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Executives

Lisa Cohn – Executive Vice President, General Council

Terry Considine – Chairman, Chief Executive Officer

Timothy Beaudin – President, Chief Operating Officer

Ernest Freedman – Chief Financial Officer

Tony D’Alto – Senior Vice President, Finance

John Bazzant -

Analysts

Michelle Ko – Bank of America

Jonathan Habermann – Goldman Sachs

Jeffrey Donnelly – Wells Fargo

Michael Levy – Macquarie Research

Eric Wolf – Citigroup

Stephen Swett – Morgan Keegan

Karin Ford – Keybanc Capital Markets

Michael Salinsky – RBC Capital Markets

Haendel St Juste – Keefe, Bruyette & Woods

[Joseph Guigan – Equity Research]

Apartment Investment and Management Co. (AIV) Q1 2010 Earnings Call April 30, 2010 1:00 PM ET

Operator

Welcome to the first quarter 2010 Apartment Investment and Management Co. earnings conference call. (Operator Instructions) Now, I’d like to turn the call over to Lisa Cohn, Executive Vice President and General Council.

Lisa Cohn

Good morning and good afternoon. During the conference call, the forward-looking statements we make are based on management’s judgment including projections related to 2010 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.

Participants on today’s call will be Terry Considine, our Chairman and CEO who will provide opening remarks, Tim Beaudin, AIMCO’s President and Chief Operation officer will speak to property operations, redevelopment activities and asset sales, Ernie Freedman our CFO who will review first quarter financial results, debt capital market activity and guidance for the second quarter and full year 2010.

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 will be AIMCO’s first quarter results, but before turning the call over to my colleagues, I’d like to offer some general observations.

First, this is a good time to invest in apartments. Supply and demand fundamentals are quite good with net new supply barely positive over the next five years, while demand is highly predictable and growing.

The number of men and women aged 24 will increase by four million or 6% over the next five years. Most of these will live in apartments at one time or another and as a result, demand for rental apartments is projected to increase by almost a million units and the predictable result will be rent increases.

The second reason to invest in apartments is that apartments are real or hard assets, and while I recognize that there’s current measured inflation, there is widespread concern that the enormous increase in money supply and financial liquidity can translate into monetary inflation, and if so, apartments are likely to hold their real value.

So this is a good time to invest in apartments and it’s an even better time to invest in AIMCO. We have a simple business plan. We own and operate about 100,000 apartments, primarily BB+ in quality. Our properties are generally located in the top 20 U.S. markets.

Besides owning and operating apartments, we also create value by redeveloping opportunistically, and we finance at the property level with low risk, non-recourse, long dated fixed rate and amortizing property debt that provides a low cost of capital and an interesting hedge against inflation.

It seems to me that the AIMCO share price stands to benefit more than the share prices of other apartment REIT’s. As the apartment market recovers and as the stock market understands more clearly six key valuation factors.

First, we hold high quality assets. Second, we’re a reliable operator. Third, we have limited balance sheet risk. Fourth, we have a high quality of earnings. Fifth, our shares are priced at a discount to the shares of apartment REIT peers. And sixth, the financial leverage of our high quality non-recourse property debt and preferred stocks magnifies the upside in a rising market.

With that, I’d like to turn the call to Tim Beaudin to review operations.

Timothy Beaudin

On today’s call, I will discuss our first quarter operating results, provide some color around what we see heading into leasing season and finally, provide a brief update on what we are seeing on the capital recycling front.

First, operating results. AIMCO’s portfolio primarily consists of same store properties and redevelopment properties with 80% of the NOI coming from same store and 15% provided by redevelopment. The remaining 5% of our NOI is generated by other conventional properties. The portfolio NOI was down 2% in the first quarter compared to first quarter last year. A total same store NOI decline of 4.3% was somewhat offset by gains in redevelopment.

Our same store properties are comprised of conventional same store and affordable same store. Conventional same store NOI was down 5.4% compared to the first quarter 2009, 10 basis points better than the high end of our guidance provided last quarter. Conventional same store revenue declined 1.8% driven by a 5.5% decline in average rents, partially offset by 2.7% increase in occupancy to 96%.

Lower rates were further offset by a decrease in bad debt expense of more than 22% and a 3.6% increase in other rental income served to offset the decline in average rent.

Conventional same store expenses increased 3.9% primarily due to increased snow removal costs in the Northeast, repairs and maintenance and marketing expenses partially offset by lower churn costs and administrative expenses.

Affordable same store NOI was 3.2% higher compared to first quarter 2009 with revenues up 2.9% and expenses up 2.7%. While this is just 11% of AIMCO’s NOI, our allocation to affordable properties serves to offset the volatility of our conventional portfolio, provide revenue growth that over time is similar to that of the conventional properties, expand our investment opportunities and provide helpful positioning with government bodies benefiting AIMCO’s business overall.

Conventional redevelopment NOI was up 14.6% compared to the first quarter of 2009 while affordable redevelopment NOI was up 10.2%. NOI gains in the redevelopment are primarily a function of lease up of units that were offline a year ago.

As we head into leasing season, we are cautiously optimistic for several reasons; first, we have had a great deal of success in retaining our residents. During the first quarter 2010 we retained 68% of our customers, which is up 120 basis points over first quarter 2009 and represents an all time high for AIMCO.

Second, our apartments are full. First quarter 2010 occupancy was 96% overall and north of 95% in nearly all of our markets. April average daily occupancy is holding steady and demand remains healthy.

Third, the decline in transacted rents seems to be slowing. For the quarter, conventional same store new lease rents were 7% lower than the expiring lease rates, while renewal rates were 10 basis points higher than the expiring lease rates.

Since the beginning of the year, we’ve been able to increase conventional same store new lease rents month over month in the majority of our markets with southern California and Florida being notable exceptions.

We saw new and renewal lease rates improve throughout the quarter and the gap between new and renewal rates has narrowed a negative 5.5% during the fourth quarter to a negative 3% for the first quarter of 2010.

While we have not seen a robust recovery, we are encouraged to see signs of improvement and we will see what the next few months bring.

As to our capital recycling, our strategy is to sell 5% to 10% of our portfolio annually with proceeds generally used to improve portfolio quality through redevelopment or acquisitions within our target markets. However, sales volumes in any given quarter or year will be dependent on the availability of attractive opportunities to redeploy capital.

We are still very focused on repaying the $35 million of our term debt, so proceeds from asset sales will be used primarily for that purpose until the balance is fully paid. During the first quarter we sold 12 properties for $83 million with net proceeds to AIMCO of $17 million.

We currently have five commercial properties under contract with hard money that are expected to close within the next 30 days or so and about a dozen affordable properties that we expect to close during the second half of the year.

We have more than 20 conventional properties that are listed in some stage of negotiation or under contract and nearly twice that amount in affordable properties in similar stages of marketing.

We are seeing strong buyer interest in the properties we are selling with multiple offers on every property. Cap rates are dropping and pricing is improving in virtually every market when compared to last year, parts of Florida being the exception. But prices remain well below peak levels due to lower projected NOI’s.

In summary, we are pleased with our first quarter results and our plans for the future remain simple and unchanged. We are going to focus on creating our portfolio well and continuing to improve portfolio quality and concentrating capital in our target markets.

With that, I will turn it over to Ernie.

Ernest Freedman

On today’s call I will cover the following subjects; first, our financial results for the first quarter, second, our balance sheet, and third, I will provide second quarter and full year 2010 guidance.

Before I discuss our results, I would like to point out that we have made a number of changes to our earning release and supplemental schedules for 2010, which we hope you will find to be improvements. As you spend time reviewing our supplemental schedules and have any questions or feedback, please reach out to Luke Coleson or me.

Now for our first quarter financial results. First quarter pro forma FFO was $0.32 per share, $0.02 per share above the high point of guidance provided in February. Higher than anticipated occupancy in our redevelopment portfolio and lower offsite costs were partially offset by lower than expected transaction income. Variances in offsite costs and transaction income are the result of timing, partially offset by lower [inaudible] over three quarters.

Turning to the balance sheet, we retained $55 million of our term debt in 2010 including $10 million in April, leaving us with a balance of $35 million today. We expect that this will be fully repaid from property sale proceeds over the next few months. We have no 2010 property debt maturities and we currently have four loans with appropriate collateral totaling $100 million that mature in 2011.

We plan to refinance these loans closer to the expected maturity dates, but we will continue to work with our lending partners to seek an earlier refinance if possible. We continue to focus on loan maturities occurring during 2012 through 2014 looking to extend our loans beyond that period to reduce refunding risks and lock in current interest rates.

As we look past the next few years of projected economic growth, we plan to reduce somewhat AIMCO financial leverage both by physical recovery of property income and by scheduled amortization of our property debt, which averages about $80 million per year over the next few years.

Now to guidance, second quarter 2010 pro forma FFO is projected to be $0.28 to $0.34 per share with year over year same store NOI decline of 5% to 6%. On April 1, two properties were moved into our conventional same store portfolio from the conventional redevelopment portfolio. Our second quarter 2010 conventional same store NOI guidance includes the reclassification of these properties.

Projected full year 2010 pro forma FFO is unchanged from our last update and is expected to range from $1.25 to $1.35 per share. Our projection of full year conventional same store NOI decline at 2% to 5% below our total portfolio NOI decline of 1% to 3% also remains unchanged.

With that, we will now open the call up 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 Michelle Ko – Bank of America.

Michelle Ko – Bank of America

I was just wondering, given the positive commentary of some of your peers over the last couple of days, we were somewhat surprised that you weren’t more enthusiastic and didn’t increase your 2010 same store guidance. I was just wondering does this pertain because of AIV’s lower price points, which might not be as volatile as some of the higher price points and you might not see an upside during the recovery?

Ernest Freedman

First, I’d like to point out that we were pleased with how we came out in the first quarter. We did perform a little bit better than guidance range. And I’d also point out when you look at the ranges of many of the companies put out at the beginning of the year, we were at the higher end of those ranges, so we feel very comfortable we kept our guidance at that point.

So I wouldn’t take it as a view of we’re not enthusiastic. We talked about where we think the market is and how it’s performing. We feel very comfortable we’re going to be able to perform within the ranges that we’ve laid out for the rest of the year.

Michelle Ko – Bank of America

Could you also comment on which markets you think are deteriorating or recovering faster than what you had expected and which markets you might see job growth come back first?

Tony D’Alto

The good news is that we’re basically seeing recovery across most markets. It’s relative of course in places like Phoenix and Miami, less so relative to rate increases, but are doing fairly well. I’d point out that we only have two markets in our entire portfolio that’s below 95%.

So I think that the coasts of course, we’re seeing the Northeast and southern California and pretty much everyplace outside of Phoenix and Florida where we’re very highly occupied and we’re taking rate increases through the first quarter and we feel very comfortable that we’ll be pretty well set up for the summer season. So in total, we’re seeing it across the board. It’s just relative levels of strength depending on the market.

Michelle Ko – Bank of America

When do you expect to see same store revenue growth year over year and also sequentially?

Ernest Freedman

Based on the guidance numbers that we guided for the second quarter and doing the math for the second half of the year, there is a possibility within our guidance range that we could see that coming up in the second half of the year. Sequentially, we did see revenue growth from the fourth quarter to the first quarter. Year over year I think you’ll be seeing some time based on the math, a possibility to see that in the second half of the year.

Operator

You're next question comes from Jonathan Habermann – Goldman Sachs.

Jonathan Habermann – Goldman Sachs

Just going back to the difference between the performances of A’s and B’s and Terry, you made reference obviously to AIMCO and compared the company to some of your peers, but I’m just curious, as you’re continuing to see the cap rates widen out between A’s and B’s, do you feel that the expectations for rent growth from the more class A assets are just getting too high at this point in terms of growth over the next two or three years?

Terry Considine

I think that the asset pricing is more optimistic than the data providers’ rent projections, and that gives rise to which of the two is right. It could be that rates will grow faster, that rental rates will grow faster, and if so, that will be because of real demand recovery in the job markets in this time of very limited supply, or it will be because of inflation, creeping into monetary inflation creeping into the economy. For the moment, I think we have to wait and see.

Jonathan Habermann – Goldman Sachs

The reason I ask is that I think about AIMCO, you referenced at your analyst day that markets such as New York and Boston and San Francisco, you have below average rents versus the market. Do you expect your portfolio to maintain the same rent growth as that of your peers, similarly positioned in those markets?

Terry Considine

I think in those markets, benchmarking against the market, we expect rent growth to be comparable to, or similar to that of the market. I wouldn’t go through and benchmark against a specific peer without looking at the properties.

Jonathan Habermann – Goldman Sachs

The question on asset sales, can you give us a sense of the dollar amount that you’re looking at? You mentioned the number of properties, but what potential dollar amount you currently have listed today and in contrast, what are you looking at in terms of acquisition opportunities and the spread between where you’re selling and where you potentially would be buying.

Terry Considine

We’ve talked about in today’s guidance; I don’t recall whether we gave guidance to it, but that we would sell probably $300 million in assets and generate $100 million in cash for corporate purposes, primarily the repayment of the term debt. And that’s well underway as Tim mentioned in his remarks.

Going forward, further sales will be connected to our opportunities on an accretive basis either in acquisitions or redevelopment and in looking at that, we don’t focus as much on NOI cap rates or NOI differences as we do on free cash flow, internal rates of return and we would expect that they would be accretive and not dilutive.

Jonathan Habermann – Goldman Sachs

But you talked about asset sales being offset by acquisitions. It sounds like perhaps that could be shifting toward redevelopment. Is that still the direction you’re moving?

Terry Considine

We’re looking at both. It just really goes back to your first question. Some acquisitions are priced at a level that’s not attractive to us and that will lead us to more value added activities like redevelopment. We will require a higher spread than would be available from the acquisition activity.

But we’re also seeing some interesting acquisition opportunities and we’re just going to have to play them out and see which of those we do.

Operator

You're next question comes from Jeffrey Donnelly – Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Can you talk a little bit about what’s happened subsequent to quarter end? Have you seen revenues? Have you seen trends retreat, hold or accelerate?

Terry Considine

We’re actually holding quite well. As a matter of fact, April will have higher occupancy than March and in terms of revenues, we’re right where we anticipated we’d be.

Jeffrey Donnelly – Wells Fargo

Does the continued improvement in occupancy lead you to think that maybe you ought to be getting more aggressive on rents sooner?

Terry Considine

We’ve actually been taking rate action and obviously increased occupancies will give us more opportunity to do more of that as we move forward.

Jeffrey Donnelly – Wells Fargo

On the expense side, we have the revenue certainly coming back. How do you think about your expenses as we roll forward into 2010 and 2011? Is there anything that stands out to you as an area that could come back a little quicker?

Tony D’Alto

We remain very focuses on expenses and as you could see from our reporting, the major material impact in our increase was based on weather. Everything else was a function of timing or some other expenditures in different markets. We expect to be right within what we planned to be, which is baked into our guidance.

Jeffrey Donnelly – Wells Fargo

You write yourself as a B, B plus owner of apartments, but by the definition I think you published, where your rents stand versus competitors would actually put you something closer to a B minus if you will. But if the goal is to move towards that B plus, I suspect that means selling out more assets. Is there a seam to where the majority of those assets, the ones that might drag you down a little bit, where they reside geographically?

Ernest Freedman

You’re right that we’re always culling our portfolio looking to sell off the bottom, and that should continue to improve our rent to market averages. The fourth quarter reported in our most recent supplemental here that we’re about 103% of local market averages. In our view, we view a B asset somewhere between 90 and 125. So over time, you would expect the 103% to continue to improve, maybe get closer to 105% to 110%.

In terms of where those assets are, they’re generally located in our non target markets. So we do continue to focus our sales efforts on the bottom of the portfolio as well as our non target markets to improve our standing against local market averages.

Jeffrey Donnelly – Wells Fargo

I would think that in your target markets, some of the larger urban markets that the gap between the high end of the market and the low end of the market in rent would be fairly wide, so the point being is that you could very easily below the mean in that market but still have pretty high rents in absolute terms. But in a more secondary market, I guess I would assume that the gap3 between high and low rent would be pretty tight, so it would be easy to be at the mean or above, if that logic makes sense. The question is, is there a chance that if you exit secondary markets you actually solidify your position as a more B minus portfolio?

Terry Considine

Based on our numbers that we presented at our investor day, our non target markets are right on top of local market averages at about 100% to 101%. At investor day we reported that we were at 104% for the entire portfolio, so at least with our specific assets, that’s not the case.

In theory it could potentially work out for someone else’s portfolio. Possibly. But that doesn’t seem to be the case for our portfolio.

Operator

You're next question comes from Michael Levy – Macquarie Research.

Michael Levy – Macquarie Research

I was wondering if you could talk a little bit about the strategy with the term loan. If the capital markets are as open as they seem, and the assets that you may sell to pay off the term loan is generating decent cash flow, and the loan isn’t due for another year and presumably prices are going to do nothing but continue to rise, or at least for the assets that you’re selling, why sell now? Why not just wait until later in the year when pricing is better and sell them?

Terry Considine

Our policy is not to have recourse debt and the term loan was an exception to that. It was a mistake on my part. I just want to get rid of it. It will be paid off in the next month or two or three, and at that point we’ll have a very low cost, very long and attractive debt.

Michael Levy – Macquarie Research

Obviously rents seem to be rising. I was wondering if you have seen any slowdown in rental rates in the past couple of weeks and the pace at which rents seem to be rising.

Terry Considine

No.

Michael Levy – Macquarie Research

At the investor day about 10 weeks ago, Ernie mentioned that he thought an appropriate NAV was around $20.00 I think. With that in mind, and given the share price, do you have any view about an equity offering and what you might use the proceeds for?

Ernest Freedman

That’s exactly the right point. What is the use of proceeds? Specific to the NAV discussion we had at investor day, we presented an NAV based on September 31 where we thought values were and I think most people think, talk on the street is that values could be up 5% at year end. So that being the case, and doing the math, our NAV would be plus or minus $3.00 higher than where we were before.

That said, you raise a key point, is use of proceeds. I think the answer is, there’s an attractive use of proceeds and if it makes the most sense for our shareholders, and it’s not going to be dilutive we would definitely consider equity.

Michael Levy – Macquarie Research

Are you looking at assets to acquire? I think you sort of touched on this earlier, but are you, has there been anything that has come to market for which you would possibly bit?

Terry Considine

Generally we have seen the assets that have come to market and have had the opportunity to bid. We are looking at possible acquisitions, and we’ll see how they turn out. Most likely, they’ll be funded by proceeds from the sales of our lower rated assets so that in terms of acquisition volumes, if we were to acquire a $300 million of assets, that would be funded by $300 million of sales of lower rated properties currently within our portfolio.

Michael Levy – Macquarie Research

I know that obviously it seems that there’s more class A assets that are coming onto market and the bidding process for those is intensely competitive, but in past conversations I think you had mentioned that you might be looking at something not in the class A area. So are you seeing opportunities in the class B plus or A minus in areas and is the acquisition environment as competitive in that section or in that corner of the market?

Ernest Freedman

You’re making a very good point. There’s a certain amount of histrionics that gets into these calls. Every part of the business is competitive and whether it’s true for B assets or A assets or C assets, whether it’s true for value added loans at discounts and so forth. It’s a very efficient, very liquid, very competitive market.

Operator

You're next question comes from Eric Wolf – Citigroup.

Eric Wolf – Citigroup

Just to piggy back off that equity raise question, if you were to raise today, do you know how much property that you could pre-pay without incurring a penalty?

Ernest Freedman

We wouldn’t be interested to raise equity to pay off property, which has a weighted average maturity of almost nine years at weighted average cost of sub 6%. That wouldn’t be attractive at all.

Eric Wolf – Citigroup

As far as occupancy, it’s pretty high right now. It looks like your expectations for the second quarter is an average of 95.5%. To meet the midpoint of your guidance you’d need to average about 94% for the rest of the year. I’m just wondering if we can take from that that you’re going to be much more aggressive on rate in the back half of the year or if there’s some conservatism built into the guidance.

Ernest Freedman

Providing full year guidance, we’ll like others have done, we’ll take a look at that half way through the year. We’ll reset guidance at that point based on activity and what we’re seeing for the rest of the year. We’ll address changing full year guidance at that point.

Eric Wolf – Citigroup

What do you attribute the record high in renewal rates to? Anecdotally, you’ve seen less tenants price shopping? Are they just more comfortable with their jobs.

Terry Considine

I think it’s a combination. Obviously some of the changes in the economy and consumers are being a little more comfortable and confident. I think we work very hard on service and contacts with our residents. We’ve had a lot of initiatives along those lines over the last couple of years. So it’s part of a concerted effort to keep them, and so far it’s been successful.

Operator

You're next question comes from Stephen Swett – Morgan Keegan.

Stephen Swett – Morgan Keegan

On the question of redevelopments, can you talk to the amount of potential redevelopment product that you still have in the portfolio and just what the status of the tax credits indication business is and how that impacts whether you’re looking for affordable or conventional redevelopments.

Timothy Beaudin

On the redevelopment side, we still have a pretty decent pipeline there. As you know, we’ve wound that down to basically finishing up some projects. We’re currently going through with Terry right now somewhere between five and ten that we think makes some good solid economic sense.

We’re still fairly cautious about seeing what the economy does and everything that goes along with that, but on an annual basis, I’d say you could see us doing, if things get back to some level of normalcy, back to $50 million to $100 million of capital spend on specific redoubts, and if the market improved beyond that, then we’d go an argue with Terry that we ought to do more of it.

So I don’t think there’s a big issue with that one about that. It’s just really a matter of timing and getting comfortable with the financing markets. Remember in the past, those things were self financing and that market is a little bit tougher right now.

The second issue you brought up had to do with tax credits, and that continues to be tough from a pricing perspective. The number of people buying the tax credit has dwindled and so the pricing related to that has gone down. Being able to come up with a capital stack that makes those deals make sense is more challenging than it’s been in the past, so we have a couple that we’re going to finish up.

We have some more that we could bring to the market if and when that pricing recovers, and so we’ll just watch it and see what happens, and we’ll work our way through it.

Stephen Swett – Morgan Keegan

I know in the past you’ve certainly preferred to pay higher cap rates than lower cap rates and your comments on finding better value opportunities, can you talk about where pricing is today. Does it make you look differently at which markets where you might be interested to buy or is it really just trying to find those value add opportunities within those markets?

Terry Considine

Right now I would say we’re in the process of price discovery and trying to get a better understanding of what’s available. Transaction volumes have been relatively limited, and so there’s not a flood of opportunities and some of them are priced at prices we don’t want to pay.

We are focusing on the geographies that are in our market allocation policies and so we’d like to increase our weightings to Seattle, to the Bay Area and in some markets we’d like to upgrade our locations, for example, in Boston and New York.

So those are the dynamics. Those are markets that are attractive to other people too, and in trying to find opportunity there, we’re discovering that in many cases, we’ll want to take on some additional element of adding value, whether it’s a lease up or construction completion or some other activity that will give us a higher return, or redevelopment from our own portfolio, and that’s exactly the kind of internal discussions we’re having.

Operator

You're next question comes from Karin Ford – Keybanc Capital Markets.

Karin Ford – Keybanc Capital Markets

I just want to see if we could get your updated thoughts on the dividend given now better visibility, better environment, the term loan now down to $35 million, just if you have any updated thoughts there.

Terry Considine

You may remember last quarter we talked about it and we said that over time that the dividend is low relative to our profitability. Our practice has been to set it once a year and the Board sets that and they did at our January meeting so I don’t expect to see a change at all in the next few quarters.

Going forward beyond that, there will be a balance between the use of profitability for dividend increases and the reduction of property debt that Ernie mentioned in his remarks and so build in our intermediate term forecast that we reviewed with the Board, earlier this week, we’re expecting to give a priority to property debt reduction.

Karin Ford – Keybanc Capital Markets

Can you talk about what might be holding back Florida as you’re looking forward?

Timothy Beaudin

Actually, it’s not recovering as fast, but there are signs that it is recovering in many of the markets, Orlando being probably the weakest followed by Jacksonville for the last several months. We have fairly high occupancies north of 95% except in Orlando, and it’s very price sensitive because there’s still quite a bit of shadow market and other opportunities for people to find housing outside of rentals. So there’s competition.

I think it’s just going to take some time to work through that, but we’re seeing again sequentially, we’re able to raise rates in most places in Florida as well from the fourth quarter to the first quarter. So it’s slower, more painful, but it’s kind of inching along.

Operator

You're next question comes from Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Just going back to the operations, you gave detail in the press release about leasing trends and the improvement in March. Could you talk about renewal and new leasing rates in April as well to give us a sense of how that’s trending?

Terry Considine

We’re just closing April, but we’re trending forward. We continue to make progress. We’ve made sequential revenue gains. We’re very focused on revenue. The rates themselves are relative. You look at last year, we had lower occupancies and a little bit higher rates and this year we have both higher occupancies and some rate improvement.

It’s just on a year over year I think we’ve listed new lease rates were down 7% which was significantly less than the fourth quarter which was double digit and we were positive in renewals, so we’re positive in rate and in the percentage of people renewing.

So that trend is continuing and hopefully it will continue. There’s no net gains in the employment picture, so we’re cautiously optimistic.

Michael Salinsky – RBC Capital Markets

Is it safe to say that April trends have been better than March trends?

Terry Considine

Yes.

Michael Salinsky – RBC Capital Markets

On the commentary about cap rates dropping right now, you’ve been a fairly substantial seller over the past couple of years here. I’m just curious as to why you’re not moving forward with selling some more. I know the acquisition opportunities may not go there, but pricing coming down, the chance to deploy some of the proceeds later in the cycle. Why not take advantage of the over [inaudible] a little bit more?

Terry Considine

First, we are as part of our basic plan, selling in the magnitude of $300 million of assets this year, so to that extent we’re taking advantage of that. We’re selling off the bottom of our portfolio. We’re getting very attractive free cash flow internal rate of return pricing on that.

Second, we’ve talked about maybe expanding it. But I’m not attracted to selling properties to hold cash with an unclear use of proceeds. And so further sales will be connected to our expected use of proceeds.

Just if I could add to what Tony had to say, sort of a sub text here that I’d like to clarify and that is, what’s happening in apartment markets as far as rental revenue and pricing, and I just want to be clear.

Our first quarter is up over our fourth quarter. Our February is better than our January. Our March was better than our February. Our April is better than our March. Our renewal rates have gone positive. Our new lease rates, which are negative, are less negative. Things are going in the right direction, and we’re just cautious about getting ahead of ourselves.

Operator

You're next question comes from Haendel St Juste – Keefe, Bruyette & Woods.

Haendel St Juste – Keefe, Bruyette & Woods

I’d like to go back to the equities for a second. Considering the run price stock this year, notwithstanding today’s performance, how does a buy back of the preferred sit into your thought process given the cost of equity somewhere in the high fives in the preferred yielding probably somewhere in the eights.

Terry Considine

Those are exactly the right questions. We’re thinking about them just as you’ve mentioned. But our thinking about our cost of equity would not be as current. It would be what our expected IRI would be over time, and so when we look at our preferreds, we think we might well refund our Series G at a lower cost, with a new issuance of preferred. But we’re not attracted to issuing common equity to invest in levered equities at returns in our preferred at average 8%.

We think our equity is commanding a higher rate of return as is.

Haendel St Juste – Keefe, Bruyette & Woods

Can you talk about the marketing plan for the conventional and affordable portfolio you mentioned in your prepared remarks? What’s the current marketing strategy on that? Are you packaging them as a group, one off, and if as a group, what’s your sense in the marketplace? Is there a portfolio pre-discount? Any thoughts there?

Timothy Beaudin

We’re just going to do a quick relay here because John Bazzant is sitting here, and John is in charge of national activity for both affordable and conventional, so I’ll let John give you some specifics.

John Bazzant

I would tell you that in general terms we’re marketing properties individually. We’re taking them out through our typical process is to solicit multiple brokers. We will interview and select a broker and based upon their particular qualifications, but generally speaking, particularly on the conventional side, we’re selling on one offs.

We do have a couple of small portfolios on the affordable side right now that have been marketed as such and that are tied up as such right now, but these are not big meaningful portfolios if you will to the bottom line.

Timothy Beaudin

I might add to that, and John alluded to it, but we tend to list properties for sale. We like the option process. In a rising market like we’re seeing right now, with the amount of capital chasing deals, we like the idea of finding out how aggressive people will get in this market, and so almost exclusively, there’s always an exception here or there, we are listing properties and working through the option process.

Operator

You're next question comes from [Joseph Guigan – Equity Research]

[Joseph Guigan – Equity Research]

The unemployment rates are close to what they were at the peak and the apartment business really started to fall in the third quarter of ’09, which was later than other industries. You’ve said many times that things are improving sequentially quarter by quarter, but the unemployment rates are near the highs, right and the number of people who are long term unemployed is at records which I think would adversely affect the apartment industry, people moving back home to parents or moving back with friends. So although companies like Intel and Apple have done very well and a lot of companies with international business have done well, your tenants are not the CEO of Intel, right. So I’m wondering why you think given the regular people in America aren’t doing better that things are getting better for you.

Terry Considine

I think you’re exactly right to point to the high levels of unemployment, the high levels of under-employment, the high levels of discouraged workers. If you wanted to bring that closer to home, in the real estate business it would also be fair to point out that there’s still a considerable inventory of single family homes to be foreclosed and moved through the process that are being absorbed.

So those are negative facts. The positive facts are that the demographics are quite strong and the number of youngsters between 21 and 34, which is the primary pool of apartment renters, is a very large number compared to previous age courts. If you look at the number of people that were born in 1980 who would be 30 today, and the number of people that were born in 1975, as you drop off the older group and they bought their own housing, there’s a significant increase in rental demand.

[Joseph Guigan – Equity Research]

So you’re advocating that there’s an increase in the 22 to 34 that became that age between January and April of 2010 compared to what it was in September.

Terry Considine

That would be a very precise indicator. I think the general reason why we’ve gone through this entire recession with much lower declines in occupancies and property incomes is because of that very strong demographic demand.

[Joseph Guigan – Equity Research]

My question was specifically this, the economy hasn’t got better for regular people and the unemployment rate hasn’t fallen. Yet you and other people in the apartment industry have pounded the table saying that rental prices got better between January and now. I’m just wondering why would that be when your tenants don’t have, many of them not having jobs have increased. The number of them, their level of income hasn’t increased. Why do you think that is?

Terry Considine

I’ll try it again. I think there’s a large number of employed people in our target ages. I think their confidence has improved. I think many people feel the economy bottomed perhaps three quarters ago. We’ve had three quarters of positive growth. That will add to confidence, and so the employed members of our target markets I think feel more upbeat.

Let me just cut through this because I may not know the right answer, but I do know what happened and the fact is that our revenues are up quarter over quarter, month over month and are positive in our renewal business, and I’m not out here beating drums trying to talk you into believing about the future. I’m just telling you what’s already happened through the end of April.

[Joseph Guigan – Equity Research]

Since average rental per unit is down 5.5% and it was 4.8% in the fourth quarter. So I guess you’re saying rental prices are getting better. Why is that getting worse sequentially?

Terry Considine

It doesn’t seem right to me, but let me check with the experts here. The last two months, it’s actually a term we call ARPU which is average rent per occupied unit. It has increased each of the last two months.

[Joseph Guigan – Equity Research]

Okay, but I just want to get this. I want to make sure because this is important. You have a table right on your press release that says average rent per unit.

Ernest Freedman

We focus on revenue, so it’s a game of balancing occupancy with revenue. So you are correct that this quarter period rates have come down, but we focus on revenue and that’s a balancing act that the ops guys focus on all the time.

Overall revenues sequentially, quarter over quarter is up .2% from the fourth quarter to the first quarter and has gotten better and better on a month by month basis versus quarter to quarter.

[Joseph Guigan – Equity Research]

But you’re not taking into consideration you sold off the unit that was lower prices, right.

Ernest Freedman

That’s not true. Those charts that you’re referring to are on a same basis, so we take out the results from anything that’s been sold from all periods.

[Joseph Guigan – Equity Research]

This table I’m looking at where it says Conventional Same Store Operating Measures and then it says average rent per unit, it says $1,006.

Terry Considine

There’s two issues here. One is revenue and one is occupancy as well as rate. On the rate question, there is a bundling and an unbundling questions. Sometimes just the way the package of goods and services offered to the customer, it will be bundled together and it will be in one rate, and some of it will aggregated and it will be less aggressive, but we’ll pick it up in other areas. So you’ve got to look at it all together.

Ernest Freedman

Let me suggest, I’d be happy to take the conversation off line with you just so we don’t hold up other folks in the queue. You can give me a call. I’ll be happy to walk you through some more of it this afternoon.

Operator

At this time we have no more questions in the queue so we will conclude the call. Thank you for joining us today.

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Source: Apartment Investment and Management Co. Q1 2010 Earnings Call Transcript
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