Apartment Investment and Management's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: Apartment Investment (AIV)

Apartment Investment and Management Company (NYSE:AIV)

Q1 2014 Results Earnings Conference Call

May 02, 2014 01:00 PM ET

Executives

Lisa Cohn - EVP and General Counsel

Terry Considine - Chairman and CEO

Keith Kimmel - EVP in charge of Property Operations

John Bezzant - Chief Investment Officer

Ernie Freedman - Chief Financial Officer

Analysts

Nick Joseph - Citigroup

Nick Yulico - UBS

Haendel St. Juste - Morgan Stanley

Dave Bragg - Green Street Advisors

Michael Salinsky - RBC

Karin Ford - KeyBanc Capital Markets

Operator

Good afternoon and welcome to the Aimco First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Lisa Cohn, Executive Vice President and General Counsel. Please go ahead.

Lisa Cohn

Thank you. Good day everyone. During this conference call, the forward-looking statements we make are based on management’s judgment, including projections related to 2014 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.

Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, EVP in charge of Property Operations; John Bezzant, our Chief Investment Officer; and Ernie Freedman, our CFO.

A question-and-answer session will follow our prepared remarks.

I will now turn the call to Terry Considine. Terry?

Terry Considine

Thank you, Lisa. And good morning to all of you. Thank you for your interest in Aimco. Aimco had a solid first quarter to the start the year. As a result and as Ernie will discuss in a moment, we are increasing our full year guidance.

Before my colleagues report on first quarter particulars, I’d like to point out a few highlights.

AFFO per share, adjusted funds from operations per share which is where Aimco measures current period profitability was up 13% year-over-year. FFO was up 4%. In property operations, Keith and his team showed excellent cost control, notwithstanding the winter cold and beat the high-end of same-store NOI guidance by 85 basis points.

In portfolio management, first quarter revenue per unit was more than $1,500, an increase of 10% year-over-year. John and his team continued to sell our lowest rated properties and reinvested the proceeds and properties with higher rents and better prospects. And of course when we make investments, we follow a paired trade discipline explicitly comparing what we expect to buy to what we plan to sell, we invest only when the projected free cash flow internal rate of return is greater than that of the property being sold and the portfolio quality is enhanced.

In redevelopment the news was mixed. On the one hand we completed Pacific Bay Vistas and our in joint rent increases across our redevelopment portfolio as John will report on in a few minutes, both generally due strong customer demand and in some cases due to scope changes to enhance the redevelopment. On the other hand, we now expect our cost to be substantially higher at two of our redevelopment projects. I’d like to take a minute to tell you how we got our cost so wrong.

In redeveloping old vacant properties, we cannot know all physical conditions and all that needs to be remedied until we uncover the last foundation and open the last wall. At Lincoln Place there are 45 buildings, we based our initial cost estimates on thorough review of the first three buildings. By last fall we work away through another 10 buildings and what we learned with the basis for the increase and expected cost that we reported on our third quarter call.

As it turned out the last 32 buildings, have had even structural challenges and so require even more work. In the case of reserve the details are different, but the problem underestimated work to be done discovered as work unfolded is the same. We now know better what needs to be done at both properties and we have given you our best estimates of what it will cost.

In addition at Preserve we increase our scope of our work and upgraded our finishes, as John will report later that was a good decision for which we are getting paid. So let me summarize the entire Aimco team accepts responsibility for Aimco results.

We regretted our earlier estimates proved inaccurate, we dislike disappointing our shareholders. We’re all engaged in reworking our processes to avoid such mistakes in the future. But, redevelopment will always have uncertainties, we will make mistakes in the future but we’ll also get things right.

We still expect this crop of redevelopments to be profit, we now expect to spend about $670 million and for the improved properties to the worth about $930 million, a near 40% gain in our investment, before consideration of financial leverage.

This will add $1.50 per share to net asset value based on today’s rents. Rents continue to rise in both markets, and if they do further value creation will follow.

Now let me turn to our balance sheet, Ernie, and Patti Fielding on his team, were pleased with Standard & Poor’s upgraded Aimco and provided a clear and achievable path to an investment grade rating.

In the ordinary course, we would expect to meet the needs of required financial metrics over the next couple of years. Aimco seeking an investment grade rating as third party validation of our conservative balance sheet. It is expected to help the pricing of any preferred stock issuance. I hope that will also help the pricing of our common shares.

But to be clear, we continue to believe in the safety of our nonrecourse long dated fixed rate balance sheet strategy and we do not expect to issue corporate debt when we obtained an investment grade rating.

Finally our business is simple, we have a clear plan, a high quality of earnings with limited nonrecurring income and a high level of transparency. Our manage the team is cohesive, collaborative and having fund. We are gratified last month when the Denver Post again recognized Aimco as one of the top places to work in our state. It’s my great pleasure to work with a high achieving team not only here in Colorado, but across the entire country.

And now for a more detail in the first quarter, I would like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

Keith Kimmel

Thanks, Terry. We are off to a good start in 2014. With first quarter revenue is up and healthy 4.6% year-over-year and 1.5% sequentially. Our on-site team is executed our plan with enthusiasm and continued commitment to excellent customer service. We continue to be rewarded with low turnover and renewal rent increases averaging 4.9% for the quarter.

With particular strength in the Bay area, Miami and Denver where renewal rates were up between 6% and 7%, of those leases that expired and were not renewed. New leases were signed at rates they were on average 1% higher than the expiring leases. Miami, the Bay Area, Denver led the way with new lease rate increases between 6% and 13%. As a result, of our team’s hard work, we achieved blended lease rate increases of 2.8% for the quarter and we increased occupancy both year-over-year and compared to last quarter.

Turnover for the quarter was 46.9%. Of the customers who decided to move out, 24% were for career moves, 17% did not renew due to price and 15% moved out to purchase homes. There are no significant changes in these move-out reasons versus recent quarters or our long-term averages.

We continue to be successful at replacing move-outs with better qualified residents at higher rents. The average incomes of those new customers who moved in during the first quarter was 119,000. The median income was 71,000, resulting in a rent-to-income ratio of 21%. Year-over-year, the median income of our new resident is up 13% as we improved our portfolio and residents quality.

Now looking at our 10 largest markets which make up two-thirds of our revenue. The top four performers had revenue increases from about 7% to over 8% for the quarter led by the Bay Area, Miami, Denver and Chicago. Our steady performers for the quarter, with midrange growth of nearly 4% to over 5%, were Los Angeles, Orange County, San Diego and Philadelphia.

Rounding out our 10 largest markets, we had Boston and Washington, D.C. both with positive growth year-over-year. While the polar Vortex in the Northeast and Midwest presented us some additional operating costs of about $1 million, we were able to offset that with higher revenues and balanced expense control in other areas.

Coming in ahead of our plan for net operating income. As we look ahead, we’re building upon our first quarter successes with the solid April. April blended lease rates were up 4%, with new lease rates up 2.6% and renewals up 5.3%. April’s average daily occupancy was 96.1%, on plan and a solid progression from the first quarter. May and June renewal offers went out with 5% to over 7% increases.

And with great thanks to our teams in the field and here in Denver for your commitment to Aimco’s success. Turn the call over to John Bezzant, our Chief Investment Officer. John?

John Bezzant

Thank you Keith. Today, I will focus my remarks on our redevelopment activities. During the first quarter Aimco invested $48 million in six redevelopment projects and $9 million in our One Canal Street development in Boston. We also invested $3 million in projects currently in our redevelopment pipeline.

As Terry mentioned in his remarks, we now expect higher costs and the delay in completion at two of our large redevelopment properties, Lincoln Place and Preserve at Marin. These two projects both for which were vacant for an extended period prior to redevelopment have presented unique challenges.

At Lincoln Place, we have now completed destructive testing and assessment in each of the 45 historic buildings on the site. Based on our findings, we have increased our estimated total investment in this project to $390 million. The majority of the additional cost is to remedy greater than expected code and structural deficiencies discovered as we proceeded with construction.

As of April 30th, we have completed construction on 19 buildings, comprising 294 apartment homes and 91% of those homes are occupied. At Preserve at Marin, our total investment is now expected to be a $125.5 million. Roughly 30% of this increased cost is a result of our decision during construction to enhance unit layouts and finishes to maximize potential rent. The remainder is due to additional structural and mechanical issues encountered in the building as proceeded with construction.

The resulting product at Preserve has been very well received. We’ve completed nearly 15% of the apartment homes to-date, all of which are leased. And on average, these apartment homes were leased within 11 days of becoming available at rents well above our original underwriting.

In San Bruno, we have completed as planned, the construction of our third large redevelopment property, Pacific Bay Vistas. Our lease-up on this property is proceeding on plan. Physical occupancy on April 30 was 62% and we expect to be fully leased by the end of the summer.

You’ll note on supplemental schedule 10 this quarter couple of revisions to our presentation. These include, segregated reporting of the previously vacant new development properties from our redevelopments and operating properties and some additional detail on other rental income and commercial revenues where applicable. We have also updated revenue estimates on all of our projects to reflect market rent growth and our leasing performance since original underwriting.

Overall, forecasted average revenues per apartment home have increased 12.4% from previously disclosed expected rents. And we will update these estimates at least annually on a go forward basis.

Finally along with updates to our cost estimates, we are also providing information around historic tax and other credits, expected to be earned in connection with our redevelopment projects, which reduce Aimco’s total investment and enhance our returns.

Based on the updated net investment estimates and revenue expectations, our redevelopments in process, and those completed in the last 12 months are expected to generate average NOI yield at today’s rents of 5.5%. Cap rates in the sub-markets [those] communities are located currently average about 4%, resulting in $260 million of value creation or roughly $1.50 per share.

With that I will turn it over to Ernie Freedman, our Chief Financial Officer. Ernie?

Ernie Freedman

Thanks John. Pro forma FFO of $0.50 per share was at the high end of our guidance range, with outperformance and property operations of $0.02 and higher non-recurring income of $0.01, offset by higher than anticipated casualty losses due to the unseasonably cold winter in the Northeast and Midwest of $0.02.

Property damage was caused mostly by ice stemming, burst water pipes and water intrusion. First quarter losses of $4 million were $2.5 million greater than anticipated and $3 million higher than first quarter last year.

Turning to redevelopment, we disclosed in our earnings release that the expected yield using current rents for our current redevelopments is approximately 5.5%. You may recall that we have previously disclosed in our third quarter earnings call that the yield using current rents for our redev pipeline was about 7%.

Let me take a few moments to reconcile these two results and refer different populations of redevelopment properties. The current 5.5% yield is for the current redevelopments that is the redevelopment communities noted in our supplemental schedule 10 plus Elm Creek which was completed late last year.

This population was included in our redev pipeline two quarters ago with an expected yield of 6%. That expected yield again on current rents dropped from 6% to 5.5% due to the cost overruns that Terry and John discussed, offset some by rent increases. The redev pipeline to which we referred in calculating the 7% yield includes our current redevelopments plus other properties.

The redev pipeline included all the projects that we had announced as our class of 2012. It included projects that were started and/or completed as of the third quarter 2013 as well as those that we anticipated starting in the next 12 to 18 months. Due to those projects and are stabilized and in our same store pool, so I removed them from our current redevelopments, all three achieved yields in excess of 7%.

Two other projects are 2900 on First in Seattle, in Sterling and Philadelphia. The third quarter 2013 redev pipeline assumed the full redevelopment of those communities but our current redevelopments assumes only the spending that we have disclosed in supplemental schedule 10. For both properties full redevelopment could involve more than two times the investment that we have announced today.

Finally, the largest reconciling item between the different populations involves Park Towne Place in Philadelphia. I anticipate that we will announce its phased redevelopment similar to Sterling later this year. Also similar to Sterling though the third quarter 2013 redev pipeline assumed the full redevelopment of Park Towne Place. Because we have not yet started its redevelopment, no contribution from Park Towne Place is included in the current redevelopments listed in supplemental schedule 10.

So our current redevelopment is sub set of our previously reported redev pipeline, and does not include spending for completed redevelopments, nor the full spending on phased redevelopments, nor the spending for the unannounced redevelopment of Park Towne. So the apples-to-apples comparison is that our yield expectations for our current redevelopments have fallen due to the additional costs we disclosed, bringing down the expected yield for this subset of our redev pipeline from 6% to the 5.5% number. These current redevelopments though are largely located in coastal California with the slow market cap rate, so we continue to create meaningful net asset value at our 5.5% current yield.

Regarding the balance sheet, in April S&P upgraded Aimco to BB+ positive, they also provided a roadmap on what it would take to achieve an investment grade rating. Items they included were leverage at the low-end of 7 to 7.5 times for debt to EBITDA; debt to undepreciated assets under 50% and fixed charge coverage on a path to achieve and sustain at two times.

These are relatively consistent with the feedback we received from Fitch last year with the important exception that Fitch required an unencumbered pool of about 7% of our GAV. We are making progress in all these areas and in the normal course of our activity should reach these targets in the next two years.

Looking ahead for the second quarter, pro forma FFO is projected to be $0.48 to $0.52 per share and AFFO is projected to be $0.36 to $0.42 per share. Year-over-year conventional same-store NOI growth is projected to be 3.5% to 4.5%. Second quarter conventional same-store NOI is projected to be up 0.25% to 1.25% compared to first quarter. We have increased, both full year pro forma FFO and AFFO guidance to take into account first quarter’s outperformance.

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

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). And our first question will come from Nick Joseph of Citigroup.

Nick Joseph - Citigroup

Thanks. So, just starting on the redevelopment and looking at supplemental 10, you break out the previously vacant communities and new development and other redevelopment. Does that 5.5% expected yield on current rents that you’re quoting right now refer to all of those assets, or just the previously vacant and the new development?

Ernie Freedman

Hey, Nick, this is Ernie, let me clarify that. For the items that are list on schedule 10 to 5.5% includes all those assets except for One Canal, as One Canal is a development property. So the yields on One Canal aren’t much different than the 5.5% and we disclosed that previously. But it’s meant to capture the three projects you see in the previously vacant communities, Lincoln Place, Pacific Bay Vistas and Preserve at Marin, as well as the contributions from Palazzo, Sterling and 2900 on First.

Nick Joseph - Citigroup

So just looking at the previously vacant communities, what was your original underwritten expectation for those, and what is the expected yield now for those, just for those three?

Ernie Freedman

For those three, we typically have not given out specific numbers Nick for specific projects. But, I’ll call them the big three. And we’re back in third quarter of 2013, they were 50 bps higher for those three. They were touch lower than 6% and those two are coming in a touch lower than 5.5% and the rest of the projects get them back up to 5.5%.

Original underwriting varied on all those, Preserve at Marin had the lowest expectations, making place at slightly higher. We had issued a press release back when we announced Lincoln Place, where we expected the yields to be closer to 6%.

Nick Joseph - Citigroup

And then you mentioned the previous increase to estimated costs. What gives you the confidence that these new estimates that you have will be accurate?

John Bezzant

Nick, this is John. When we did a six months ago, at Lincoln for example and Terry kind of walk through the map there. But we were relatively early in the process for these buildings. We now have had the opportunity (inaudible) 45 of them Lincoln is unique and it is designated historic buildings and the existing structures. And so our ability to go in and do mass demolition if you will improve our cost early on was very limited.

And so as we worked our way through the project we now have all 45 open we have more experience working with the contractor that has given us the opportunity to kind of see where costs come in and how we fix the deficiencies that we find as we get into the buildings. And we feel very comfortable with where our projections are today. And at Preserve it’s kind of same works not historic buildings, but they are roughly 40 years old and as we got into those we just found more as we went along in addition to the scope that we have.

Nick Joseph - Citigroup

And just one final question, big picture, given the cost increases now twice, what does that do to make you rethink maybe the possibility of large-scale redevelopment and development in the role with AIV?

Terry Considine

Nick its Terry. And what I would say is that we would point to the success we’ve had in other large scale development activities the most difficult of which was actually the $75 million or $80 million CRCI project at Park Towne over the last year and half which came in ahead of schedule and under budget. So that first things is that these are not all of our experience they’re part of our experience.

The second thing is that we will do make every effort to improve our process and one example of that you can see at Sterling or as Ernie mentioned at 2900 First and that Park Towne, which is we’ll take big projects and break them into smaller projects. So that we’ll be better able to communicate what the costs are in the near-term for a smaller amount of it, sterling, we are doing three floors out of 30 that’s, what’s been announced there is a phase we will be able to report on that and upgrade our cost or adjust them as we learn going forward.

Nick Joseph - Citigroup

Great thanks.

Operator

And our next question will come from Nick Yulico of UBS.

Nick Yulico - UBS

Thanks. Going back to the redevelopment, I want to go through a couple of the accounting issues here. In the fourth quarter, you said that 2014 you would get a $0.07 FFO benefit per share from the big three delivering this year. I think that was going to then grow to $0.14 of annual benefit next year. What are the updated numbers for this year and next year?

Terry Considine

Well, specifically Nick for the big three, those numbers won’t change very much, we will see a little bit more capitalize interest in 2013 than we originally expected because deliveries have been slowed some, we actually had an outperformance in the first quarter with regards to absorbing units at the big 3 specifically at Pacific Bay Vistas and at Lincoln place.

And so for 2014 we’re likely to see a penny or two benefit from that, what that means is the comparison the 2015 we won’t be as strong, but we still expect to get to the same number. Now that’s from the NOI contribution from the big 3 and that we do have to fund the additional $65 million of costs associated with these projects, which will come from property sales.

And those sales could happen any time as we get later in the 2014 or into 2015, that timing has not been completely determined. I would expect though on a run rate basis to lose about $0.03 to $0.04 of NOI contribution from those assets, so I have to sell in order to fund the remaining cost that we’re going to be required on those assets.

So that redev contribution will stay very consistent, but we’ll potentially have a dilutive impact from having to fund that extra work through additional property sales over the next 18 months.

Nick Yulico - UBS

And just going back to when you’re saying the redev contribution would be similar now this year to what you previously said, you’re saying that also factors in the capitalized interest staying longer this year?

Terry Considine

No, that will help our numbers this year which will make the comparison for next year little bit more challenging because it will have won’t have stable comparison.

Nick Yulico - UBS

Okay, and then going to the -- when you talk about this, the 5.5% yield you expect on the redevelopment pipeline, does that include the tax credit income that you’re booking this year from Lincoln Place?

Terry Considine

Now what we do at that is and we talk about supplemental schedule too Nick is that that reduces the cost basis to the projects. So we count that as a deduct to the overall cost of the projects, so the cost of the projects that we talked about from this class as well as Elm Creek is about $670 million on a net basis, $695 million on overall total basis. And so it does brings down the denominator and the calculation yield we were not impacting our income numbers for that when we are calculating the 5.5.

Nick Yulico - UBS

Okay. So the 5.5%, from a modeling standpoint, you’re saying that 5.5% yield times the $670 million cost is the NOI contribution?

Terry Considine

NOI contribution in today’s rents and of course that will change based on how rents grow over the next few quarters.

Nick Yulico - UBS

Right. Okay. But then from an accounting basis, you’re also booking the $10 million to $11 million of tax credit income this year?

Terry Considine

Well it’s really apples to oranges Nick and the fact that you are talking about how something get impacted in FFO. So we have given the math and calculate what the NOI contribution is going to be for these ones to stabilize, we’ve also disclosed separately how things will run through FFO. So I would disagree with your characterization double count there.

Nick Yulico - UBS

No. I wasn’t saying there’s a double count; I’m trying to make sure that everyone -- that our modeling is correctly in that, the NOI contribution you’re saying is based on this net investment that you’ve had. Or you’re booking tax credit income this year for the piece that you’re saying reduces your net investment. So I’m just trying to understand the overall NOI, should it be actually based on that $670 million?

Terry Considine

Nick it sounds like we should prior to take offline so tap the call too much, but absolutely the answer is that to get to the NOI number if you take the yield multiplied by the investments and that’s we’re going to see overtime, certainly I don’t want you to bake that into your model in 2014 or 2015 because there is stabilization period. But that’s how you deal with the redev contribution separate from that is the income recognition how running, the impact from tax credits over the next many years, but I’d be happy to take that offline with you to help to make sure we have here model correctly.

Nick Yulico - UBS

Okay, thanks.

Operator

The next we have a question from Haendel St. Juste of Morgan Stanley.

Haendel St. Juste - Morgan Stanley

Hi, thank you, thank you. Terry, question for you. You’ve made significant strides in your business the last few years here on the operations portfolio, balance sheet. And despite your pretty strong first-quarter operating performance, the question so far has focused pretty exclusively on your redev activities. How concerned are you that the latest issues here might overshadow your recent progress on other parts of your business? And how are you thinking about future redev beyond the current pipeline that you’ve identified? Are you just as committed to redev as an external growth leveler? Will you adjust your underwriting, perhaps require higher returns? What are you thinking?

Terry Considine

Haendel, first of all thank you very much for your kind words about the significant strives that have been made. The entire Aimco team has worked very hard at being better at operations, better at cost control, upgrade the portfolio, improve the balance sheet so on and so forth. So, I guess, I look at redevelopment as just one more of these areas where the entire team will focus.

When we look at redevelopment, we see a number of successes and we see a couple of disappointments. And so, it’s important to maintain context and not throughout the baby with the bath water. We are not excited about reporting cost increases.

I don’t want to mislead you there, that is a big disappointment to me and to all of my colleagues. But we’ll be focus in the future about being better at estimating cost and better at execution and hopefully more predictable, I mentioned a couple of examples of that in response to an earlier question. And my hope is that we will have more predictable execution in the future.

That said, it is inherently unpredictable business. And it’s one that has been highly profitable for us even in these particular properties, which are the subject of concern. Just to think about it, if we’re creating 40% value on our investment, that’s a pretty good return. And so, we will continue to do it, we’ll continue to try to do it better.

Haendel St. Juste - Morgan Stanley

Okay. Thank you for that. Ernie, one for you. Can you walk us through the cost increases for each project, Corte Madera and Lincoln Place, since you began work on them last year? And also, can you talk a bit about the rent growth that’s occurred in those markets over the same timeframe?

Ernie Freedman

Sure, I’ll let John address the changes in the cost estimates from the projects at Lincoln Place and Preserve at Marin and I can then address the changes in rents.

John Bezzant

Hi, Haendel. I think Lincoln Place we’ve got two pieces I mean we can go back to schedule Tim and I don’t have initial schedules, Tim’s here to tell you but I would tell you at the hard cost line not including capitalize costs, similar stuff. Our total cost increases at Lincoln from the original budget are about $50 million and at Preserve at Marin it’s about 32. And then we’ve got other soft cost and some other things are involved in there, but that’s ballpark from where we started on the projects. Does that answer your question?

Haendel St. Juste - Morgan Stanley

Yes on the cost side, can anyone talk maybe keeping up where the market growth in those areas that are faced out there?

Ernie Freedman

Hey Haendel. This is Ernie I can address what’s happened with the markets we’ve been fortunate that the market in the Bay Area has been very strong since we started the project at Preserve at Marin. From our original underwriting expectation that market is virtually from original starting of the project that market is up almost 20%, 19.5%. Keith and his team have been able to achieve and we’re confident we will be able to continue to achieve rents although more than 10% higher than we originally expected coming from the scope changes that John had put into place with the team back away. And so rents are almost up 30% between those two that’s how you get from the 38, 80 number that we’ve disclosed previously upto the 51, 50 numbers we’re disclosing today.

At Lincoln Place, it’s a similar story but not quite a strong. At Lincoln Place rents are up about 7% since we started the works on the market units the Phase 2 units and we have rent achievement that we’re expecting to be right about where we expected and maybe slightly better about 101% or 102%. So roughly a 10% increase getting from 2,470 to today’s rents closer to 2,700 that we’ve disclosed in the current scheduled time.

Haendel St. Juste - Morgan Stanley

Okay, great. And then just one follow-up if I may. Can you walk us to the components to that $25 million credits you’ll be able to offset against some of the cost increase at Lincoln Place, some of the components and then potentially are there any maybe further credits that you have not enrolled yet but are well somewhat likely?

Terry Considine

Sure. Specifically at Lincoln Place, (inaudible) we have two streams of credit so we’ve been able to take advantage of. We have talked about the fact that Lincoln place that one of our requirements is to maintain the historic nature of that project that certainly has made it more costly for us as to maintain the historic nature of the project. But it also gave us the opportunity to get historic tax credits and use those historic tax credits. Today we expect those historic tax credits to be about $23 million to $24 million that were earned over the construction period of the project.

In addition we’re able to negotiate with some local utilities some utility reimbursement credit in the amount of a couple of million dollars so net-net we expect that $25 million of credit at Lincoln place. I don’t expect that will achieve further credits at Lincoln place, but what I can tell you this is something that we look at our other projects as well.

Two projects in particular that have the ability to potentially achieve historic tax credit for us or sterling, as well as Park Town Place. And as you know Park Town Place we have not disclosed or announced the beginning of the that project, but we have the first phase of sterling, the numbers that we currently have in our earnings release and supplemental schedule Tampa sterling do not take into account any of the historic tax credits we make it there. That is still a moving target. Those credits have not been earned as if yet like they’ve been at Lincoln place, where we have better inside in that more specific number that we potentially get on sterling we’ll highlight that in supplemental schedule ten and adjust our expect to cost bases downward on sterling for when we earn those credits.

Haendel St. Juste - Morgan Stanley

Fair enough. Thank you very much.

Terry Considine

Thanks Haendel.

Operator

And our next question will come from Dave Bragg of Green Street Advisors.

Dave Bragg - Green Street Advisors

Hi good afternoon.

Terry Considine

Hey Dave.

Dave Bragg - Green Street Advisors

Hi. So first question relates to one more just on the redevelopment looks like for the four projects, the big projects are on, you are assuming roughly a 75% margin to get to that 5.5% yield is, is that close?

Terry Considine

That would be pretty close, they vary a little bit above and little below, that’s correct based on the rents and their locations.

Dave Bragg - Green Street Advisors

Okay. And as it relates to operating expenses, the recurring maintenance reduction really stood out in the first quarter. I just want to make sure there is no change in accounting policy between that in your capital replacement cost per unit which went up 20% year-over-year?

Terry Considine

No changes all there, that’s just the nature of the timing when those repairs of maintenance happen to happen. We would expect that that number will trend back to budget throughout rest of the year that is just the timing of activity that happen, so changes in accounting policies.

Dave Bragg - Green Street Advisors

Okay, great. And then in the second quarter of 2013 in same store pool you achieve that renewal growth of 5.2 and you move into 3.1, how should we expect second quarter ‘14 to stay relative to that?

Terry Considine

Okay. Well, Keith, why don’t you go -- we talked about the numbers for April, so we really talked about how April came out and why don’t you talk about what’s happening renewals at least for May and June?

Keith Kimmel

Sure. Dave, April let me just walk through the progression of what we saw on new leases at 26 renewals and 53 in the blended 40. And what I would tell you our May and June went out at 5% to better than 7% on the renewal side. We typically see somewhere between 15 and 100 basis point melt from the [ask] to the ultimate take and so that’s what I give you some inside on how it is looking.

Dave Bragg - Green Street Advisors

Thank you. Last question for Terry and one for Ernie is regarding the ATM would that in place just talk about your thought process in what situation what might we see you utilize it?

Terry Considine

Well, David we might use it to issue preferred stock but we are unlikely to use it to issue common stock to take those in order. For preferred stock, we remain interested in long duration fixed rate liabilities and preferred the pricing of preferred stocks is getting more attractive to us and we’re following that. So it’s consumable that we would issue preferred stock in a way that would accelerate that unencumbered pool that would prefund future maturities so on and so forth. For common stock, it’s not attractive at this time, because the share price continues to be at a discount, even though the stock has had a good run, our net asset value continues to increase and so we look at that before we had issue common stock.

Dave Bragg - Green Street Advisors

Okay. Thank you.

Terry Considine

Thanks Dave.

Operator

And next we have a question from Michael Salinsky of RBC.

Michael Salinsky - RBC

Good afternoon, guys. Just going back to one last thing on the redevelopment. The $25 million of tax credits. Is that the plan to sell those and net that against the cost to or those be amortize than earnings going forward?

Terry Considine

I don’t know, last three people I have promised this would be the last question on redevelopment. Promise (inaudible) else going forward too.

Michael Salinsky - RBC

My next two questions will not be related to redevelopment I promise that.

Terry Considine

Mike, nice thing about the tax, because we have a choice to either/or. Right now our base model is to assume that we’re going to ease the tax credits, because we have taxable income from other activities that would be able to be in the tax credits we have used against. So we have that available for us to use those tax credits. That said it is a better economic decision starting tomorrow six months, nine months or 12 months from now is to bringing the partner, who can then use those tax credits and effect they buy to the partnership and that allows for them to get the tax credits and that provides better economics for us, we would absolutely do that and of course we have done that in the past some other projects.

Right now, the base cases assume that we will use the tax credits, but we have a person who monitors that market very closely for us and if there is an opportunity to get even more value for the credits so we would certainly love to do that too.

Michael Salinsky - RBC

Okay. The transactional income you recognized in the first quarter, I believe your guidance before was zero to $2 million and it was about $2 million in the quarter. Was that just moved forward from the fourth quarter to the first quarter or was that incrementally more? And if you look at the guidance now, what is assumed in terms of transactional income in the updated guidance?

Terry Considine

You asked this question that was actually transactional income that we were not anticipating. So whether or not a timing issuance of the reasons why I was comfortable bumping up guidance for the entire year for FFO and AFFO, because of that activity Mike. That said, when it comes to the next quarter and we do an updated guidance across the entire board, that’s one area where you will likely see a slight guidance increase because that was unanticipated transaction income in the first quarter.

Michael Salinsky - RBC

Okay. Then final question, in terms of dispositions, previously, when we last talked on the fourth quarter, you said second quarter was going to be where the bulk of dispositions occurring. How much is being marketed right now? Is it still 2Q heavy, or has some of that been pushed back to the back half of the year just can you give us an update where we stand on dispositions for the year?

John Bezzant

Sure, mike. This is John. Yes, we have, there will be more activity in the second quarter than what you’ve seen in the first quarter, borrowing some black swan event that keep things from closing, but we’re on track for a heavier second quarter than the first.

And then as Ernie referenced earlier with the additional redev spend here we’ve got the opportunity or we will be selling some more assets as we get into the later part of the year. So you will see some activity come together towards the end of the year in terms of total dollar volume and everything else remains to be seen, how big that goes, but there will be something more coming towards the end of the year as well.

Michael Salinsky - RBC

Okay. Thank you.

Terry Considine

Thanks Mike.

Operator

And next we have a question from Karin Ford of KeyBanc Capital Markets.

Karin Ford - KeyBanc Capital Markets

Good morning.

Terry Considine

Hey, Karin.

Karin Ford - KeyBanc Capital Markets

Sorry to break the promise. One more for you sorry. In the two projects that the overruns do they still meet the projected free cash flow internal rate of return hurdle that you mentioned at the beginning of the call?

Terry Considine

Karin this is Terry. They do in this sense that with these numbers the risk adjustment would be out of the expectation. In other words if we were starting something new we would want to have a high margin over the cost of buying a stabilized property to just allow for the kind of uncertainties we found, at this point having found them that risk adjustment would come down. And so if the expected NOI yield is 6.5% and the expected market gap is 4% the net value creation would be quite effective to us.

Karin Ford - KeyBanc Capital Markets

Okay thanks for that. A question for Keith, it looks like rent increases were just a little bit below in 1Q ‘14 which is a little bit below where they were in 1Q ‘13 but you had some pretty nice momentum here post quarter. Do you think rent growth could be as good this summer as it was in the summer of 2013?

Keith Kimmel

Hi Karin this is Keith. As you’ve pointed out we’ve seen a nice steady progression on rent growth. As we look at where April came in and where we’re seeing May we think that that should look quite similar. And as far as the summer goes we believe it should be quite similar to what we saw last year.

Karin Ford - KeyBanc Capital Markets

Helpful. And then just last question was the dispositions you did this quarter I think we’re at a 6, 7 cap rate that seems pretty attractive. Was there anything particular about those assets were they value-add under occupied or anything the cost of cap rate to be below 7 or is it just the nature of the pricing in the market today?

Ernie Freedman

Nature of pricing in the market, locationally they were two Florida assets, one West Palm area and one in the Jacksonville area and one hand Denver.

But that cap rate, I think reflective of metropolitan area BC pricing generally, I think as we look forward into the pipeline for the remainder of the year and if you look back to last year, I think our average last year was kind of mid 7s range I would expect to see you’ll get, depending on the mix in any given quarter you will see the numbers bounce around a little bit but I think for the year on a whole it will in kind of the low 7s range.

Karin Ford - KeyBanc Capital Markets

Thank you very much.

Operator

And with that we will conclude the question-and-answer session. I would like to turn the conference back over to Terry Considine for any closing remarks.

Terry Considine

Well, thank you and thank you all for your interest in Aimco. Please call Elizabeth Coalson or Ernie Freedman, or me if with any of your questions. And we look forward to seeing many of you at the NAREIT meetings in New York City in another month or so. Have a great day. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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