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Apartment Investment and Management Co. (NYSE:AIV)

Q4 2007 Earnings Call

February 8, 2008 1:00 pm ET

Executives

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

Terry Considine - Chairman of the Board, President, Chief Executive Officer

Jeffrey W. Adler - Executive Vice President - Conventional Property Operations

Timothy J. Beaudin - Executive Vice President and Chief Development Officer

David Robertson - Executive Vice President; President and CEO, AIMCO Capital

Thomas M. Herzog - Chief Financial Officer, Executive Vice President

Scott Portam

Analysts

Louis Taylor - Deutsche Bank

Mark Biffert - Goldman Sachs

Craig Molcher - Citigroup

Dustin Pizzo - Banc of America Securities

Rich Anderson - BMO Capital Markets

Alexander Goldfarb - UBS

Karin Ford - Keybanc Capital Markets

Steve Sakwa - Merrill Lynch

Stephen Swett - Keefe, Bruyette & Woods

Richard Palli - ABT Investments

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Apartment Investment and Management earnings conference call. (Operator Instructions) I would now like to turn the presentation over to our host for today’s call, Ms. Lisa Cohn, Executive Vice President and General Counsel. Please proceed.

Lisa R. Cohn

Good morning and good afternoon. During this conference call, the forward-looking statements we make are based on management’s judgment, including projections related to 2008 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.

The participants on today’s call will be Terry Considine, our Chairman and CEO, who will provide opening remarks; Jeff Adler, who will review property operations; Tim Beaudin will speak to our redevelopment activities; David Robertson will review AIMCO capital; and Tom Herzog will address financial results and 2008 guidance.

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

Terry Considine

Thank you, Lisa. And I’d like to mention to all on this call that Lisa was promoted to AIMCO General Counsel last December. Lisa is a remarkable and wise woman and AIMCO and I are most fortunate to have her help and wise guidance.

Good morning to all of you and thank you for your interest in AIMCO. 2007 was a good year. Jeff and his team produced same-store NOI growth of 4.5% for the year, Tim and his redevelopment team invested nearly $320 million in 64 properties, completing almost 5,000 units. Jeff and his team released 4,600 redeveloped units at rates equal to or above expectations, creating substantial net asset value.

David and his team grew our asset management and transaction income after tax by more than 40%. One major accomplishment was the completion in the December of a joint venture with J.P. Morgan asset management. The joint venture will own three of our Los Angeles properties and AIMCO will continue to manage the properties.

Tom and his team were busy, reducing our cost of leverage with the redemption of our Class W convertible preferred stock, repurchasing 4 million shares of AIMCO common in the fourth quarter, and another 4.5 million shares in January, all the while maintaining abundant liquidity, ending the year with more than $675 million in dry powder.

One happy result of this good work was the special dividend declared in December and paid last week, which was an effective 5% increase in the AIMCO regular dividend.

In December, we made two important changes. Jeff reorganized property operations into a strategic effort, which he leads, and a tactical one led by Tony Dialto reporting to Jeff and focused on daily operations. Tony previously served as divisional vice president for the Gulf region and Tony will do a great job.

And another change, as I mentioned, Myles Cortes has been appointed Chief Administrative Officer and Lisa Cohn has assumed Myles’ role as Executive Vice President and General Counsel. Myles is a terrific leader and will be a great help to me in ensuring AIMCO's smooth operation, and I’ve already told you my opinion of Lisa.

As we begin 2008, I expect a similar year of solid progress, notwithstanding considerable caution about the near-term economy.

With that, I’ll turn the call over to Jeff Adler to report on property operations. Jeff.

Jeffrey W. Adler

Thank you, Terry. Conventional same-store NOI was up 2.9% in the fourth quarter and 4.5% for the year. While positive, this was a disappointment. When we look further, revenue growth was good at 4% and 4.4% for the quarter and the year.

When we look market by market, these results are about 200 basis points ahead of recent metrics on a market weighted basis, about one-half rate and one-half occupancy. Our problems were in expenses, especially Florida, and the magnitude in the fourth quarter was about $1.5 million. Across the portfolio, expense growth exceeded peer averages by about 150 basis points for the year.

The above average expense increases were at there worst in Florida. However, NOI growth outside of Florida was 5.4% and 6.2% for the quarter and the year. Some of the above average expense growth, such as landscaping, will benefit 2008 results and so it’s just timing. For the rest, we’ve taken the following actions -- heightened emphasis on expense control across all categories, which is a critical component of our 2008 actions throughout the country, but especially in Florida; reorganization of Florida operations into a single state organization led by Joe [Bourgess], who successfully turned around Houston operations two years ago and who prior to that had been posted in south Florida.

Now as to our 4% growth in same-store revenues, it was composed of 2.8% of rate, three-tenths in occupancy, and nine-tenths in ancillary income. Fourth quarter same-store occupancy at 94.7 was up 30 basis points from fourth quarter ’06 and down 10 basis points sequentially. The year-over-year occupancy change was driven by increases across the Northeast, Midwest, Southeast, Texas, partially offset by reductions at Florida, California, Phoenix.

Fourth quarter year-over-year renewal rents were up by 3.8% and new lease transaction rents were up 1.6%. In Florida, new rents were down 3% but renewals were still up by 2.8%.

At the same time, unit turn availability remained greater than 90%, with cycle times of 15 days and cost per turn well in hand.

Year over year, new lease rent growth in excess of 5% occurred in Dallas, Houston, and Denver. New lease rents declined in Phoenix, New England, Orlando, Tampa, and South Florida.

As we look forward to 2008, demand through the first quarter remains consistent with full year revenue growth in the range of 2.5% to 3.5%. In 2007, South Florida performed the best relative to other Florida markets, and Orlando the worst. In 2008, we expect that South Florida will be under more relative pressure given expected new supply. We expect Orange County and Northern Virginia to also face pressure due to new supply.

Customer experience scores continue to improve. For example, our office courtesy score, a key predictor of retention, has improved to 94% in the fourth quarter from 90% at last year’s end. Maintenance courtesy has risen to 98% in the fourth quarter from 89% at year-end 2006.

Team member turnover continues its positive downward trend. Total team member turnover is down over 9% year-to-date to 34% and fourth quarter turnover within 90 days of hire has been cut by more than half to 5%. Affordable operations remained on track and university communities properties are off to a good leasing start to the school year move-in.

The bottom line is that external forecasters tell us that 2008 will be a tough year but so far, first quarter revenue is consistent with guidance and our operating platform is healthy across a wide range of metrics.

Looking forward, we expect 2008 full year conventional same-store NOI to be up in the range of 2.5% to 4.5%, with revenue growth of 2.5% to 3.5% and expense growth of 2% to 3%. We expect expense growth to be front-end loaded and have the benefit of the leasing season.

Now here’s Tim Beaudin to review redevelopment. Tim.

Timothy J. Beaudin

Thank you, Jeff. The development group had a record year. We invested $319 million in 64 conventional redevelopment projects in 2007, began work on 19 new projects and completing 16 projects during the year. At the end of the year, we had 48 active conventional projects with budgets totaling more than $750 million, an increase of 46% when compared to budget projects at the end of 2006. The majority of these projects are concentrated on the coast.

During 2007, we produced more than 4,900 units and Jeff’s team leased nearly 4,600 of these units during the year, with rent increases consistent with underwriting expectations. It should be noted that the volume of AIMCO's 2007 redevelopment production is equivalent to 16 new 300 unit communities.

During the fourth quarter, construction cycle time averaged 38 days and lease cycle time averaged 37 days. While these times are within the underwriting expectations, we continue to work closely with Jeff’s team to further reduce these times overall and to minimize drag.

We ended the year with about 850 units in inventory and we expect that the lease cycle times will lengthen in the first half of 2008 compared to the fourth quarter of 2007 as the current inventory is worked off while production continues in anticipation of the 2008 leasing season.

2007 was a year of significant growth in our conventional redevelopment program. We increased our investment by over $140 million over 2006, tightened our processes, built a strong team of development professionals. Our investments are providing solid rent growth, an attractive return on cost and producing significant return on equity.

In 2008, we expect to continue to grow in AB by investing $250 million to $300 million in conventional redevelopment projects with average returns of 7.5% to 8.5%.

With that, I will turn it over to David Robertson for a review of AIMCO Capital. David.

David Robertson

Thanks, Tim. Today I will review the fourth quarter and full year 2007 results from our asset management and transaction business and will provide an overview of our expectations for 2008.

2007 was a strong year for AIMCO Capital. Asset management and transaction income net of tax totaled $29 million for the fourth quarter and $59 million for the year, which was $11 million above the high end of our guidance, primarily due to higher promote and asset management income. This represents an increase of $18 million from the $41 million of income generated in 2006.

During the quarter, we raised $68 million of tax credit equity, bringing the total for the year to $103 million. On a disposition front, we sold eight conventional properties for $75 million, or about $45,000 per unit, at an average free cash flow yield of 5.6% and at values consistent with our internal expectations. We also sold 10 affordable properties for $26 million at an average free cash flow yield of 5.2%.

Acquisition activity in the quarter was limited to the purchase of one nine-unit property, the last remaining part of a New York portfolio acquired in the second quarter of 2007.

Turning to our outlook for 2008, I’ll start with our fee business. We expect to generate asset management and transaction revenues of $85 million to $95 million, with income net of tax of $55 million to $65 million. At the midpoint, this is essentially flat with our 2007 results and like 2007, this income will be weighted more heavily to the second half of the year due to the seasonal nature of the tax credit business.

We expect to raise $100 million to $125 million of tax credit equity in 2008, which is consistent with the amounts raised in each of the past two years. And while we will not provide specific acquisition and disposition guidance, we do expect to be active in both areas in 2008.

As we evaluate which properties to sell and markets to exit, we are considering, among other factors, expected job growth, population growth, and the incremental returns generated when making required capital investments.

Additionally, as we have discussed in the past, we are exploring joint venture opportunities to recapitalize our portfolio, adjust capital allocations within markets, and make accretive investments, including stock repurchases.

As Terry mentioned, to further this strategy we completed the Palazzo joint venture in December. Joint ventures will also support acquisitions by providing financing and improving the returns of our invested capital through promotes and other fee income.

And while we will pursue opportunistic investments on a limited basis, we expect the vast majority of our acquisition activity to take place in the top 20 U.S. markets by asset value.

I will now turn the call over to Tom Herzog, our CFO. Tom.

Thomas M. Herzog

Thank you, David. There are several items I will cover today. First, our fourth quarter FFO was in line with guidance. Second, we continued our share repurchase program and received board authorization to repurchase additional shares. Third, we declared a special dividend in the fourth quarter and finally, we are providing first quarter and full year 2008 guidance.

First let me clarify that in accordance with accounting rules, all per share amounts reported in our earnings release and those I will discuss in this call have been retroactively adjusted for the issuance of approximately 4.6 million shares of common stock in connection with the payment of a special dividend declared in December and paid last week. See page 20 of the supplemental schedules of our earnings release for a reconciliation of the pre-special dividend versus post-special dividend measurement. These shares are also included for a full year in our 2008 guidance, which I will provide later in this call.

Turning now to fourth quarter results, Q4 FFO of $0.88 per share was at the midpoint of guidance. Note that without the effect of the stock dividend, this is equivalent to $0.92 per share. There were various items outside of guidance, including: property same-store NOI was $0.01 below our expectations; asset management and transaction income after tax exceeded guidance by $0.11, due to higher-than-projected promotes and deferred asset management income; casualty losses and non-real estate depreciation expense each contributed a negative $0.02; G&A expenses were $0.03 unfavorable and interest expense was $0.02 higher than expected, due primarily to lower capitalized interest.

Sequential results -- Q4 FFO was $0.06 higher than Q3 2007 due to several items, including a $0.04 increase in same-store NOI, primarily as a result of an increase in rate of $5 per unit and higher utility reimbursements, a reduction in expenses as a result of lower turnover, contract services, repair and maintenance, and property taxes; and a $0.12 increase in asset management and transaction income net of tax, driven by higher tax credit syndication income and deferred asset management income, partially offset by the fee recognized in Q3 of ’07 related to the Flamingo option terminations.

These favorable variances were partially offset by an increase in G&A of $0.03, higher casualty losses and non-real estate depreciation of $0.02 each, and higher interest expense of $0.03 due to increased borrowings and decreased capitalized interest.

Year over year, full year FFO increased to $3.25 per share from $2.95 per share or about 10%. These numbers without the effect of the stock dividend would have been $3.41 per share and $3.09 per share respectively.

Share repurchase activity and special dividend -- during Q4, we repurchased 4 million shares of AIMCO stock at an average price of $37.28 per share for a total of $150 million. Additionally, in January, we purchased 4.5 million shares under a 10B51 plan for $151 million at an average price of $33.33 per share.

Since the third quarter of 2006, we have repurchased on an accretive basis 14.3 million shares, or about 15% of our total common shares outstanding, at an average price of $41.79 per share for a total of $597 million.

Last week, our board of directors increased the number of share authorized for repurchase by 25 million shares, so that going forward we have authority to repurchase another 28.7 million shares.

As announced in December, we declared a special dividend totaling $2.51 per share that was paid last week. The special dividend was paid in a combination of cash and stock subject to shareholder elections. A portion of the dividend represented an acceleration of the Q407 regular dividend with the remainder paid as a result of taxable gains arising from completion of our venture with J.P. Morgan and other property dispositions in 2007.

The special dividend allows the [inaudible] to avoid corporate level taxation. Going forward, the effect of the stock dividend provided our shareholders a 5% increase in the AIMCO dividend.

Turning now to 2008 guidance, our projections for 2008 are as follows: FFO between $3.22 and $3.38 per share, which will continue to be back-end loaded, primarily due to the timing of anticipated transactional activities. We expect to cover our cash dividends with AFFO; NOI growth of 2.5% to 4.5%; average occupancy of 94% to 95%; and, as we did in 2007, in 2008 we plan to invest heavily in capital replacements and improvements to continue to maintain and improve the quality of our properties.

And as Tim stated, we anticipate investing $250 million to $300 million in redevelopment projects this year.

Key assumptions underline our 2008 guidance, some of which were provided earlier by my colleagues, include: same-store revenue growth of 2.5% to 3.5%, driven primarily by rate; same-store expense growth of 2% to 3%; asset management and transaction revenue of $85 million to $95 million, which represents $55 million to $65 million of net asset management transaction income after tax; G&A to be flat before the impact of variable compensation; a year-over-year decline in the average LIBOR rate of approximately 135 basis points, from 5.25% in 2007 to 3.9% in 2008; a decline in interest income of $15 million from 2007 as a result of certain high-yielding GP loans that were repaid by borrowers in the first half of 2007; average outstanding dilutive share count for the year of 91.8 million; the reduction in share count is expected to result in a net $0.14 positive impact in 2008; and lastly, net redevelopment drag of about $0.04 per quarter based on our projected expense.

First quarter 2008 guidance -- Q108 FFO is projected to be $0.68 to $0.72 per share compared to $0.72 per share for Q1 of ’07. The negative variance of $0.02 at the midpoint is primarily the result of higher interest expense net of preferred dividends of $0.04, due primarily to increased borrowings; lower interest income of $0.07, due to the repayment by borrowers in Q2 of ’07 of certain high yielding GP loans; and higher G&A costs and other of $0.01.

These negative variances are partially offset by higher same-store NOI of $0.02, driven primarily by rate increases; higher asset management transaction income net of tax of $0.05; and a net $0.03 positive impact due to the reduction of share count.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Lou Taylor with Deutsche Bank. Please proceed.

Louis Taylor - Deutsche Bank

Tom, can you walk us through some of the mechanics of the special dividend, in the sense that it looks like you bought 4.5 million shares and then you turned around and distributed it a couple weeks or couple days later. I mean, why not just pay it out in cash?

Thomas M. Herzog

That’s a good question. The purpose for the stock dividend is purely tax related, to provide a dividend pay deduction at the root level so that we don’t incur corporate level taxation at the root. Now, we bought back 4 million shares, 4.5 million shares and at the same time, we issued 4.6 million shares. Some of you might look at that and say that sounds like a push. But it really isn’t because the stock dividend provides an equal allocation of shares among all the shareholders, similar to what a stock split would. So that’s an economically neutral transaction utilized solely for tax purposes, whereas the share repurchase allows us to buy shares from certain shareholders that wanted to sell and create an accretive event for the remaining shareholders that stay with AIMCO, both from an FFO perspective per share and an NAV perspective per share.

Louis Taylor - Deutsche Bank

Okay. Thank you. And then the second question just pertains to your ’08 guidance and the rehab units that you say we’re getting out of service, that were going to be a drag of about $0.16 for the year. What was the drag for ’07?

Thomas M. Herzog

No, it really was -- it was probably a little bit lower than that, not too much lower in just pure drag. And when I define drag, I’m really talking about the period of time that the units are down and we’re not collecting rents. That represents drag by the way I’ve defined it.

Louis Taylor - Deutsche Bank

Yeah, no, that’s what I figured but sort of -- that drag for ’08 is similar to the drag in ’07, it sounds like.

Thomas M. Herzog

That’s correct but at the same time, Lou, I think an important point that I should raise is as I’ve talked about in the past, we typically have been looking at two to three years break-even on the re-dev program before it turns positive is a better way to put it. And that’s in part because we do have certain periods that it takes to stabilize assets and capture the full amount of rents, so there will be a certain amount of noise from that as well. So there will be some incremental noise within that equation.

There is no question that re-dev leans on FFO but we consider it to be, as you know, quite a highly accretive NAV activity and are willing to suffer those two components of drag while we stabilize those assets and create that NAV.

Louis Taylor - Deutsche Bank

Thank you.

Operator

Our next question will come from the line of Mark Biffert with Goldman Sachs.

Mark Biffert - Goldman Sachs

Good morning. A question on the assets that you guys have lined up for sale. Are you guys having troubles with maybe some of the lower quality assets in terms of your buyers obtaining the financing on those assets and that’s why we haven’t seen transactions on those?

David Robertson

No, we haven’t had any issues with -- across product types. When we sold assets, basically the transaction values have been at prices consistent with our expectations.

Mark Biffert - Goldman Sachs

So have the buyers been able to achieve the financing with Freddie and Fannie or have they had to go to other sources to find that capital?

David Robertson

As I think you know, Fannie and Freddie are providing a lot of capital to the multi-family market and I have not heard of buyers having any difficult arranging financing from either agency.

Mark Biffert - Goldman Sachs

Okay, and then my second question, related to the impairments that were in the quarter and it sounds like there were some more in the first quarter, can you provide a little more color on those?

Thomas M. Herzog

We had a few different impairments, none of them significant. And these are just assets that as we shortened our holding period, we reassessed whether these assets are recoverable for GAAP purposes and concluded that it was appropriate under GAAP to take impairments on about three assets.

Mark Biffert - Goldman Sachs

Okay, and that should be it, then?

Thomas M. Herzog

Well, that’s a calculation that we do every quarter, depending on our outlook for specific assets in our portfolio. So that’s an ongoing -- we do that every quarter of every year. But if there was something in the hopper that we should be taking an impairment on, we would have taken it.

Mark Biffert - Goldman Sachs

Okay, thanks.

Operator

Our next question comes from the line of Jon Litt with Citigroup.

Craig Molcher - Citigroup

Hi, it’s Craig [Molcher] here with Jon. Can you walk me through the share count difference from the 101.1 in the fourth quarter versus the guidance of $90.1 million in the fourth quarter.

Thomas M. Herzog

Let me see if I can do this without all my schedules in front of me. I’m going to take you to schedule four, supplemental schedule four and what you are going to see is the $90 million, 90 -- I’m going to take you to the far left column, Craig, in that table, under the common stock and equivalents section. And you’ll see that you’ve got 90.4 million shares outstanding. That would include the shares that were repurchased in the fourth quarter, so it would not have capture of course those shares repurchased in January. And then you’d see the 4.5 million special dividend, 4.523. That’s the stock dividend that was paid out as a result of the transaction that we completed.

Down from that you’ve got your options and restricted shares and you’re not going to have a lot of options in the money at this point. That’s really the difference in restricted shares where you’ve got certain restricted shares that are going to be in the money. The amount of the restricted share price goes through a comp, as you are aware, as restricted shares amortize. But the portion that’s in the money is shown as a dilutive item, bringing us down to the $95.4 million. Add the nine-point -- essentially $7 million OP units and HP units and it brings you down to the 105.1.

It’s easier to see, Craig, in that particular column because it captures shares at a point in time. If you move over a couple of columns in the dilutive FFO share count, that could cause some confusion because of the timing of the share repurchases in Q4, which were loaded for the second half of the quarter.

The other thing you see there down at the bottom of the 2.2 million shares for the convertible preferred securities. Those are preferred OP units, wherein the FFO yield is now higher than the interest rate on those preferred units and therefore, it kicks out of preferred stock dividends when you look in the preferred stock dividend line in the income statement and it moves into dilutive shares for share count purposes in this section. It’s practically a wash at the current time. I guess it’s probably about a $250,000 net negative. But that’s a good question because there were a lot of moving parts in that particular area.

Does that answer the question?

Craig Molcher - Citigroup

So just to be clear, the first quarter, that 101.1 should go down to that guidance as the fully diluted average share count is going to 90.9?

Thomas M. Herzog

Back to your original question, we included the January repurchase of 4.5 million shares in that count in the guidance page is what I think you are referring to.

Craig Molcher - Citigroup

Right. Are there any additional buy-backs included in guidance then?

Thomas M. Herzog

No.

Craig Molcher - Citigroup

Okay. What’s your net floating rate, interest rate exposure if you net your liabilities that are floating rate versus your assets that are floating rate?

Thomas M. Herzog

It’s about -- at the current date, it’s probably about a penny-and-a-half per quarter per 1% change in LIBOR.

Craig Molcher - Citigroup

What’s that amount to, just in terms of millions net?

Thomas M. Herzog

I think what you have to do, Craig, is you have to go through an exercise where you take the total floating rate debt at the bank level and at the property debt level. You have to back out the BMA effect from that. You have to back out the floating rate assets and then for FFO purposes, you have to back out the CapEx on the re-devs and the like, and after you get down to that, my recollection -- I’m digging back here a month or two when I last saw this, but I think it was around $650 million or $700 million, something like that.

Craig Molcher - Citigroup

All right. Thank you very much.

Operator

Our next question will come from the line of Dustin Pizzo with Banc of America Securities.

Dustin Pizzo - Banc of America Securities

Thank you. Good afternoon, guys. Jeff, last quarter you guys talked about revenue growth moderating just 50 to 75 basis points this year versus last year, yet when you look at it now it looks like it’s down about 150 at the midpoint so what’s changed in your outlook since last quarter?

Jeffrey W. Adler

Well, when I went through each one of the markets and actually began looking through where PPR, where Reese was looking at it, and began just taking a look at what everyone else has been writing about in terms of supply and overall demand. We’re I kind of came back up with, tops down and bottom up was that it was going to be more like a 3% kind of revenue growth, based upon a current set of economic drivers that I can see and everything would tell me based upon what I am seeing so far in January that that is consistent.

We are not seeing that at occupancy changes one way or the other. It’s coming at an overall revenue -- rent growth.

Dustin Pizzo - Banc of America Securities

Okay, and then -- and what economic drivers are behind the --

Jeffrey W. Adler

Well, if you look at -- you know, you look at job formation. Obviously that’s not bad but it’s obviously down to the kind of a million jobs, eight, nine-tenth of a percent growth rate -- you know, we are -- you know, no big surprise to see that Orange Country job growth has been impacted. There is new supply coming in in Orange County coming out of the ground as well as our own redevelopments. Phoenix, you know, there is a meaningful amount of supply and we’re seeing that impact overall rate levels, and then Northern Virginia -- these are areas that have traditionally been very big drivers of growth, of rent growth. Northern Virginia is seeing supply, not so much from a demand overall but from a supply reversion.

And a sort of continued kind of no growth in Florida for the whole year, and when we kind of look at that all together, even with growth that is pretty decent in Texas and Chicago and the Midwest, you kind of come back to a number that kind of gets you to around 3%.

Dustin Pizzo - Banc of America Securities

Okay, and then I know you are not giving disposition guidance for the year, but do you guys care to comment at all on the reports that have been going around that you are currently marketing about $1 billion to $1.5 billion of assets concentrated in Texas and Florida?

Terry Considine

Not specifically but what I will say is as we outlined at investor day last year and we’ve discussed on the last few calls, we plan to focus our portfolio in the top 20 U.S. markets by asset value and in properties that meet our return thresholds. So this means that we are going to selling assets from time to time that don’t fit our hold criteria and over time, that will be about 20% of our current portfolio with the timing dependent on market conditions.

Dustin Pizzo - Banc of America Securities

All right, and then just as a follow-up to that, we saw UDR recently shed about $1.7 billion across the sun belt for close to an 8% nominal cap rate. Do you guys think that’s a fair barometer of where cap rates are right now for that type of asset?

Terry Considine

Well, as you know, the UDR portfolio was in a number of markets and cap rates are very market specific, so it’s hard to say whether or not their pricing is representative.

Dustin Pizzo - Banc of America Securities

Okay. Thank you.

Operator

Our next question will come from the line of Rich Anderson with BMO Capital Markets.

Rich Anderson - BMO Capital Markets

Thanks and good afternoon, good morning, everybody. Tom, you mentioned $0.14 in your comments -- that was the accretion from the lower share count, is that what you said?

Thomas M. Herzog

Yes. Let me clarify that, Rich. What I did, so as not to confuse it, is I took the incremental benefit of having repurchased shares against the costs of the funds from the source of the funds to repurchase those shares. So I’ve netted those numbers so that you can get the real incremental benefit from that.

Rich Anderson - BMO Capital Markets

Okay, and that includes the special dividend in that --

Thomas M. Herzog

Yeah, keep in mind -- let me reword that just a little bit. I think I know what you mean but the special dividend does not have any impact on that. It’s the share repurchase because that just -- that just reallocates the shares in the hands of everyone in the same increment. But the share repurchase is what actually drives the incremental benefit that I’m describing.

Rich Anderson - BMO Capital Markets

Okay, so then when you -- and just to get back to the guidance being based on 91.8 million shares for the full year, how does that not assume more buy-back activity for the rest of the year if we are, as of the end of the year, at 101 million? Unless I’m looking at a different number, I mean --

Thomas M. Herzog

Hold on a second. Let me pull that open. Scott, do you want to address that? Scott [Portam].

Scott Portam

First of all, the 101 million that I think you are referring to is the weighted average in the dilutive FFO calculation, so that does include dilution for options. It also includes the convertible preferred securities of $2.2 million. Again, as Tom was describing earlier, the impact of that 2.2 is just whether the dividends are up in the income statement or the shares are down in the denominator. And so in our guidance, we have calculated that there would not be a dilutive impact from the preferred units.

Rich Anderson - BMO Capital Markets

Yeah, because it’s a wash, so what’s the apples-to-apples starting point number that I should be looking at that’s equivalent to the 91.8 that you are assuming using the same through process?

Thomas M. Herzog

I think Rich, what you are going to do is you’ll want to go to that first column again in schedule four, pick up that 90.4 million, pick up the 4.5 million shares from the common stock dividends, and then you are going to subtract the 4.5 million shares that were repurchased in January and that’s going to get you pretty much right on that number.

Rich Anderson - BMO Capital Markets

Okay. And then the last question is on the AIMCO Capital, I’m curious to see the continued pace that you expect for 2008 and I wanted to know if David could comment on the availability of customers if banks are losing money -- a lot of banks are losing money. Is it at all a tougher business in this marketplace to sell tax credits?

David Robertson

Rich, could you clarify what you mean in terms of pace?

Rich Anderson - BMO Capital Markets

Well, I mean if banks -- if some banks, at least, some that I know of very well -- aren’t making money today then they don’t have as much need to buy tax credits.

David Robertson

Okay, I think I understand the question. Well, I mean, you’re right. There are a number of investors that have either exited the tax credit market or reduced their allocation but -- and I’m sure you know, it is a very deep market and it includes many investors that invest primarily for CRA purposes. As such, I don’t expect any problems placing our equity.

However, you’re right. With fewer participants, there’s less demand for credits and I would expect that that will have an impact on pricing. And so what does that mean for AIMCO? What that means is a pressure on margins, on syndication fees and we’ve taken that into account in our guidance.

Rich Anderson - BMO Capital Markets

Okay, great. Thank you.

Operator

Our next question will come from the line of Alexander Goldfarb with UBS.

Alexander Goldfarb - UBS

Thank you and good day. First on the guidance, if you can just go back and perhaps I missed it in the MD&A, have you taken into account a recession in your guidance range? And then also, what factors need to happen to get you to the top end of the range and what needs to not happen that you get to the bottom end of the range?

Thomas M. Herzog

Well, as far as a recession, you’ll note that our NOI growth is coming in at an average of 3.5%. You’ll note that we’ve got LIBOR ticked down some from what we saw in 2007. We’re not incorporating a recession scenario but we certainly are exercising a degree of caution in the guidance that we are providing.

As to the high end and the low end of the guidance, I would look at it this way -- there’s obviously some upside for us in NOI, possibly in the transaction side of the business. It could be other activities, such as share repurchase that are accretive. There are many different things that could push that higher.

As far as having to go lower, if we had a reduction in certain of our activity based fees, transactions and the like, that could drop it a bit. Or we could see more softening in the operations side of the business.

So those would be some of the things that would come to mind -- changes in interest rates might affect it positively or negatively. So I think the way we’ve set the spreads, it just is trying to capture a reasonable possibility of potential outcomes.

Alexander Goldfarb - UBS

Okay. And then can you just give your comments on the Phoenix market, what you are seeing there? There was a comment from one of your peers that they were seeing things beginning to turn. I just want to get your sense of how you see that market and when you think it may recover.

Jeffrey W. Adler

Well, what I’m seeing is occupancy, overall lease pace isn’t that bad but it’s at a lower price level than it was several months ago. So what that -- that kind of is bleeding, beginning to bleed through the revenue side of the numbers. And Phoenix is very much again a transient market and so it is highly dependent upon job growth. There are a lot of single family homes which will create some dilution of overall demand and -- that be soaked up.

I haven’t seen necessarily a positive turn as it relates to the price level, is what I would be looking for. So I -- you know, we’re kind of cautious on Phoenix for the coming year.

Alexander Goldfarb - UBS

Thank you.

Operator

Our next question will come from the line of Karin Ford with Keybanc.

Karin Ford - Keybanc Capital Markets

Can you tell me what assumptions are baked into your guidance for Florida for 2008?

Jeffrey W. Adler

Yeah, I can tell you the NOI -- [inaudible] -- but pretty much we think it’s going to be flat and we don’t really seen any particular impetus to occupancy growth in the first half of the year. There will be some earn-in of the new rent growth, which is negative, so it will be kind of a -- it will be deteriorating and will be running up against both expense controls and very modest renewal rate increases kind of all year long.

That’s the best handle we have on it right now.

Karin Ford - Keybanc Capital Markets

Okay. Any markets that you are assuming will go negative in 2008?

Jeffrey W. Adler

None that I haven’t already kind of discussed. So no, I would say that the -- the Northern Virginia market will just be kind of soggy but it’s still got a good fundamental amount of demand. New England is just not bad on occupancy but it’s tough to get rate right now. I think Northern California looks okay, even though I think our west Los Angeles properties look in great shape. You know, Orange County -- San Diego is kind of coming back some. Orange County is just going to be kind of a wildcard because we really just don’t know how deep the job losses are and there is new supply coming out of the ground. So I feel pretty good about the Midwestern markets, you know, as marketplaces, are in very solid shape, and so is Texas.

So I don’t -- I haven’t seen anything that surprises me so far but I can only -- and in all honesty, I can only see about three months out and from there on out, it’s based upon looking at overall trends.

Karin Ford - Keybanc Capital Markets

Thanks very much.

Operator

Our next question will come from the line of Steve Sakwa with Merrill Lynch.

Steve Sakwa - Merrill Lynch

Thank you. Tom, just to be clear, I want to go back to the guidance question. You did $3.25 this year on an adjusted basis before the impairments. And you are saying that the buy-back is $0.14 accretive, correct?

Thomas M. Herzog

Correct, for the full year for 2008, that’s right.

Steve Sakwa - Merrill Lynch

Okay, so if I take the 325 as kind of a starting point, add the $0.14, I’m up at $3.39 and your range is $3.22 to $3.38. So what am I -- and you’ve got some same-store growth that presumably would take that number higher. So what is pulling the number down as much as it appears to be?

Thomas M. Herzog

Are you going from ’07 to ’08 guidance, reconciling those two, is that --

Steve Sakwa - Merrill Lynch

Well, I’m just trying to think through the building blocks of your ’07 results, kind of what’s positive, what’s negative, and trying to just reconcile with your outlook.

Thomas M. Herzog

So as you go from 2007 to ’08, if I’ve captured the question properly, what you’re looking at is $3.25 a share going to $3.30 a share, both as adjusted for the stock dividend. What we are going to be picking up within that is we’ve got same-store growth of 3.5%, which is going to be about $0.19. AIMCO Capital is coming in about flat. We’re going to have the effect of some of those high interest, effective interest loans that I talked about that were in place in the first half of ’07 and in prior years, that that will be a reduction of probably about $0.15. The share count that I talked about was about $0.14 positive. Re-dev, we’re going to be at about a negative $0.16 all-in, including the drag plus the stabilization of rent in those re-dev properties that are underway. And then we have various other items, summing up to about $0.03.

Steve Sakwa - Merrill Lynch

So just to be clear, so the re-dev, even though there’s dilution in the ’07, you’re saying you haven’t really delivered a full year’s worth of re-devs -- you’re incurring another $0.16?

Thomas M. Herzog

That’s correct.

Steve Sakwa - Merrill Lynch

And when would that hit a point where what you are bringing out and stabilizing equals what goes in -- is that next year?

Thomas M. Herzog

No, I think before that really -- and Steve, that’s actually an analysis that’s underway as we are measuring what comes out of a re-dev asset. So this is going to require further assessment as we go forward but what I am really referring to is it takes a while to get to the stabilized rent on some of these assets, so there is some additional drag that results from that.

It doesn’t affect the NAV creation of the asset so much but it definitely does lean on FFO for sure.

Steve Sakwa - Merrill Lynch

Okay, thanks.

Operator

Our next question will come from the line of Stephen Swett with KBW.

Stephen Swett - Keefe, Bruyette & Woods

Thanks. Jeff, I think you said in the fourth quarter the expenses were higher mainly in Florida, is that right? And then I think you said that the timing of expenses in 2008 was going to be more in the first part of the year. Is it the same issue? Is that Florida as well or is that timing of other things? Could you just --

Jeffrey W. Adler

Good question, Steve. Actually, sequentially we think that Florida expenses will have topped and will be going down but we are going to be front-end loading some of the areas, so that -- so you end up with a front-end loading for the leasing season and then tailing out for the year.

Stephen Swett - Keefe, Bruyette & Woods

Okay, and then the low net operating --

Jeffrey W. Adler

And what I’d tell you is we sequentially expected to see it going down. If you look, based upon what I’m looking at on a year-over-year basis, it will still look higher in the first quarter on a year-over-year basis.

Stephen Swett - Keefe, Bruyette & Woods

Okay. And then on the NOI, obviously starts off lower because of the expenses. Have you assumed revenue growth is steady through the year or is there a trend up or down for that?

Jeffrey W. Adler

No, that looks like revenue growth will be more steady across the whole year. I don’t see a kink or a growth rate above that or below that throughout the year.

Stephen Swett - Keefe, Bruyette & Woods

Okay, thanks.

Operator

Our final question comes from the line of Richard [Palli] with ABT Investments. Please proceed.

Richard Palli - ABT Investments

Good afternoon, everyone. Just a couple of questions, and I think this is more for the AIMCO Capital fee and asset management income -- am I correct in understanding the -- I guess the deferred portion of what you are going to recognize in -- I guess in future years. Is that -- that’s primarily non-cash, is that right?

Thomas M. Herzog

That’s correct.

Richard Palli - ABT Investments

Okay. And then can you just give me a --

Thomas M. Herzog

Hey, Rich?

Richard Palli - ABT Investments

Yeah.

Thomas M. Herzog

It’s primarily non-cash. I mean, the cash comes in over the first couple of years in great part but then there is NOI that comes in over time and residual value at the end of the asset as well.

Richard Palli - ABT Investments

So for --

Thomas M. Herzog

-- substantially correct.

Richard Palli - ABT Investments

So for 2008, you have on the schedule on page 18, schedule 11, almost $26 million of deferred income. Is that 75% non-cash or is it 50-50?

Thomas M. Herzog

It would be a high percentage non-cash at that point. Most of the cash would have been received up front, with some of it coming in over time but it probably is in that 80% range, something like that.

Richard Palli - ABT Investments

Okay. And then the other -- I guess the other question is, and I know you’re sensitive to relationships but is the future management income that you are expecting to receive from the joint venture that you formed, is that going to show up in the AIMCO Capital asset management fees? Where is that going to show up?

David Robertson

Well, it’s going to depend on the fee. So we have -- we get property management fees which will show up in real estate income, and the balance of the cash flow I think comes through as real estate cash flow.

Richard Palli - ABT Investments

Okay. Because I’m just trying to reconcile if your flat AIMCO Capital --

Thomas M. Herzog

Scott [Portam] is here again, our CAL. Scott, do you want to elaborate?

Scott Portam

Keep in mind that the joint venture we did is still consolidated into the financial statements of the company, so the ---

Richard Palli - ABT Investments

Right, but the fees have to show up somewhere, doesn’t it?

Scott Portam

The fees have to show up somewhere. Many of them will come through minority interest on the income statement.

Richard Palli - ABT Investments

Okay. And then just a broader question about liquidity -- could you -- one, I’m not sure if I got the number that was quoted early in the commentary about how much liquidity you have available. And then secondarily, kind of relating question, my first question about cash flow from -- putting AFFO aside and thinking more of CAD, and I know it’s just sort of a difference without much of a distinction often, but how much free cash flow are you guys generating versus GAAP type AFFO for the year?

And then my second part to this question is can you just give me an idea of how many assets or percentage of assets that are encumbered with mortgages, how many assets do you have unencumbered? And then, more or less from a -- if I was a banker looking to make a loan, what’s the average LTV today? Because I know at some time, you guys went through and did topper loans. And I’m just curious, you know, if sort of real estate values probably flattening out. I don’t want to make a strong statement one way or the other but I think if I was a banker, I’d be looking a little more jaundiced on making a topper loan. But I know there’s some embedded growth that you’ve had over the past, so I just want to get an idea of how much room you have to go to what I’d call a Fannie and Freddie 65% LTV view today.

Thomas M. Herzog

Rich, you optimized that question. That was pretty good.

Richard Palli - ABT Investments

Gotta get it while you can.

Thomas M. Herzog

Let me hit them all. Liquidity -- we’ve got a revolver of $650 million. At year-end, we had nothing drawn on it. That’s where that dry powder comes from. We would have dipped into the revolver a little bit as we purchased some of those shares in January, but there are a lot of moving parts within cash flow, as you’re well aware.

AFFO versus dividends and free cash flow and the like, our AFFO has been sufficient to cover dividends. We’re projecting the same for 2008 but I would tell you that FFO and AFFO have their flaws within the measurement for sure. Both ignore structural depreciation, both ignore gain on sale. And when we’re going through and we’re looking at what real coverage do we have against our dividend, it’s far in excess of the difference between AFFO and our dividend. Because as a part of our basic model, it’s going to produce gains and that really does provide cushion in dividend coverage and positive cash flow for us, and then we seek to utilize that positive cash flow in the most accretive means possible.

As far as unencumbered assets, we have a little bit of that but not much. Most of our -- our financing structure by design is to seek to utilize property debt and minimize bank debt and we refinance when we think it’s effective and it’s costs optimal. On average, we’re probably at about 40% to 42% levered at that level, so within very good coverage constraints and leverage.

And as far as top-off loans, in connection with our re-dev that is part of our program, is that Tim and his team go through and re-dev assets and create additional revenues and ultimately NOI and it’s part of our whole financing structure, to start with a recast loan, a construction loan, and then ultimately a topper loan as we stabilize those rents. And there’s a whole inventory of those in the hopper as Tim and Jeff stabilize those assets over the coming quarters and the coming years.

And that’s all part of the system again that as I described, that we do eat a certain amount of FFO drag that we’ve talked a lot about internally and have concluded that we’re NAV players and it is the best economic move for AIMCO and our shareholders, and plan to continue to do so.

Richard Palli - ABT Investments

Okay. Thank you.

Thomas M. Herzog

You bet. Are there any other questions?

Operator

Ladies and gentlemen, this concludes the question-and-answer period. I would now like to turn the call back over to Chief Executive Officer, Terry Considine, for closing remarks.

Terry Considine

Well, thank you all for your interest in AIMCO. We are upbeat about the year ahead, enthusiastic about our plans. If you have further questions, please feel free to call either Tom, our CFO, or Lisa Coalson, who’s head of investor relations, or me and we’ll do our best to answer them. Thanks again and good day.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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