Apartment Investment & Management's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Apartment Investment & Management (AIV)

Q1 2012 Earnings Call

May 04, 2012 1:00 pm ET

Executives

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

Terry Considine - Chairman and Chief Executive Officer

Keith M. Kimmel - Executive Vice President of Property Operations

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

John E. Bezzant - Executive Vice President of Transactions

Daniel S. Matula - Executive Vice President of Redevelopment and Construction Services

Analysts

Eric Wolfe - Citigroup Inc, Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Jana Galan - BofA Merrill Lynch, Research Division

David Harris - Imperial Capital, LLC, Research Division

Paul Morgan - Morgan Stanley, Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Robert Stevenson - Macquarie Research

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

David Bragg - Zelman & Associates, Research Division

Taylor Schimkat - Keefe, Bruyette, & Woods, Inc., Research Division

Buck Horne - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good afternoon, and welcome to the Apartment Investment and Management Company First Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Cohen, Executive Vice President and General Counsel. Please go ahead.

Lisa R. Cohn

Thank you. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2012 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 we may -- from what we discussed today. Also, we will discuss certain non-GAAP financial measures such as funds from operations. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on Aimco's website.

Participants on today's call will be Terry Considine, our Chairman and CEO, who will provide opening remarks; Keith Kimmel, Executive Vice President, in charge of property operations; and Ernie Freedman, our CFO, who will review first quarter results and 2012 guidance.

Also in the room today are John Bezzant, EVP, Transactions; Miles Cortez, EVP and Chief Administrative Officer; and Dan Matula, EVP of Redevelopment and Construction Services. We are available to answer questions at the conclusion of our prepared remarks.

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

Terry Considine

Thank you, Lisa, and good day to all of you on this call. Thank you for your interest in Aimco. Business is good. With great thanks to my teammates all across Aimco, we are on track to meet or beat our guidance for 2012, with FFO up 9% year-over-year and AFFO up 22%. More importantly, we are making steady progress on 4 long-term goals.

First, our portfolio gets better and better. Our Conventional portfolio revenue per unit is now $1,263, up 9% year-over-year and up from $800 7 years ago, a compounded annual growth rate of 7%. This gratifying increase is due to same-store rent increases, higher rents on acquired and redeveloped properties and the sale of lower rent properties. We expect this process of steady improvement to continue as we concentrate our capital in fewer submarkets with greater and more certain rent growth. In addition, we are reducing our investment in our Affordable segment, selling 40 properties last year and expecting to sell another 60 properties this year. Our remaining business will be simpler and of higher quality.

Second, we are ramping up our redevelopment activities. We began this year with 4 redevelopments underway and we have since started a fifth. We expect to start 5 more during the balance of the year. For all 10, we expect to spend about $400 million over the next 2 or 3 years. On completion, we expect rents on the redeveloped units, un-trended and at today's levels to average $2,200 or so. We expect free cash flow IRRs greater than 10% and cash and cash returns greater than 7%. Given that the average cap rates in these markets are about 4.5%, we expect to get -- create considerable value for our shareholders. These projects will also improve our portfolio quality and increase our average portfolio rents. We have a deep pipeline of similar opportunities, and we expect to start them in future years, market conditions permitting.

Third, we are working to strengthen our balance sheet by reducing our leverage while maintaining its nonrecourse long-duration and fixed-rate character. We expect to end this year with total leverage, defined here as debt plus preferred stock divided by annualized fourth quarter EBITDA equal to 8.7x. We are on track to meet our longer-term goal of 7x over the next 3 years or so, assuming only market growth in property income, amortization of property debt from retained earnings and contribution from completed redevelopment projects. We are also considering alternatives to accelerate both our portfolio upgrading and our balance sheet delevering by the sale of properties that we would otherwise sell in 2013 and '14, with the use of proceeds to redeem our high-cost preferred stocks.

Fourth, we continue to simplify our business and to reduce offsite costs. As previously reported, we're under contract to sell our Asset Management business later this year. As I've just mentioned, we are reducing our affordable line of business. We have eliminated 7 public partnerships during the first quarter. And over the past 8 years, we have reduced property partnerships by 90%. This simplification supports lower offsite costs, improved management execution and greater transparency to our shareholders.

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