Apartment Investment and Management's (AIV) CEO Terry Considine on Q2 2014 Results - Earnings Call Transcript

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Apartment Investment and Management (NYSE:AIV)

Q2 2014 Earnings Call

August 01, 2014 1:00 pm ET

Executives

Lisa R. Cohn - Executive Vice President, General Counsel and Secretary

Terry Considine - Chairman of the Board and Chief Executive Officer

Keith M. Kimmel - Executive Vice President of Property Operations

John E. Bezzant - Chief Investment Officer and Executive Vice President

Ernest M. Freedman - Chief Financial Officer and Executive Vice President

Analysts

Nicholas Yulico - UBS Investment Bank, Research Division

Nicholas Joseph - Citigroup Inc, Research Division

Ryan H. Bennett - Zelman & Associates, LLC

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Jana Galan - BofA Merrill Lynch, Research Division

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

David Bragg - Green Street Advisors, Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Operator

Good afternoon, and welcome to the Aimco Second Quarter 2014 Earnings Conference Call. [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.

Lisa R. Cohn

Thank you. Good day. 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 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 on this call. Thank you for your interest in Aimco. Business is good. During the recently completed second quarter, Aimco continued on plan. Before my colleagues report on second quarter particulars, I'd like to point out a few highlights.

AFFO, adjusted funds from operations, per share, which is where Aimco measures current period profitability, was up year-over-year by double digits. FFO was up 6%.

In property operations, Keith and his team beat the high end of same-store NOI guidance by 140 basis points.

In portfolio management, second quarter revenue per unit approached $1,550, up 11% year-over-year. John and his team continue to sell our lowest-rated properties and reinvest the proceeds in properties with higher rents and better prospects. And of course, when we make investments, we follow a paired trade discipline, explicitly comparing what we buy to what we sell. We invest only where portfolio quality is enhanced, and the projected free cash flow internal rate of return is greater than that of the property being sold.

In redevelopment, we are on track to create more than $200 million of net asset value, about $1.50 per share. During the second quarter, construction continued at the revised pace and cost discussed in our first quarter call, while Keith and his team leased 90 redeveloped apartment homes a month at average monthly rents of $2,800.

On the balance sheet. In May, Ernie issued $125 million of preferred stock at a yield of 6.875%. Pricing was in the range for an investment-grade issuer, and providing confirmation of the market's confidence in the Aimco balance sheet and business plan. In the coming months, Ernie, Patti and their team will use the proceeds from this issuance to prepay property debt in order to increase the size of our pool of unencumbered properties. Our financial metrics are approaching Fitch's requirements for an investment-grade rating, and we expect to reach those levels over the next several months.

In sum, we're making steady progress on all fronts. For these good results, I'd like to offer sincere thanks to all my Aimco teammates, both in the room here in Denver, as well as across the country. It's a privilege and pleasure to work with you.

Now for a more detailed report on second quarter operations, I'd like to turn the call over to Keith Kimmel, Head of Property Operations. Keith?

Keith M. Kimmel

Thanks, Terry. I'm pleased to report that we had a solid quarter in operations, with revenues up 4.1% year-over-year, 1.1% sequentially and 4.4% on a year-to-date basis. Our on-site teams demonstrated their deep commitment to providing world-class customer service to our residents. Through this dedication, we maintained low customer turnover and renewal rent increases averaging 5% for the quarter.

Of those leases that expired and were not renewed, new leases were signed at rates that were on average 4.7% higher than the expiring leases. The Bay Area, Miami and Denver led the way with new lease rate increases between 11% and 14%. As a result of our team's hard work across the country, we achieved blended lease rate increases of 4.9% for the quarter, the highest rate of increase in 7 quarters.

During the second quarter, we also increased occupancy, both year-over-year and compared to last quarter. Turnover for the quarter was 50.6%. Of the customers who decided to move out, 27% moved out for career moves, 17% did not renew due to price and 14% 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 in replacing move-outs with better qualified residents at higher rents. The average income of those new customers who moved in, in our same-store communities, in the second quarter, it was $131,000. The median income was $75,000, resulting in a rent-to-income ratio of 21%. Year-over-year, the median income of our new residents versus those that moved in a year ago is up 9%, as we improve our portfolio and resident quality.

Looking at our 10 largest markets, which make up 2/3 of our revenue. The top 4 performers had revenue increases from nearly 6% to over 8% for the quarter, led by the Bay Area, Denver, San Diego and Philadelphia. Our steady performers for the quarter, with midrange growth of over 4% to better than 5%, were Miami, Los Angeles, Chicago and Orange County. And rounding out our 10 largest markets, we had Boston at nearly 4% and Washington, D.C., which improved by 60 basis points.

The third quarter is off to a solid start, with July blended lease rates up 5.6%. New lease rates were up 6%, and renewal rates up 5.3%.

July's average daily occupancy was 95.6%, 50 basis points better than prior year. August and September renewal offers went out with average increases of 6% to 8% across the portfolio.

And with great thanks to our teams in the field and here in Denver, for their commitment to Aimco's success. I'll turn the call over to John Bezzant, our Chief Investment Officer. John?

John E. Bezzant

Thank you, Keith. I'll provide today an update on our major redevelopment projects, as well as additional information on our transactional activities.

On the redevelopment front, we completed a quarter of solid execution. We invested $54 million in redevelopment projects across the country, and $8 million in our One Canal Street development project in Boston. In April, we completed the redevelopment of Pacific Bay Vistas, a 308-apartment home community in San Bruno, California. The community was 88% occupied as of July 30. We expect occupancy to stabilize above 90% in the coming weeks, which would mean bringing the community into our same-store portfolio in January 2016.

Construction continued at both Preserve at Marin in Corte Madera, California and at Lincoln Place in Venice, California. Work at each of these communities is progressing in accordance with the budget and schedule we outlined last quarter.

At Lincoln Place, 342 of the 391 completed apartment homes were occupied as of June 30. And 26 of the 36 completed apartment homes at Preserve at Marin were occupied on the same date.

Since quarter end, at Lincoln Place, we delivered the amenity building in the first of the newly constructed apartment homes, in time for a July 4 celebration. And just this week, we delivered the third of 7 apartment buildings at Preserve at Marin.

Finally, on redevelopment, during the second quarter, we expanded the scope of our project at 2900 on First in Seattle. You may recall that we started the interior phase of this project, including the renovation of all 135 apartment homes, earlier this year. The expanded scope includes the construction of new amenities, as well as a redesigned and upgraded common areas and commercial space. We expect to invest an incremental $8.2 million in these areas, and to generate an incremental $245 of revenue per unit from the investment. This additional work does not impact the construction and delivery schedules we disclosed last quarter.

We also had a successful quarter in our transactional activities. During the second quarter, we sold 15 communities, with approximately 2,500 apartment homes, generating gross proceeds to Aimco of $157 million. Four of these were among our lowest rated Conventional apartment communities, with average revenues per apartment home of $930, 40% below the average of our retained portfolio. We also continue the sell down of our Affordable portfolio, with the sale of 2 communities, and our partnership interest in 9 other Affordable communities.

On average, the communities sold during the first half of 2014 were sold at prices reflecting a free cash flow cap rate of 5.5%. Had we held these communities for the next 10 years, we would have expected them to generate a free cash flow internal rate of return of just over 7%.

As we maintain a paired trade discipline in our investment activities, investing the proceeds of these sales in higher growth, higher margin, higher opportunity communities, we continue to see improvement in the quality of our portfolio. Over the last 12 months, our capital recycling activities, combined with same-store revenue growth, led to an 11.4% increase in our portfolio average revenue per apartment home.

In July, we sold 1 additional Conventional community with 309 apartment homes, for gross proceeds to Aimco of $21.5 million.

Recently, we began actively marketing another group of communities that were originally planned for sale in 2015. By bringing these communities to market now, we take advantage of healthy buyer demand, as capital is plentiful and interest rates remain low. If we are successful in executing these accelerated sales, proceeds will be used in accordance with our paired trade discipline and may include pre-funding of 2015 redevelopment and development investments, selective acquisitions and/or property debt pay downs.

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

Ernest M. Freedman

Thanks, John. Before I discuss the results, I want to take a moment and apologize for the error yesterday in releasing earnings prior to the market close. We have controls and processes in place to ensure that those types of mistakes won't happen, but they obviously failed. I'm confident that it won't happen again.

Pro forma FFO of $0.52 per share was at the high end of our guidance range, driven by $0.02 of outperformance in property operations.

Turning to our balance sheet. As we previously announced, in May, we completed an offering of 5 million shares of a new class of perpetual preferred equity, our Class A stock, with a coupon rate of 6.875%. Proceeds from this offering were approximately $121 million.

Also in May, we issued about 117,000 shares through our Class Z Preferred Stock At-the-Market offering program. The shares, which have a coupon of 7%, were issued at $25.65 per share, equating to a yield of 6.8%, for proceeds of $3 million. Both series continue to trade at a premium to par, equating to yields between 6.6% and 6.8%.

Proceeds from these issuances will be used to pay off 5 property loans in the second half of this year. This will increase the size of our unencumbered pool of apartment communities, from $570 million today to between $900 million and $950 million at year's end. This puts us very close to the requirements sent out by Fitch, around having an unencumbered pool of $600 million of assets, using a stressed cap rate of 8%.

Looking ahead, pro forma FFO is projected to be $0.48 to $0.52 per share for the third quarter. Full year 2014 pro forma FFO per share is projected to be $2.04 to $2.12, which is an increase of $0.01 at the midpoint compared to the guidance we provided last quarter.

Our updated guidance includes the following increases: $0.02 from second quarter outperformance; $0.01 from higher expected same-store NOI growth during the second half of the year; and $0.01 from higher projected tax benefit in the second half.

These increases are offset by $0.02 of prepayment penalties that we expect to incur mostly in the third quarter, in connection with the early repayment of property debt, and a net $0.01 increase in funding costs, which includes $0.03 of additional preferred stock dividends due to second quarter's issuances, offset by $0.02 of interest savings from the property debt we will pay off with the proceeds.

Specific to the updated tax benefit projections, about $8 million has been recognized through June 30, of which about $5 million represents the historic tax credits from Lincoln Place.

Looking to the second half of the year, we expect third quarter tax benefit to be about $4 million, of which $3.5 million represents the historic tax credits. And we expect fourth quarter tax benefit of about $5 million, of which $4.5 million is from historic tax credits.

At the AFFO line, we are projecting $0.34 to $0.38 per share for the third quarter, and full year AFFO guidance has been maintained. The $0.01 increase in FFO guidance is offset by anticipated increased capital spending.

As to operations, year-over-year Conventional same-store NOI growth is projected to be 3.25% to 4.25% for the third quarter. We are increasing our full year Conventional same-store NOI guidance to a range of 4.5% to 5.25%, or an increase of 87.5 bps at the midpoint.

Supporting our increased expectation for NOI is a higher revenue projection of 3.9% to 4.2%, and a lower expense expectation of 2.25% to 2.5%.

As you can see from our full year guidance, NOI growth for the second half of 2014 is expected to be lower than what we achieved in the first half of the year.

Let me take a few moments to walk you through the various pieces. I'll refer to our year-to-date results on Page 2 of our earnings release.

Year-to-date, our rent per apartment home is up 3.1%. We expect an acceleration in rental rate in the second half of the year.

Other income, which makes up about 10% of our property revenues, is expected to be up around 5% in the second half, which is a deceleration from the first half's 11.3%. This deceleration is consistent with our thoughts from the beginning of the year. We had outperformance with utility reimbursements in the first quarter due to the cold winter.

Average occupancy was 30 bps higher than last year in the first half of 2014. We expect to continue to have an outperformance to occupancy in the second half, but a bit lower than what was achieved year-to-date.

Regarding expenses, we have more difficult comps from prior year second half, so we anticipate a higher expense growth rate.

On the transaction front, as John mentioned, we are looking to complete some additional asset sales during the second half of the year. These sales and the reinvestment of proceeds are not contemplated in our current guidance, as the timing and magnitude are uncertain at this point.

With that, we will now open up the call for questions. [Operator Instructions] Laura, I'll turn it over to you for the first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Nick Yulico of UBS.

Nicholas Yulico - UBS Investment Bank, Research Division

Ernie, can you just talk a little bit more about the decision to pay off the property loans and then also increase your capital spending? Because if you hadn't done either of those, the boost from your same-store NOI guidance going up would have created even more of a FFO and AFFO guidance raise.

Ernest M. Freedman

Nick, be happy to address that. I think first and foremost, we're thinking long-term about what we want to do here in Aimco, and not so concerned about what short-term results may be on our earnings profile. And for both of those items that you mentioned, let me talk about that, so you can understand a little bit more about how we think about things long term. I'll start with the capital costs. We do expect our capital replacements to go up about $0.01 in the second half of the year, as we have the opportunity to invest long term in our assets, and do that today. And it's really accelerating things that we could've done tomorrow or next year. So we'll actually have a better profile for the company and better assets by getting that capital done today, because our teams have done a good job in executing what they've had on their plate and have capacity to take on some more. It's not really a different story around what's happening with paying off the property debt. We like the idea of making a trade of putting in place perpetual preferred equity with no maturity date, at what we felt was a very good price of 6.875%, to pay off property debt that was coming due anywhere in the next 3 to 6 years. There's certainly a cost to doing that. And we looked at it from a payback perspective, and based on where those interest rates were on the loans that we were paying off, we think it's a pretty quick payback, it's about a 2 to 3 year payback. And so, we have the benefit of putting the balance sheet in a safer position and a better position by bringing on some preferred equity. And we also have the benefit then of getting much closer to the target that's been set by Fitch, with regards to the size of the unencumbered pool that they would like, and really have us knocking on the doorstep of getting to investment-grade, hopefully here in the next few months, as Terry talked about.

Nicholas Yulico - UBS Investment Bank, Research Division

And then back in NAREIT in June, you had a good slide showing the next wave of larger redevelopments you might start over the next 3 years. Can you provide some updated thinking on these projects and the possible size of them and whether any might be as impactful to your NAV as Lincoln Place looks like it'll be?

Ernest M. Freedman

Sure. No, Nick, appreciate the question on redevelopments. The answer is, as John and his team continue to make progress on the planning on some of those projects, and we would anticipate some of those that we laid out on that slide will be -- some may start here as early as late 2014 and some going into 2015, and we do believe each of those has an opportunity for some nice NAV accretion. I'll turn it over to John, maybe to talk about a few of the specifics.

John E. Bezzant

Yes, from the slide, we would expect we are in kind of final planning process on the project out in La Jolla, that we would hope to have formally approved and announced later this year. A project in Philadelphia, Park Towne, we did review with our investment committee and we're getting ready to move forward there, as we look to this build-out of an initial phase at Park Towne. We are in final planning of numbers, timing and cost there, that will be in our next quarter's report. And then we have a handful of others that are in a planning process, a project in Chicago, and others that we'll talk about as we get a little more definition to them and release in our schedules in the future.

Nicholas Yulico - UBS Investment Bank, Research Division

Any rough numbers you can give on Philly right now?

John E. Bezzant

Not yet. I mean, we're -- I'd rather complete the final planning and get it formally into the report before we release the numbers on it.

Operator

And our next question will come from Nick Joseph of Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

One of your peers announced they're exiting the new development business. Terry, I'm wondering what your thoughts are on that business for Aimco going forward?

Terry Considine

Nick, thank you for the question. It's, as you know, it's something that is not a major focus for Aimco, and yet it's something that we've done from time to time over the past many years. I think of Palazzo being a good example of that. And as we look at One Canal today, we're quite pleased to be doing it, and so it's a tool in our toolkit that we'll use where appropriate.

Nicholas Joseph - Citigroup Inc, Research Division

Do you think you get the credit for development in, kind of in the stock price? And I'm also wondering if you're looking at any additional land sites right now?

Terry Considine

We focus on creating financial results. I'm never quite sure about the linkage between creating net asset value and the share price. Over time, I think there's a, maybe a correlation. And we look at it in our paired trade discipline of free cash flow, internal rate of return expected, and with this very significant risk adjustment, if we're undertaking development work. And where it makes sense, we'll do it. And I've kind of forgot what your second question was.

Nicholas Joseph - Citigroup Inc, Research Division

It was if you're looking at any additional land sites right now, or just focusing on the Boston development?

Terry Considine

We're -- we have lots of conversations with the market. There are lots of opportunities that are presented to us. We look at many, many possibilities and do very few.

Operator

And next we have a question from Ryan Bennett of Zelman & Associates.

Ryan H. Bennett - Zelman & Associates, LLC

Just to follow up on your comments on the operations. I think you said occupancy so far this quarter is running slightly below where you ended the quarter. Is that just a function of you being more comfortable where new move-in lease rent growth is right now, for your portfolio, and you're willing to take the additional turnover?

Ernest M. Freedman

No -- Ryan, it's Ernie. If Keith wants, Keith could chime in as well. We typically see occupancy come down from June to July and from July to August, mainly just due to the number of turns. Mostly, those 2 months have the most turns for us in our portfolio. Our average days outstanding are right around 20, 21 days, and just because there's more turns, we typically have a little bit lower ADO. We're actually tracking higher than we did last year. Keith, you want to, maybe you want to give some comps of what July looked like last year, compared to this year?

Keith M. Kimmel

Ernie, thanks. Ryan, if we look at it year-over-year, we're actually 50 basis points ahead of where we were last year, looking at July. So we're feeling good about where we are in the position and as we get into peak season, we want to take advantage of that new lease price, that we're achieving it, 6% in July and 6.2% in June.

Ryan H. Bennett - Zelman & Associates, LLC

Got it. And then, just on that new move-in lease growth that you've been seeing accelerating over the past few months. Is that a pretty clean number, in terms of -- is there any impact of signing more leases in some of your higher rent growth, or sorry, higher rent per unit markets? Or are you thinking that is a pretty clean number, in terms of the momentum you're seeing?

Ernest M. Freedman

No, that's a clean number, Ryan. We're just -- we're seeing very good rent growth coming off of the numbers from last year, and it's not skewed one way or the other, based on where it's happening in the markets. We're seeing occupancy up across the board. So we're not, compared to where we were last year. So it's clean.

Operator

The next question today is from Rich Anderson of Mizuho.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

So I don't remember what the story was last quarter, but the preferred offering, in terms of the timing, did -- was that a bit of a surprise move? I was thinking, in terms of your approach for an investment-grade rating, one of the reasons isn't so much to issue unsecured debt, but it is to get better pricing on preferred. So did that kind of get triggered a little bit sooner than you thought? Or was that always in the game plan?

Ernest M. Freedman

I would say, Rich, it's always been in the game plan. We certainly have been talking about it for a long period of time, and we'd actually set up the necessary paperwork with the various bankers back in September of 2013, to be prepared to be able to take an advantage of a moment in the market. And we've been pretty clear with folks that we wanted to see if we can achieve a price better than 7%. And we thought there was a window there very quickly in May, that we might be able to accomplish that, and we did. And you're absolutely right, Rich, we probably would get slightly better pricing on our preferreds. Although we did price them between 2 investment grades, and interestingly enough, with that preferred offering. Public Storage, who I think most people would consider the top of the top, in terms who issues preferreds, their paper, just been issued at about 6.375% a few months before us, and there was some -- another investment-grade company out there that was at over 7% with their preferred. So the fact that we kind of came in between the 2 gave us confidence, or showed us that the market seems to think we have a pretty safe balance sheet and pretty close to investment grade. It's kind of what comes first, the chicken or the egg. And to get to investment grade, Fitch has been pretty clear, they want a larger unencumbered pool, and by not doing the preferred, we would get there, but it would certainly take us a longer period of time. So that's why we like doing a smaller preferred then, Rich, and certainly, if we can get that kind of credit rating from Fitch here, soon, in the next many months, it could certainly open us up for even better pricing for preferreds in the future, of course, depending on where the 10-year Treasury's trading at that time.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Right. And then big picture question for Terry, I guess. What do you think, is this the optimal, economic kind of environment for multifamily, sort of a Goldilocks type of situation, where you're not getting overheated, and hence you're not inciting development, but you still have enough, kind of household formation, maybe not so much, but job growth, to feed the business? Would you like the economy if it were just your business, the only thing you cared about, would you like the economy to stay right about here, or would you like it to be stronger?

Terry Considine

Rich, I think you've described it correctly as a Goldilocks economy, that it's not too hot, not too cold, and it's quite good for the apartment business. And I think that we and our peers and private competitors are all doing well, and I think that our prospects are quite good.

Operator

And the next question is from Jana Galan of Bank of America.

Jana Galan - BofA Merrill Lynch, Research Division

I was wondering if you could provide a little bit more color on your Southern California portfolio's performance. I know you are feeling very good about that market heading into this year. I'm just curious if it's meeting or exceeding expectations and particularly, what happened in San Diego.

Keith M. Kimmel

Jana, it's Keith. Let me walk you through, and I'll walk you through San Diego, Orange County and L.A. If we start in San Diego, a couple of good things going on there. First being that, the occupancy in the second quarter was at 96.5%. And we're starting to see some new lease growth coming in. In Q2, our new leases were up 8.6%. And so, we're starting to build some momentum, obviously that translated into a revenue of 6.1% in Q2. And of course, I wouldn't want to miss that we really have a very solid team out in San Diego, and they really executed well. Moving into Orange County, Orange County continues to be a solid market for us. Had some good results there. One thing I would just point out is that it's been steady for us. And over the past couple of quarters, we've been in the mid-4s, and we're pleased with what's going on there. And then in Los Angeles, where we think we have an advantage is that we just have, we believe, some of the best located assets in West L.A. And we're seeing some good growth there, we're taking advantage of it, and we're looking forward to the second half of the year.

Jana Galan - BofA Merrill Lynch, Research Division

And then also, on your West Coast expenses, they're down pretty significantly year-over-year, is that primarily insurance?

Ernest M. Freedman

Jana, I don't have the answer specific for West Coast. Across the board, we had some good guides in insurance, as we -- when we got our latest actuarial results from our actuaries around our general reserve liabilities. We had a good guide to pick up there, and that was spread amongst all of our properties, not just the West Coast. I'll take a look at the numbers separately, Jana, after the call and give you a call back, to see. But nothing, I don't recall anything else that stuck out specifically for the West Coast on expenses.

Operator

The next question is from Haendel St. Juste of Morgan Stanley.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

So one for, I guess you, Terry. You talked in the past about your optimal long-term portfolio balance on the quality spectrum: 40, 40, 20, A versus B versus C. I was wondering if perhaps you've given some thought recently or perhaps gone through the exercise of assessing your optimal long-term geographic or market exposure balance, and perhaps can you share some thoughts or perspective on how you're looking at your market balance today in light of the current acquisition market opportunity, the varying revenue growth outlooks for different regions of the country. And assuming you could snap your fingers and instantly shift some capital from your other markets, which look to be about 15% of your conventional NOI, where would you like to add to your portfolio, given the current asset pricing in the marketplace and the near-term growth outlook? And where amongst your current top 20, your target market, would you also potentially like to rebalance from your current NOI exposures?

Terry Considine

Well, Haendel, that's quite a question. I'll try to answer it as best I can. The first point is that Aimco is very committed to a geographically diversified portfolio. It's my experience that all markets fluctuate over time, some are good now and some are bad now, but they'll reverse in the future. And to provide steady and predictable growth and returns to our shareholders, we want to be appropriately diversified. And so we like our strategy. And turning to our strategy, which is unchanged, we would like to improve our allocations to Boston, bringing more capital from the outer suburbs and into more urban locations in Boston and Cambridge. And in New York, we'd like to increase our allocation. We're under-allocated there. And in San Francisco, or the Bay Area in general, we're under-allocated, and we'd like to increase our allocation there. Seattle, we're under-allocated and we would like to increase our allocation there. In all of those markets, we are in an environment where apartments are highly priced, and that's great when we're selling assets on one side of the paired trade, but it makes us cautious about investment on the buy side of the paired trade. Much of what we are doing in terms of buying or reinvesting is, as you know, through redevelopment and development. And from time to time, John will find a particular property with a particular appeal, or where we have an opportunity to add value, and you'll see that be part of our capital allocation process. John, was -- is there anything you want to add to that?

John E. Bezzant

No, maybe just one thing. The, Haendel, just keep in mind that with the paired trade, we are really looking for accretive investments. And so to the extent we can find them, we bought in the first quarter a couple of little buildings in New York, which is a highly priced market, but we happen to find a deal that was -- a couple of buildings, adjoining things we already owned and we were able to get a transaction executed that was accretive for us, and made sense. And really, that's the math that we look at, and so, while there are markets where we would love to put more dollars to work, we've got those dollars to work someplace else right now. And we continue to look in nooks and crannies for opportunities, and we think we'll find a few here and there, but it's not going to be a mass exodus. Unfortunately, we can't just snap our fingers and move from one to the other.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

A follow-up to that, your stock has run quite a bit here year-to-date and is trading around NAV or slightly above, depending on whose numbers you believe. Given your improved cost of capital, are you ostensibly inclined more towards acquisitions? Is your stock at a point yet where you can, would consider using it, stock or units, as currency in pursuit of external growth here?

Terry Considine

Well, Haendel, first, you're correct that the stock's had a good year to-date. But in our view, it continues to price at a significant discount to net asset value. And I think that it's a discount to consensus, but more importantly, it's a discount to the more informed analyses. Because the market tends to look at the cap rates of the properties we're selling, without making a sufficient adjustment for the fact that we're selling off the bottom and investing in higher quality, lower cap rate assets. So I think that what lies ahead is an opportunity to close that gap, and that's probably our first priority before we think too much about equity issuance.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Got you. Then one last, if I may. Ernie, can you talk a little bit more about the 2Q expense results, it came in well below our expectations. Can you talk a bit about how much that number benefited from perhaps, lower-than-expected taxes versus maybe your cost efficiency initiatives?

Ernest M. Freedman

Sure. Happy to do that. As I mentioned earlier, in the previous question, we definitely had a benefit in expenses. They are going to be a onetime issue, with regards to adjusting for some reserves for general liability, and that certainly had some help. Across the board, we're seeing good things across all the different expense categories, Haendel. Property taxes are coming in about where we expect for the year. So no surprises that are material in either direction, both either a favorable or unfavorable. We still expect real estate taxes to come in about 4% to 5% up for the year, which is our biggest expense that you'll find on our operating statement. We continue to make good progress on payroll. We're very pleased with that. We do have some timing issues with repairs and maintenance. We do expect repairs and maintenance costs will go up a little bit, compared to prior year, compared to what we've seen in the first half. So I would give some of that outperformance that you're seeing year-to-date around timing with some of our repairs and maintenance. We expect that to come back in line. Utilities certainly have been higher than we would have anticipated. Second quarter came in more in line, but the first quarter numbers were much higher than we expected. And we're seeing some good things around what's happening with marketing. And then again, back to our personnel costs, we continue to see some nice progress, in terms of being able to control our costs associated with personnel in the field. And July 1 is our -- when we do our merit increases, and those went through at slightly under 2% on average across the company. And we're confident we'll find ways to offset that increase through productivity, to continue to keep personnel costs in that flattish range. And I looked at the numbers this morning, Haendel, and for all operating costs exclusive of utilities, insurance and taxes, we had told earlier, we told folks early this year we expect to keep those under 1%. And right now, it looks like we'll keep those right around 0.5% increase, versus a 1% increase. So Keith and his team continue to do wonderful things on expense control for us.

Operator

Our next question comes from Dave Bragg of Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

John, earlier you provided some insight on potential incremental disposition plans. I think we missed the magnitude of those potential sales. Could you remind us what that is, and talk a little bit about the likely mix of Conventional versus Affordable?

John E. Bezzant

Sure, I'll give you a little bit of color, maybe not the level of precision you want, but I'll give you some, how's that? We've intentionally not provided precise guidance, because we don't quite know yet how much of it will transact, we are looking opportunistically in multiple markets, primarily on the Conventional side, to see what the market will bear, kind of back to Haendel's question about portfolio reallocation. In large measure, our reinvestment opportunities are driven by how good an execution we can get on the sale side. And when we get a better execution, that provides us some capital that is maybe reinvestable at a more market rate today. And if we get those good executions in the fall, I think you can anticipate us seeing a fairly high level of activity on the sale side. If they're not there, or if there's some sort of a disruption that would cause the market to freeze up a little bit, then we would have less, but I don't have a good number to give you right now in terms of magnitude order. But we're chasing a lot of deals. We have a few hundred million dollars' worth of deals out in the market today, and -- but I don't know how many of them are going to get closed.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And I think the acquisitions on a one-off basis, debt repayment and pre-funding redevelopment are mentioned as potential uses of those sales proceeds. Terry or Ernie, can you rank the -- your preference for those 3 items, based on what you see today?

Terry Considine

I think it's a question of balance. I don't think we're going to select one or the other. But we -- our overall strategy is to provide steady, predictable growth, and so it's a question of which particular acquisition opportunity provides an attractive risk-adjusted return. I would not expect to see the rate of development and redevelopment spending increase beyond the range that Ernie has established, of $200 million to $300 million a year. And on the debt reduction side, there's a possibility that we could accelerate the debt reduction and delevering on the company. Again, as John pointed out, a lot depends on the pricing of the assets we're selling.

David Bragg - Green Street Advisors, Inc., Research Division

Okay, and Terry, regarding your answer to Haendel, is it your perception that the quality of the Conventional portfolio or the Affordable portfolio is more misunderstood by the market?

Terry Considine

I'm not sure I'm knowledgeable enough to -- of everyone's models and markets, but I think you have done particularly good work at your firm on the Conventional portfolio pricing. And I think that the Affordable portfolio, which has become a much smaller, single-digit percentage of our GAV, is not as especially important to the market's understanding of our NAV per share.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And the last question just relates to potential disposition plans on the Affordable side, since your -- the sales year-to-date, and it sounds like over the balance of the year, have been more heavily concentrated on Conventional. Terry, can you just update us on the intermediate and long-term plans for your Affordable exposure, and what that disposition environment looks like today?

Terry Considine

Well, John will give the details, but Dave, let me just point out that year-to-date, we have shed 20 or 30 properties...

John E. Bezzant

50. 15 on the Affordables.

Terry Considine

15 Affordable Properties. And so, what you have is a quite consistent steady runoff of that business. And I think that John's done a wonderful job of executing it, and I don't see it being accelerated, unless the pricing is particularly attractive to us. Is that responsive to your question?

David Bragg - Green Street Advisors, Inc., Research Division

Yes. I must be missing something, I see 4 sales year-to-date on Page 24, but maybe you mentioned some third quarter sales that I'm not...

John E. Bezzant

Dave, let me walk you through them a little bit. So we've got, what you're seeing on the 4 Affordables are Affordable-owned, I think it's important that -- to make sure that we draw the distinction. What we call and classify as our Affordable business comprises assets that are essentially 100% owned by Aimco, or majority-owned by Aimco. And they are our low-income housing tax credit business, all of which gets, if you will, consolidated into this 8% number of our GAV. The Affordable-owned business is literally down to a handful of properties today. There are, through the course of the rest of year, we have scheduled really in the fourth quarter, we don't anticipate any other, but we do have scheduled in the fourth quarter a few more sales out of that Affordable-owned portfolio. On the low-income housing tax credit portfolio, those are properties that we look to sell at the end of either the tax credit flow period, or the tax credit compliance period, where we work with our investor partner that has invested initially in the tax credits when we did the syndication. And that is the portfolio that we'll sell off, and if you will, bleed down over time, as we reach the end of those various periods. And so from a sales standpoint, as we look forward, we would anticipate a multiyear sell off of that under our current plans, as those compliance periods mature.

Operator

And the next question comes from Michael Salinsky of RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Just had a couple of quick follow-ups. First of all, the sales activity, that wouldn't -- you guys have plenty of cushion from a tax standpoint to distribute, is that right?

Ernest M. Freedman

For where we're at today, Mike, we do. I mean, of course, depending on what may happen going forward, if there is an acceleration of sales, we'd certainly have to look at that, and see how that would play in with regards to requirements around our dividends.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. Second of all, Keith, did you mention what turnover actually was for the quarter, and how that compared to a year-over-year?

Keith M. Kimmel

Mike, I did. It was 50.6, compared to a year ago at 49.8. So pretty much right on top of each other.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. And finally, Ernie, last quarter you talked about some potential tax benefits that you could recognize in '15 or '16. Can you just give us an update where you stand on that, kind of the expectation at this point?

Ernest M. Freedman

Sure. I think Mike, what you're referring to is the fact that we have historic tax credits currently in Lincoln Place. We do expect to recognize most of those in 2014, as John wraps up the construction there with his team. Some of those may bleed over into 2015. We do have 2 other redevelopment projects that are eligible for historic tax credits. Both are in Philadelphia, Park Towne Place and the one that we have ongoing currently, Sterling. And there may be the opportunity for us to do 1 of 2 things. Of course, with historic tax credits, these are a real asset for someone, whether they're in our hands or in someone else's hands. In the past, we've sold those to others and monetized them. Where the market was last year, we thought it was best and most economic us to use them for ourselves, because we had uses for those within our taxable REIT subsidiary. We'll make the same determination with Park Towne and Sterling as we get closer to the point where those are certain, and those are, can be monetized. But there is absolutely that potential for us, Mike, from both of those projects, to generate tax credits either for sale, and we'd recognize them as nonrecurring income, or to recognize them ourselves in our taxable REIT subsidiary. And that would then flow to the tax benefit line item. Unfortunately, I don't have a better update for you as to how -- what those numbers could be.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Fair enough. And then just finally, just in terms of updated spend on the redevelopment, capital upgrades and stuff. Can you just give us an update there, it sounds like the maybe, it may be a push-pulling some of that forward this year, so just curious as to what the spend plan is there.

Ernest M. Freedman

Sure, in talking -- I'll make sure I address it correctly, Mike. We did talk about on our guidance, that we're spending a little bit more in capital replacement spending. That is completely separate from our redevelopment program. So there, we've had the opportunity to increase what we call our appliance program, where we're putting in newer appliances to replace older appliances a little faster than we expected. As well, we've been talking for the last couple of years about our wood flooring program, where we have our acetylated wood flooring that is replacing the soft surface of the carpeting. And the team continues to track ahead of pace, and doing better in terms of what it's costing us to do it. It's costing us less, it's given us an opportunity to do a little bit more this year, which will, over time, give us better returns on the rent side, but importantly, also bring down our overall costs. So it's really mutually exclusive from where John is on pace currently, and expectations have not changed from when we talked about, with regards to our redevelopment projects.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. So that's more in the -- that's separate from the bucket there. Do you have an updated cost projection for that or no?

Ernest M. Freedman

Cost projection for which, Mike?

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

The -- you talked about the flooring, you talked about appliances. Relative to the guidance you gave, which had capital replacements, and all the different ones, do you have an updated forecast for that?

Ernest M. Freedman

Let me give you a call offline, Mike, just to make sure I don't mix it up. We haven't talked specifically about what we're going to spend on each of those programs. In general, we're going to spend about $1 million to $2 million more in the second half than we would anticipate. I'll give a call offline, and we can make sure we're on the same page with that.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Terry Considine for any closing remarks.

Terry Considine

Thank you. As many of you know, last week Aimco celebrated its 20th anniversary as a public company. At the time of the Aimco IPO, Peter Kompaniez was my partner, Lanny Martin was our Lead Director and Leeann Morein was our Chief Financial Officer. And happily, all 3 remain my friends and colleagues today. We were excited then by the opportunity presented by the IPO and went to work. Back then, there were more than 30 public apartment REITs. Now there are 10. These 10 have grown larger and better capitalized, and become more expert business enterprises. We've learned a lot from our competitors, who of course, are also our friends. For Aimco, over the past 20 years, we've provided apartment homes to several million families. We've increased our enterprise value from $315 million to more than $10 billion, and increased our stock market capitalization from $168 million to more than $5 billion. We've seen Aimco shares included in the S&P 500, and we've provided a return to shareholders comfortably ahead of the equity REIT indices, and even further ahead of the S&P 500. And -- but while the business and financial results of the past 20 years are gratifying, my greatest satisfaction comes from working with so many extraordinary colleagues. It is they who make Aimco a top workplace in our state, and it's they whose friendship I treasure.

Looking forward, I'm optimistic about Aimco's prospects, and I'm energized by the opportunity to work with the entire Aimco team to achieve still more for our customers and for our shareholders. So I thank you for interest over the years, and for your interest today. If you have questions, please call Elizabeth Coalson, Ernie Freedman or me. We look forward to when we're next together. Thank you.

Operator

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

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