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Executives

Lisa Cohn - EVP, General Counsel, Secretary

Terry Considine - Chairman, President, CEO

Jeff Adler - EVP of Conventional Property Operations

Tom Herzog - CFO, EVP

John Bezzant - SVP

David Robertson - EVP, President and CEO, Aimco Capital

Miles Cortez - EVP, CAO

Analysts

Lou Taylor - Deutsche Bank

Michael Bilerman - Citigroup

Alex Goldfarb - UBS

Rich Anderson - BMO Capital Markets

David Harris - Lehman Brothers

Karin Ford - Keybanc Capital Markets

Dustin Pizzo - Banc of America

Haendel St. Juste - Green Street

Apartment Investment and Management Co. (AIV) Q1 2008 Earnings Call May 2, 2008 1:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Apartment Investment and Management Earnings Call. My name is Fab and I will your coordinator for today. (Operator Instructions)

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

Lisa Cohn

Thank you, Fab. 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 fund 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; John Bezzant sitting in for Tim Beaudin who is on vacation, will speak to our redevelopment activities; David Robertson will review Investment Management 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. Good morning and thanks to all of you for joining us today. Aimco is off to a good start in 2008. Jeff, Tony and the property operations team are on track with solid rent growth and NOI gains. Tim, represented today by John Bezant and his team continue to add value to our portfolio through redevelopment, which while reducing FFO in the short run generates significant net asset value over time.

David and his team are growing our investment management business and increasing our allocation of capital to target markets. Tom and his team continue to take advantage of what seems to me a disconnect between our share price and our net asset value, buying back 6.7 million shares so far this year, while maintaining comfort liquidity.

We have a talented team that is working hard to provide good value to our customers and so create value for our shareholders. And we're cautiously optimist as we look forward to balance of 2008.

With that I will turn the call over to Jeff Adler to report on property operations. Jeff

Jeff Adler

Thanks Terry. Conventional same store NOI growth was up 3.4% in the first quarter which was above our forecast. We had a good balance between NOI drivers with revenue growth up 3.6% and expenses of 4%. Revenue was higher and expenses lower than anticipated.

Growth and same store revenues was composed of 2.5% rate, 4/10th of a point in occupancy and 7/10ths of a point growth and utility reimbursement and other income. First quarter same store occupancy at 94.8% was up 40 basis points from the first quarter of '07 and up 10 basis points sequentially. Occupancy in March hit a seasonal high of 95.1%. Overall demand is running strong across the entire nation, with opportunities and visits up 10%.

Fourth quarter year-over-year, excuse me first quarter year-over-year renewal rents were up by 3.7% and new lease transaction rents were up by 3%, a meaningful increase from the prior pace of less than 2%. New lease transaction rents grew strongly in New England, Philadelphia, Chicago, Atlanta, Dallas, Denver, and Northern California, with moderate growth in Washington D.C., and Southern California and declines in Phoenix and Florida.

Directing your attention to supplemental schedule 6 you can you can see the results in our top 20 target markets. Specific grew NOI at 5.6% and northeast at 3%, Chicago 17.6%. North Florida Sun Belt At 3.5% but Florida NOI declined 7.4%. Totals same store NOI excluding Florida grew 4.8%. Specifically as to Florida, year-over-year results especially outside of Miami as expected were down. However, viewed sequentially we have reason to be cautiously optimistic.

Occupancy in Tampa and Orlando rebounded in March to the 93% to 95% level. Sequential expenses declined and we began to execute higher sequential new lease transaction rents late in the quarter. Unfortunately, earned in rates will not immediately show this welcome inflection point and we will still see year-over-year revenue declines for several more quarters. At the same time, in our last call I stated that we expected that Miami, which had held up reasonably well to this point would be under more pressure, given expected new supply. We're now seeing that in our Miami high rise buildings.

Same store expense spending was better than anticipated particularly in utilities, snow removal and repairs, consistent with our objectives for 2% to 3% total expense growth in 2008. Year-over-year we had modest growth in payroll, repairs and trash. We had sizeable growth in administrative marketing year-over-year, sequentially, expenses declined in those two cost categories. On a sequential basis total expenses rose 1% while the year prior, fourth quarter to first quarter expenses rose 5%. We know we have work to do and we are making progress.

Customer experience scores continue to improve. For example, our office currency score, key predictor of retention has improved to 94% to 92% in the first quarter of last year and maintenance fee currency score has risen from to 98% from 91%.

Team member turnover continues its positive downward trend. Total annualized team member turnover is down 4% to 39%. And turnover within 90 days of hire have been cut significantly to under 7%. Our non same store properties also exceeded expectations for the quarter. These properties are spread across New York City, Jacksonville, Northern California and Miami Beach.

University community’s properties continue to as well into the '08-'09 school year. Affordable operations exceeded expectations in the quarter, due to increased occupancy and reduced expenses. There are two additional topics I would like to mention. First: the impact of troubles in the for sale housing industry on apartment rent, resident quality and demand. We are seeing our applicant quality scores increasing -- throughout the country and the percent of applicants approved in our consistent standards are up versus prior year.

We have also seen a reduction in the early termination rate, and a sharp reduction in move outs due to home and condo purchases. Our bad debt is stable. An average customer duration continues to increase from 18 months to 19 months, so from our perspective the turmoil seems to be currently working to our advantage.

Second, our property insurance program. Last year, I described that because of our size and scope, we have been able to use self insured retentions to reduce our costs, although it may result in some lumpiness within the year.

In the first quarter, we had a few larger losses and one of our properties sustained earth movement. The expected cost to remedy this specific situation drove a spike in our casualty loss line. While we seek to recover our costs from non-insurance parties that may take some time, and in the interim, we are required to recognize the casualty loss. Every year, I review our retention levels versus insurance costs to insure that we make the best decision possible.

The bottom line, we had a good quarter with conditions in place to sustain momentum and NOI growth consistent with our full year expectations. We're encouraged by the level of demand seen so far and at the same time we're being cautious about the overall economic climate.

Looking forward, for second quarter we expect year-over-year NOI growth of 2.5% to 3.5%, with expense growth moderating. For full year 2008, we continue to expect conventional same store NOI to be up in the range from 2.5% to 4.5%, with revenue growth of 2.5% to 3.5% and expense growth of 2% to 3%.

We continue to expect expense growth to be front end loaded because of the benefit that we received. Now, here's John Bezzant to review redevelopment. John?

John Bezzant

Thank you, Jeff. The development group is off to a good start in 2008. We invested $68 million in 48 conventional redevelopment projects, and wrapped up two projects during the quarter to end the period with 46 conventional projects in process, with budgets totaling $760 million.

During the first quarter, we produced more than 1400 units and Jeff's team leased over 1,100 redeveloped units with rent increases consistent with underwriting expectations. As expected lease cycle times lengthened during the first quarter. As year end 2007 inventories being worked off, while production continues in anticipation of the 2008 leasing season.

While this trend is expected to continue into the second quarter, our focus on reducing construction and lease cycle times is on going, thereby minimizing the drag on FFO while further adding to NAV.

Our expectation is that 2008 will be another active year for the development team, as we invest $250 million to $300 million in conventional projects. With that, I will turn it over to David Robertson for review of Aimco Capital. Dave?

David Robertson

Thanks, John. Aimco Capital got off to a bit of a slow start this year with total investment management income net of tax of $9.4 million, about $2 million below the guidance that we provided last quarter.

Looking mat supplemental schedule 11, asset management revenues or fees that we earned for providing investment services to affiliates and third party investors were largely in line with expectations. This was also the case for portfolio management revenues where the investment income that we earned from our owned assets.

The shortfall came in our tax credit business, where we did not earn syndication fees during the quarter due to challenging market conditions that delayed the closing of certain transactions until the second quarter. However, our guidance for the year assumed a difficult environment, and based on our current pipeline of opportunities and the express appetite of our investment partners, we continue to expect to raise $100 million or more of tax credit equity during the year. We also continue to expect to generate investment income net of tax of $55 million to $65 million in 2008 consistent with the guidance that we provided last quarter.

Turning to capital allocation, I would like to point you to supplemental scheduled 6 and 7 that summarize same store operating results and other conventional portfolio data by market. As you will see, we have modified the schedules to make it easier to track our progress and performance as we increasingly allocate our capital to the top 20 US markets or those markets with the greatest asset value of total apartments.

Today, properties located in our target markets represent 71% of NOI and approximately 80% of NAV for conventional properties. Of the NAV, approximately 20% is on the Pacific coast, 30% in the northeast, 25% in the Sun Belt, and 5% in Chicago. Our acquisition activities will be concentrated in target markets where we are currently under allocated, such as Seattle, the Bay Area and New York, and we expect the bulk of our disposition to come from the opportunistic and other markets which currently represent 20% of our conventional portfolio value.

The pace at which we are able to reallocate capital to our target markets will be dictated in large part by market conditions and our ability to achieve our target returns on acquisitions and pricing on dispositions. During the quarter we sold one conventional property for $23 million or about $55,000 per unit and three affordable properties for $13 million. We continue to expect to use any sales proceeds to repurchase shares, pay out debt and for other corporate purposes with acquisitions funded primarily with joint venture and 1031 proceeds.

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

Tom Herzog

Thank you, David. There are several items that we will cover today. First, our first quarter FFO exceeded the midpoint of guidance by $0.02; second, we continued our share repurchase program during the quarter; third, our liquidity remains good and finally I will provide guidance for the second quarter.

But before I address these items let me remind you that in accordance with accounting rule, all prior period share and per share amounts reported in our earnings release supplemental schedules and those I will discuss on 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 on January 30, 2008. A reconciliation of pre-special dividend versus post-special dividend measurements is included in the final page of our news release. These shares are also included for a full year in our 2008 guidance.

Turning now to first quarter results; Q1 FFO of $0.72 per share exceeded the midpoint of guidance by $0.02. Items outside of guidance included the following; property operations came in $0.05 higher than expected due to property same store NOI $0.03 above our estimates and non-same store NOI $0.02 above our expectations as operating expenses across the non-same store portfolio was less than anticipated and redevelopment revenues were higher than forecasted due to rate and occupancy.

Additional items outside of guidance included - G&A expenses were $0.03 favorable, interest expense was $0.03 lower than expected due primarily to lower average interest rates, investment management income net of tax was $0.02 unfavorable. And losses from casualty event resulted in a negative variance of $0.07. This included $0.05 of casualty losses for Aimco's share ownership share and $0.02 of losses pertaining to coverage provided to our partners.

Sequential results. Q1 FFO was $0.16 lower than Q4 2007, through the several items including. A $0.01 decrease in same store NOI from operations and an additional net $0.02 decrease in same store NOI resulting from ownership changes including Palazzo properties. An $0.18 decrease in investment management income net of tax, driven by the seasonality of the investment management business. And a $0.03 increase in casualty losses. These unfavorable variances were partially offset by a decrease in G&A of $0.03. Lower interest expense of $0.04 primarily due to lower interest rates, a $0.06 benefit to lower share account and several other miscellaneous items, which netted to a negative $0.05.

Share purchase activity. During Q1 we repurchased 5.1 million shares of Aimco stock at an average price of $33.67 per share for a total of $171 million. Additionally, in April we repurchased 1.6 million shares for $63 million, at an average price of $38.46 per share. Since the third quarter of 2006 we have repurchased 16.5 million shares, for about 17% of our total common shares outstanding at an average price of $41.29 per share for a total of $680 million. Going forward we have the authority to repurchase another 26.5 million shares.

Debt and liquidity. We continue to enjoy sound liquidity. Our non recourse property debt maturities are laddered with 245 million maturing during the balance of 2008, and approximately 400 million maturing in 2009. With LTVs at maturity estimated at 43%.

$75 million of our corporate term debt matures in September of 2009, inclusive of a one-year extension option, but the balance of $400 million maturing in March of 2011. Lastly, our $650 million revolver matures in May of 2010, inclusive of the one year extension option. At the end of the quarter we had over $400 million in dry powder.

Now turning to guidance. Q2 '08 FFO was projected to be $0.79 to $0.83 per share, and includes the following. Same store year-over-year NOI growth of 2.5% to 3.5%. Investment management income net of tax of $0.13 to $0.15 per share. Full year FFO guidance remained unchanged at $3.22 to $3.38 per share.

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 would turn it over to you for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question will come from the line of Lou Taylor with Deutsche Bank.

Lou Taylor - Deutsche Bank

Thanks. Good morning. Terry, last year you had some problem with foreign aid in the market and B you mentioned some issues with your team down there. This time around you sound a little more optimistic. Can you talk about the improvement there? Is it team, is it market, is it both? What is kind of making you feel a little bit better?

Terry Considine

I feel both are actually pointing the right direction, but I would like to ask Jeff to answer since he has got charge of that operation.

Jeff Adler

Sure. I’d tell you that I do think it is a combination of both. I am very pleased with what Joe [Burgess] and his team have been putting together in terms of just the core operating metrics and customer satisfaction. I think the market is also improving as well. Certainly that's what we are seeing in terms of demand. And, I have kind of told you what now is being transpired relative to occupancy and rents. That’s happen kind of late in the quarter, so I do think it is a combination of both right now.

Lou Taylor - Deutsche Bank

Okay. And then second question is for Tom. With regards to the casualty, can you just expand on that a little bit in terms of what triggered it? Was it a multiple event, single event or what is in that item this quarter?

Tom Herzog

Well, Lou, there were a few different events but there was one large event that resulted from some land shifting on an asset that we owned. So there were three casualty events during the quarter that drove those losses. But there was one that was by far the largest.

Lou Taylor - Deutsche Bank

Okay. And then, could you just give us a sense for what the large item was?

Terry Considine

Sure. It was -- Jeff, why don't you provide more of the details on it.

Jeff Adler

It is property in Cincinnati. And we noticed in late in the fourth quarter some shifting happening and it really you know kind of happened most meaningfully in the first quarter where we really recognized that there was an issue at hand. And the construction services teams have been fantastic getting all over it. And we recognized the future expected costs to of remedying the entire situation, because most of it really began to occur in the first quarter.

Terry Considine

Yeah, the fourth quarter shift was very minor. Not considered a problem. It was the shift that occurred in the first quarter that created the damage.

Lou Taylor - Deutsche Bank

Okay, thank you.

Terry Considine

Next question.

Operator

Your next question will come from the line of Michael Bilerman with Citigroup.

Michael Bilerman - Citigroup

Craig Melcher is on the phone with me as well. Terry you’ve been out in the market with a few billion dollars of asset sales. Can you talk about how those processes were going, how the discussions with potential buyers are and what you sort of see them going throughout the year?

David Robertson

Yeah, this is David Robertson and I will answer it. As we discussed on prior calls, we have about $4 billion in assets that we plan to sell at some point. As you know we have been an active seller over the years. I think we have probably sold somewhere in the neighborhood of $5 million in assets over the last five years. And the next $4 billion we will sell when market conditions allow us to get the pricing that we require, and where we have an appropriate use for the proceeds.

Michael Bilerman - Citigroup

Well, how -- I mean, there is obviously been discussion in the market about actually having portfolios out there and things you know sort of falling out of bed. Can you talk about what the disconnect or what the spread is versus the offers you're receiving, and where you think pricing is.

Terry Considine

Well, first of all, let’s speak to pricing. I think that what transaction, volume in general has been lighter than last year I think there is enough data out there to suggest that pricing has been relatively stable over the last 90 days.

And as far as our marketing efforts, as when you're selling assets, a deal isn't done until the wire hits. And so, we're in the middle of negotiating sales and we will see what happens. But I don't think it is productive to speak to what might happen with transactions. We will wait and see what sells as time goes by.

Michael Bilerman - Citigroup

Okay.

Terry Considine

Next question please.

Operator

Your next question will come from the line of Alex Goldfarb with UBS.

Alex Goldfarb - UBS

Good morning.

Terry Considine

Good morning Alex.

Alex Goldfarb - UBS

If you can just talk a little bit about what you're using the line of credit for, and then also how you funded the $170 million of share buy backs this quarter and if your strategy of funding share buy backs has changed?

Tom Herzog

Yeah, Alex, no, it has not changed. As we do sell assets, we will continue to, as I have said in the past that we're going to continue to look for most accretive use of those funds. That will involve share repurchases, and it will involve some component of delevering.

As to the $170 million in our use of the line of credit, we keep our line -- we have got a $650 million line. And we like to maintain a sizeable amount of dry powder. We're continually working through liquidity assessments, looking at our sources and uses and we have a certain amount of dry powder that we want to maintain and that differs one quarter to the next based on what our future needs are.

As we got into the fourth quarter and -- in anticipation of Palazzo, we had broader line of credit to an amount of debt that we were comfortable with even if the Palazzo deal had not closed. When the Palazzo deal closed it cleared our line of credit out at the end of the year. And during the first quarter, we repurchased shares of $170 million against our line bringing our dry powder back to a level that we feel is prudent and correct for our current business operations.

Alex Goldfarb - UBS

So just following that up, then, as you sell assets over the course of this year, then you would use those assets and sale proceeds to pay down the line or would you consider using more line to buy back more stock?

Tom Herzog

It is a combination, Alex, of the two. We look at our total debt structure including preferreds and the coverages and the LTV that we want to maintain in place. And we will balance that out against stock repurchases. So there will be some degree of deleveraging across our various debt components and the way we find most advantageous with the balance either going to share repurchase, or either accretive opportunities that might arise.

Alex Goldfarb - UBS

Okay. And then the follow-up question is, what was the drag of Flamingo, and redevelopment this quarter?

Tom Herzog

Drag that we had stated last quarter in our guidance is that we expected down unit redevelopment drag of about $0.04 per share per quarter for the year, and it wasn't terribly different than that. It was in and around that range and that is not a number we're updating at this point. So in other words, we're still comfortable in that range. At the current date, although, continuing to work to bring that down over time.

As the Flamingo, we had mentioned in the last call that we had a certain amount of construction period discount that was incorporated into our guidance as it pertained to redevelopment programs that caused some of the variance year-over-year. That's another number there as we seek to get rents and to manage the redev program tighter and tighter that we hope to improve that over time. Flamingo was an item that was a component of the item that I had described in the last quarter, probably to the tune of $4 million or $5 million and that was incorporated into our guidance. And I think we're seeing some improvement on that item but still plenty of work to do. Jeff, is there anything you'd add on Flamingo as to kind of how it's going?

Jeff Adler

Yeah, there are two towers of note. The center tower which has always been rental and then the north tower which was under contract for condo conversion and it came back to us. The re-leasing of that north tower is proceeding better than we had anticipated. So that's kind of a good news. We had obviously wanted to be quite cautious about their ability to re-lease the north tower. That is going quite well. We're seeing a little bit of weakness in the center tower, which is the higher end, which is one that alludes back to the earlier comment I gave concerning our high rise product line.

Alex Goldfarb - UBS

Okay and the $4 million-$5 million, that was per quarter or for the year?

Tom Herzog

That was for the year.

Alex Goldfarb - UBS

Okay. Thank you.

Tom Herzog

Yeah. Thanks.

Terry Considine

Next question.

Operator

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

Rich Anderson - BMO Capital Markets

Hi and good afternoon everybody.

Tom Herzog

Hi, Rich.

Rich Anderson - BMO Capital Markets

I guess I am going to certainly go on the Aimco capital topic or what you now call investment management. And I know, Tom we spoke earlier today there was no definitional change to what Aimco capital was and the 55million to 65 million guidance is apples-to-apples with what was said in previous quarters. But in terms of that new bucket or newly named bucket calmed portfolio management income, it seems sort of open-ended to me that you could sort of put things in there and not have like a set rule of what they are. That is sort of how I read it. And I note this quarter that you have a swap gain of some sort in there. But what types of things can be in that portfolio management income bucket in the future? What can we expect to see? Can you just define it a little more for me?

Tom Herzog

Rich, let me just clarify one thing. We changed the -- for the rest of the group that might not have studied this yet, if you go to supplemental schedule 2, you will see a line item called property excuse me, asset management and tax credit revenues. You will also see a line item down below in the expense section called investment management expenses. Those are different names for the same as what we had previously called activity and asset management revenues and likewise for expenses. We have not moved numbers around. We have not moved new categories of income into these line items. So, I just want to make that clear.

The other thing I want to point out is that when you're trying to look at the Aimco capital or slash investment management business, it's the same thing. Go to schedule 11. You will see the entire picture, all in one schedule, all the way down to an after-tax income number. It helps to reconcile the pieces but see it all in one place. The thing about GAAP is, it causes us to have to take things like accretion and the swapping common land gains and some different things that are very much Investment Management/Aimco Capital activities and classify them in about four different places in the income statement. That’s why we created schedule 11 is to help you have a clear picture of that business.

Rich Anderson - BMO Capital Markets

Okay.

Tom Herzog

As to what might be the components of that business, David, why don't I turn that to you to see if you can describe that business.

David Robertson

I think you pretty much answered that. Rich, the only thing I would say, you have studied Aimco Capital for some time. It is not so much a definitional change as it is just trying to make it more clear, what Aimco capital does. As you know, a few years back Aimco capital was the affordable housing business. When we merged the conventional affordable transaction activities that came under the umbrella of Aimco Capital. So, just to avoid any confusion, what we're doing on schedule 11 and in the text is making it clear that Aimco Capital is our Investment Management business.

And as Tom said, the line items have changed. All we have done again is to try to make it clear what each sub total means. So asset management income is income that we earn providing services to third parties and affiliates. Tax credit revenue I think everyone knows. And then portfolio management we just sub totaled the line items that Tom referenced, to make it clear that that is income that we earned on our own account.

Rich Anderson - BMO Capital Markets

Okay. And a follow-up question I guess sort of unrelated really. You beat same store and you' did a good job there. But the casualty costs associated with your self insurance probably, you benefit from self insuring yourself. Its you have cheaper costs there. So, when you have a loss, shouldn't that be communicated in your same store numbers, because the loss is in effect a property level expense, is it not?

Tom Herzog

Well, Richard, what we do is we do have insurance premiums and that flows through NOI for the various categories. As casualty losses are lumpy and I think the most REITs are going to have some form of insurance layers that they have within their insurance coverages as well. The casualty losses are lumpy and therefore they have fallen below the line.

There is not a level of intuitive merit which you're saying as well. But this is how we have consistently handled it and feel so it’s a reasonable way to treat it for same store purposes.

Rich Anderson - BMO Capital Markets

Okay. Thank you.

Terry Considine

Next question please.

Operator

Your next question comes from the line of David Harris with Lehman Brothers.

David Harris - Lehman Brothers

Yeah, hi. You guys reported $0.51of AFFO for the quarter, which is a $0.09 Delta on your $0.60 dividend payment. Is there something happen in the first quarter that is, suggest that, tell me why you feel comfortable about getting to 240 for the full year, which I think you maintained in terms of your guidance?

Tom Herzog

It is really just the timing of CR, throughout the year. The CR is going to be different one quarter to the next. And so we're still, as we stated in our guidance, expecting to get to $2.40 of AFFO for the year. Jeff, anything you would add on the timing of CR expenditure.

Jeff Adler

No, CR normally ramps up in the second or third quarter due to terms and then also when projects get done. At the same time there is a appropriate level of seasonality in the overall income stream. So again I think we're going to line this out for the whole year to feel comfortable that you know we will get there.

David Harris - Lehman Brothers

Okay not to flog this casualty issue to death but Tom, what’s in your guidance for the full year is it more, are we adding more in? And I am assuming that we really should be looking for this on the expense line.

Tom Herzog

Well, you know David it hits two different places. Just to help you understand it better. You're going to have those two casualty lines, and I think I direct you back to schedule 2. That is the best place to look at it. You will have a line that is casualty conventional and one that is casual affordable. And what flows through those two lines are the actual book value of the casualty losses that occurred. That is how accounting rules have you do it.

The book value of casualty losses that occur for our share of the ownership of those assets. That is what will hit those two lines. The actual insurance expense that we pay for third party insurance is just going to be up within the COE line. Then we also have insurance that we're providing on behalf of our partners, and, within that line, that falls down into the other expenses net. It is the other income expense line, the other expenses net, and so that one is guided to be at a small gain per quarter. And if we have favorable experience, if we look like over long periods of time we expect to run a small profit there as an insurance company would. And if we get hit with a couple of heavy claims then it could be negative. As far as the casualty lines, within just the casualty, we have got in our guidance about $3 million a quarter or so, already incorporated into the guidance.

So that’s the number. So if the casualties come in a little bit higher than that then we are going to end up upside down against our guidance and vice versa. But that is based on looking at long term historical trend and what we would expect.

David Harris - Lehman Brothers

The incident that you referenced is that essentially a closed issue, or could there be some tail charges running into the seconds and third quarter?

Tom Herzog

That is actually, Jeff do you want to take that?

Jeff Adler

Yeah, we're on this particular loss into our insured layer. So, costs on this loss any further costs should there be any, over what we expect, because we haven't spent the money. But we have made an estimate as to the final cost but any costs above this we would expect would be into our insurance layers.

David Harris - Lehman Brothers

Okay. Great.

Tom Herzog

And David, to add on to that the bottom line is that we have reached the insurance layers where the insurance companies would be covering costs above that. But beyond that there is the concept of subrogation on the work that was performed. And any subrogation cash that we would receive at a later date has not been incorporated and then I would remind you that that would be gain at the time that, that is realized.

Accounting rules have us state the losses up front. But if there is subrogation, that is considered a contingent gain that we would recognize at later date. We will see how all that plays out.

David Harris - Lehman Brothers

Thanks.

Terry Considine

Next question.

Operator

Your next question is from the line of Karin Ford from Keybanc Capital Markets

Karin Ford - Keybanc Capital Markets

Hi, good afternoon. I think in the last call you said the economic scenario that was underlying your guidance was about a million jobs this year and some modest slowdown. Can you talk about what your economic assumptions are for maintaining your NOI guidance for the balance of the year?

Tom Herzog

Well, I haven't really updated that. In the first quarter, there has been obviously a decline in job formation. The jobs report just came out which was kind of what this overall -- just kind of a combination of, depending on which survey you looked at, declined or expanded.

I think what is happening right now is what is going on in the underwriting for new mortgages is having an impact right now, more positively than we had anticipated and so right now I have no reason that that should change the overall expectation of where we're going. Obviously we look at that every quarter and every month just as you do, but I am not seeing anything that would cause us to make a fundamental change in our perspective going forward.

Karin Ford - KeyBanc Capital Markets

Okay, thanks.

Terry Considine

Next question, please.

Operator

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

Dustin Pizzo - Banc of America

Hey, good afternoon, guys. I should probably know this since it hasn't fluctuated much quarter-to-quarter but can you just remind us what the large restricted cash balance is for, it just seems like $300 million is a pretty sizeable number?

Tom Herzog

It's just a variety of items. But we are going to have all the escrows we have got within our affordable assets the variety of different items that have to be held aside. So, we are going to have capital replacement escrows, debt service escrows, residual receipts, taxes and insurance escrows, tenant security deposits. There is nothing within that that would fall out of the normal course for a company of our nature with the types of operations that we have but those will be the components.

Dustin Pizzo - Banc of America

Good, thanks.

Tom Herzog

Yeah. Next question.

Operator

And your last question will come from the line of Haendel St. Juste with Green Street.

Haendel St. Juste - Green Street

Good morning.

Terry Considine

Hey, Haendel.

Haendel St. Juste - Green Street

I guess Tom, this might be for you since we have spoken on it previously, can you give me an update on the current thoughts for Lincoln Place considering the recent California state court rulings?

Tom Herzog

I am going to turn that one to Miles Cortez, who has been working on that particular case. Mile?

Miles Cortez

Yeah, Haendel, with respect to Lincoln Place, we're still considering our options whether to pursue a sale or redevelop it ourselves. We're looking as those right now. We hope to make a decision by the end of the second quarter. The litigation will play out in due course.

Haendel St. Juste - Green Street

So, in light of the court allowing the lawsuits proceed, there hasn't been a material shift in thinking there?

Miles Cortez

No. We're still working through those.

Haendel St. Juste - Green Street

Okay. So as far as an impairment bill, we shouldn't expect one until you have reached a point where you feel it's, I guess, estimable and probable as a prior language.

Miles Cortez

I would word that just a bit little differently and what we're really looking at is, an impairment would apply if we chose to sell the asset and we sold it for something less than our book value, then an impairment would apply. Another way that impairment could apply is if we projected out our development of that asset, the cash outflows versus the cash inflows on an undiscounted basis. And under accounting principles then on an undiscounted basis if they are not recoverable then we would have to take an impairment down to the fair value.

One of the things you have to consider is what your intent for the asset is and if we were in a position right now that we were planning to sell that asset we would look at it one way. If we were in a position where there is a great deal of uncertainty, we do the impairment analysis on a health per use basis. So, we have taken all that into account and worked with our auditors quite carefully and at this point under the accounting rules we do not have an impairment.

Haendel St. Juste - Green Street

Great. Thanks for the color.

Tom Herzog

You bet. Are there any other questions?

Operator

There are no further questions at this time. I would now like to turn the call back over to Terry Considine for closing remarks.

Terry Considine

Thank you very much for your interest in Aimco. These are obviously interesting times in the US economy and capital markets and I feel very comfortable about Aimco’s place in that. I am delighted by the team and the people with whom I work. I think we are doing a good job to provide value to our customers and create value for our shareholders. If you have further questions, please feel free to contact Tom Herzog or Elizabeth Colson or myself and we will try our best to answer them. Thanks so much and have a good day.

Operator

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

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Source: Apartment Investment and Management Co. Q1 2008 Earnings Call Transcript
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