, and (inaudible) last 12 months between David, Jeff and Tom being the three most high profile. There is a lot of talent, and I’m not diminishing any of the talent you have there today, but clearly three executives that were very, very important. And so if I can just be a little bit more poignant [ph] in terms of directing how did this decision, if I’m sure it came up of, well, maybe today is the right time to split the roles or have a one-year transition or something to that effect, with David stepping into the CEO role and you taking Chairmanship.

Terry Considine

Michael, I think I answered that with Rich. I like what I’m doing and I’m going to continue to do it so long as the Board agrees. So I think, for David, he is naturally ambitious and filled with energy and possessed with great potential, and would like to have that kind of role and responsibility and will look elsewhere, and I’m quite confident, will land on a seat.

Michael Bilerman – Citigroup

I guess if there was a timing surrounding that decision -- I mean, what was -- because it was part of the succession planning, I mean, what was the timing of David moving to that role previously?

Terry Considine

Moving to what role?

Michael Bilerman – Citigroup

I think you had commented that David was tap [ph] for the eventual CEO role of the company, and what timeframe was that?

Terry Considine

There was no timeframe associated with that. In other words, we were not on a clock as to my making a change. So for the last many years, it’s been my indefinite plan -- my plan to stay here indefinitely and that continues.

Michael Bilerman – Citigroup

Okay, thank you.

Operator

Thank you. Our next question comes from Giarno Garul [ph] of RBC Capital Markets.

Giarno Garul – RBC Capital Markets

Good afternoon. Going back to planned dispositions, what are your cap rate expectations for the properties that you currently have under contract?

David Robertson

Ignoring the mix of assets being sold, our cap rate expectations are roughly in line with what we have seen over the last six months.

Giarno Garul – RBC Capital Markets

Okay. And then lastly, looking at your unencumbered portfolio, where the step stands right now?

David Robertson

I’ll let Ernie discuss it in specific. But in general, we are not focused on having an unencumbered portfolio. We are focused on adding property debt as our primary financial vehicle so that the portfolio is largely encumbered. Ernie, do you want to add anything to that?

Giarno Garul – RBC Capital Markets

That’s true, David. We virtually -- we have a handful of assets at this time that are unencumbered. It was value of less than $100 million that is not the focus of ours there, unencumbered properties.

Giarno Garul – RBC Capital Markets

Okay, thanks.

Terry Considine

I’d like to add to that, just a more general comment on leverage because it’s a subject of interest to our board and to our shareholders. And I would start by saying, we look at overall leverage in consideration of several factors and are comfortable with our leverage given that we have no obligation to fund ongoing developments. We have no forward obligations to purchase properties. We will have, as of the first quarter, no recourse debt and therefore no entity risk. And we have very limited maturities and refunding risk on our property debt. And so we like our leverage on a property level, long-term, fixed rate, non-recourse basis.

Giarno Garul – RBC Capital Markets

Perfect, thanks.

Operator

(Operator instructions) Our next question comes from Michael Levy of Macquarie.

Michael Levy – Macquarie

Yes, thank you. If occupancy ended the quarter at 95.5% based on the numbers that had been previously released, is there an expectation that the portfolio is basically at its peak occupancy at this point and there is no more room for further improvements given the guidance for the rest of the year?

Tim Beaudin

Physical occupancy today is 95.8%. We expect occupancy on an ADO basis to be above 95%. We don’t anticipate that changing for the balance of the year.

Michael Levy – Macquarie

Okay. So then I guess the guidance would be more than on the conservative side if I were to look at it like that. And can you give us some sense of the magnitude -- I know there were some talk earlier, the magnitude of expense savings that we might see next year?

Terry Considine

I think that we shouldn’t get ahead of ourselves, Michael, that we will -- we are going through our 2010 planning process right now. We do have draft budgets. They are in various stages of review by the business unit leaders. I can promise you that we will scrutinize cost very, very carefully, and that one of the opportunities of the current difficult environment is that it’s deflationary as far as most of our operating expenses. And we will work to see what economies we can achieve.

Michael Levy – Macquarie

Okay. One more question, and I think I know the answer to this, but I’m just going to ask it anyway. Is there going to be any change in strategy at all with the departure of David? I mean, can we think of things as just a status quo remaining the same and it really is just David just wishing to pursue a CEO role elsewhere and everyone else is on the same page about the direction of the company going forward?

Terry Considine

I think the short answer is yes. The longer answer is that, as was asked by Michael Bilerman a little bit earlier, a number of talented people have left Aimco, but a larger number remained. And over the years, we have been highly successful in attracting good people, and we retain our share. A number of our key leaders, Patti Fielding, our Treasurer, Harry Alcock, our former Chief Investment Officer; Leann Maureen [ph], our first Chief Financial Officer, have worked together for more than 15 years. My old friend Miles Cortez too has been part of the Aimco team for all that time, first as outside counsel and for a decade or so as a corporate officer. And so I don’t see a change in strategy, but I see rather an increased focus on execution. So if you think about it, we are here in Denver, home of the Broncos, and we are making a transition from Jay Cutler to Kyle Orton football. We are focused on playing as a team where everyone contributes. Our emphasis is on execution, ball control, defense, and mistake-free football.

Michael Levy – Macquarie

That’s what I thought. I’m Bill’s [ph] fan in either of those quarterbacks. Good luck.

Terry Considine

Yes. We got the ratings on Sunday.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.

Terry Considine

Thank you so much.

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Source: Apartment Investment and Management Co. Q3 2009 Earnings Call Transcript
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