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Edited Transcript of AIV earnings conference call or presentation 28-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Apartment Investment and Management Co Earnings Call

DENVER May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Apartment Investment and Management Co earnings conference call or presentation Friday, April 28, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John E. Bezzant

Apartment Investment and Management Company - CIO and EVP

* Keith M. Kimmel

Apartment Investment and Management Company - EVP of Property Operations

* Lisa R. Cohn

Apartment Investment and Management Company - EVP, General Counsel and Secretary

* Patti K. Fielding

AIMCO Properties LP - EVP of Securities & Debt at Aimco-GP Inc and Treasurer of Aimco-GP Inc

* Paul L. Beldin

Apartment Investment and Management Company - CFO and EVP

* Terry Considine

Apartment Investment and Management Company - Chairman of the Board and CEO

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Conference Call Participants

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* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Buck Horne

Raymond James & Associates, Inc., Research Division - SVP, Equity Research

* Conor Wagner

* John Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Michael B. Kodesch

Canaccord Genuity Limited, Research Division - VP and REIT Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Nicholas Yulico

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's

* Richard Charles Anderson

Mizuho Securities USA Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Aimco First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Lisa Cohn. Please go ahead.

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Lisa R. Cohn, Apartment Investment and Management Company - EVP, General Counsel and Secretary [2]

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Thank you. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2017 and 2018 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.

We will also discuss certain non-GAAP financial measures, such as AFFO and FFO. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on Aimco's website.

Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, EVP in charge of Property Operations; John Bezzant, our Chief Investment Officer; and Paul Beldin, our Chief Financial Officer. The question-and-answer session will follow our prepared remarks, and I'll now turn the call to Terry Considine. Terry?

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [3]

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Thank you, Lisa, and good morning to all of you in this call. Thank you for your interest in Aimco. Aimco first quarter results were consistent with our expectations, and our guidance for the full year is unchanged. As my colleagues will discuss in detail, first quarter property operations were on track. Redevelopment activities continue to meet our targets for value creation. As our work in Philadelphia nears completion, Patti has started a substantial overhaul of Calhoun Beach Club in Minneapolis. Keith's execution of our lease-ups has been exceptional, and that assignment is largely completed.

The Aimco balance sheet remains strong, with abundant liquidity and limited exposure to capital markets. For the fifth consecutive year, Aimco is recognized by The Denver Post as one of Colorado's Top Workplaces. And AFFO, our preferred measure for current period profitability, was $0.01 ahead of the midpoint of guidance.

That said, we remain cautious about the many factors that impact our business, just as we were at the start of the year. The supply of new apartments continues to increase, and there are many markets where new lease rent increases have slowed or turned negative. This especially impacts A price-point communities. Our portfolio strategy emphasizes geographic and price-point diversification, which provides some protection from these predictable results of the local building cycle.

In the quarter, this worked well. Weaker new lease rates at the A price point were offset by stronger B price-point pricing, solid renewal rates and improvements elsewhere in our business. As we look forward, we expect new supply to continue to pressure new lease pricing at the A price point. Our successful navigation of these choppy waters will turn on our execution of the numerous other tasks that drive our business, including customer satisfaction and retention, consistency, cost control, innovation and value creation through redevelopment.

Happily, we have a cohesive and high-achieving team with the requisite experience and commitment. With this, I offer sincere thanks to my Aimco teammates here in Denver and across the country. It's a privilege and a pleasure to work with you.

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

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [4]

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Thanks, Terry. I'm pleased to report that we had a solid first quarter in operations, with revenues up 3.4%, expenses up 2.7%, net operating income up 3.7%. Turnover for the quarter was 50.5%, 50 basis points better than the first quarter of 2016. Move-out reasons for the quarter are unchanged versus recent results or our long-term averages. And our residents gave us better than a 4-star rating in customer satisfaction for the 14th consecutive quarter, with our best score ever achieved at 4.24 stars out of a possible 5.

Looking at rates which transacted in the quarter. Blended lease rates were up 1.9%, with renewal rents having solid increases of 5.1%. We saw particular strength in Seattle, Philadelphia, Atlanta and Boston. Renewal rents in these markets increased 6% to 8% compared to the expiring leases. Where those leases expired and were not renewed, our new leases were 1% below the prior lease as we continued navigating choppy waters in a few markets. Los Angeles and Denver continued to be the most heavily impacted by supply, especially at the A price point in Los Angeles. Los Angeles and Denver combined for a negative 3.2% new lease price and a softer average daily occupancy year-over-year.

Average daily occupancy for the 2 markets was a combined 95.4%, some 100 basis points below prior year. The balance of our same-store portfolio saw a new lease pricing finish about flat for the quarter, with average daily occupancy at 95.9%, within 10 basis points of prior year.

Turning to the first quarter revenue growth. Our 12 primary markets were up 3.7% for the quarter. The top performers had revenue increases from almost 6% to nearly 10% for the quarter. This was led by Seattle, followed by Boston and San Diego. Our strong performers, which had revenue growth between 4% and 5%, were Atlanta and New York. Our steady markets with roughly 3% revenue growth were Chicago, the Bay Area, Denver, Washington, D.C. and Miami. And with revenue growth at or above 2.5%, we had Philadelphia and Los Angeles.

Finally, in looking at our early second quarter results, preliminary April blended lease rates are up 2.1%, with renewals up 4.5% and new leases improving by 100 basis points versus first quarter to flat versus last April. When comparing our new lease performance of As versus Bs, there's nearly a 300 basis point spread, with our As down 1.8% for the month, while Bs are currently up 1.1% for April. April's average daily occupancy is on plan at 95.6%, and May and June renewal offers went out with 4.5% to 6.5% increases.

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

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John E. Bezzant, Apartment Investment and Management Company - CIO and EVP [5]

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Thank you, Keith. During the first quarter, our investment and lease-up activities were executed as planned. We invested $41 million in redevelopment and development, about half of which was in our phased projects in Center City, Philadelphia, Park Towne Place and The Sterling.

At Park Towne Place, the lease-up of the South Tower is complete. And as of today, the East Tower is 84% leased, which is in line with our plan, and our achieved rental rates are consistent with our underwriting. Construction on the North Tower is on schedule, and we are off to a successful start with our pre-leasing, with nearly 15% of the tower leased before our first deliveries. Most deliveries came last week and move-ins have commenced.

We also completed the redevelopment of The Sterling's Apartment Homes, where as of today, 89% of the homes are leased, and the results of the redevelopment are consistent with underwriting.

During the quarter, redevelopment continued as planned at 3 other projects that were underway at year-end. And we've decided to slow our pace of work a bit at the Palazzo at Park La Brea in Los Angeles as we absorbed some excess inventory.

We also started a phase redevelopment in Calhoun Beach Club, a mixed-use residential community located in Minneapolis. Over the next few years, we anticipate investing about $29 million in redevelopment of 275 apartment homes and the updating of common areas.

And as Terry noted, our lease-ups at One Canal and Indigo are all but put to bed. Keith and his team successfully completed the lease-up of One Canal in Boston during the first quarter. And at Indigo in Redwood City, California, 90% of the apartment homes are leased today, and we expect to complete lease-up in the second quarter.

And with that, I'd now like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [6]

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Thank you, John. I'd like to cover today a number of subjects, starting with our financial results for the first quarter. AFFO at $0.51 per share and FFO at $0.58 per share are each $0.01 ahead of the midpoints of our respective guidance ranges, driven by operating results slightly ahead of our expectations and lower-than-anticipated interest in G&A expenses.

Next, on the balance sheet. We continued to take advantage of the low interest rate environment and closed 2 property loans totaling $65 million. The loans have 10-year terms, are fixed rate, amortizing, and non-recourse to Aimco. The weighted average interest rate on the loans of 3.71% represents a weighted average spread of 134 basis points over the corresponding treasury rates at the time of pricing.

Quarter-end leverage to EBITDA was consistent with plan and on track to meet our year-end target. Liquidity remains high. At quarter end, our $600 million line was largely unused, and our unencumbered pool of communities was valued at $1.6 billion.

Turning to guidance. Our views on 2017 AFFO and FFO are unchanged from the start of the year. In last night's release, we established second quarter AFFO guidance of $0.46 to $0.50 per share and FFO guidance of $0.56 to $0.60 per share. We are maintaining full year same-store guidance, with revenue year-over-year growth of 3.25% to 4.25%, expense growth of 2.5% to 3% and NOI growth of 3.5% to 5%.

Before we open up the call for questions, I would like to update you on our annual revisions to our supplemental schedules. In 2011, when Aimco decided to wind down its Affordable business, we owned 108 Affordable communities. At the end of 2016, we owned only 7, and 2 of these communities are under contract to be sold. For our 2017 reporting, we will be including these 7 communities in our real estate portfolio.

Also in 2011, we held nominal ownership positions in a number of limited partnerships holding 64 Low Income Housing Tax Credit or LIHTC communities. We now hold 47, and the partnership agreements require their liquidation over the next 5 years or so. As we described to you last fall in our third quarter net asset value calculation, which is posted on our website, our relationship with these partnerships is different than real estate ownership and is better described as an asset management business. Aimco provides services to these partnerships and receives fees and other payments in return. To the extent amounts due Aimco are not paid currently, the balances accrue and are satisfied from the partnership's future operating or liquidating cash flows. Aimco has limited upside or downside exposure. We value this business at the present value of the future cash flows we expect to receive.

In order to provide better visibility into the contributions of our real estate portfolio and our asset management business, we have updated our supplemental schedules to present separately FFO and balance sheet amounts for each. In connection with this changed presentation, we have identified both by the assets and liabilities of the LIHTC partnerships. This change in presentation has no impact on Aimco economics, limited impact on most metrics and some impact on our calculation of leverage to EBITDA, lowering our first quarter ratio from 6.9x to 6.7x.

Consistent with our commitment to transparency, we have included in the supplemental schedules the calculation of leverage to EBITDA, both under the current presentation, which excludes the related LIHTC debt, and also under the previous presentation, which included the LIHTC debt. A second change to the supplemental schedules identifies Aimco ownership line by line, making it easier to calculate Aimco proportionate results.

And the third change, we have expanded Supplemental Schedule 10 to include information to help users calculate Aimco asset value for communities classified as redevelopment and development. Our objective in making these revisions to our supplemental schedules is to provide you with ready access to the information useful to understand the Aimco business, operations and value. We thank those of you whose suggestions have shaped these changes, and hope that they will prove useful to all of you.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Nick Yulico at UBS.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [2]

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First quarter same-store revenue growth, I'm guess I'm wondering, is there anything that drove that down that was unusual, any sort of other income piece or anything?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [3]

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Yes, Nick. This is Paul. Thank you for that question. You're right. You'll likely notice that our other income growth was only 60 bps year-over-year, and that was actually quite a bit below our expectations. But the reason for that is it is actually a net positive to NOI, in that we had much lower utility expenses than what we expected, which was driven by warmer weather, and in turn, we had lower utility reimbursements. And just as a reference point, our net rental income or so our true rental growth during the quarter was about 3.7%. And had you -- had we had utility costs and reimbursements at a level consistent with our expectations, our overall revenue growth would have increased from the 3.4% that was reported to about 3.6%, 3.7%. And another factor to point out that didn't impact same-store revenue but did impact same-store expenses were property taxes. You'll likely notice that our property tax increase during the first quarter was 6%. That was largely what we expected, and it's really just due to the timing of some assessments and refunds that will occur during the year. And we feel confident that for the full year, real estate taxes will be about at the 4% or so level.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [4]

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Okay. That's helpful. And then that drag in the first quarter, does that -- do you make that back in -- for the rest of the year in coming quarters? Because the reason I ask is, obviously, your reported same-store revenue growth for the quarter is below the midpoint for your full year, so it's kind of hard to see how -- maybe you could talk about some of the math behind how you can get back up to midpoint of the range. Because I think there's sort of a -- there's a bit of a worry that you guys should have cut guidance and you didn't, and now you're kind of in a camp of maybe you can't make your midpoint guidance for the year.

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [5]

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You bet, Nick. And as we look at our expectations for the year, there are certain elements that are somewhat out of our control, such as weather and the corresponding impact on utility costs, but there's a number of factors that are within our control. One thing that you all know but I want to emphasize is that between now and our call in July, we're going to transact about 40% of our leases for the year. And so at this point, we're about 17% or so of our leases have transacted. We still have a lot of wood to chop, and we'll know much more in 3 months about where we stand. But we also have the opportunity to do better with revenue growth on items that are not related to new lease rates. And an example of that relates to our work in bad debt. And over the course of those -- history of Aimco, we have been very focused and done a very good job of controlling bad debt. But we think there's quite a bit of additional opportunity there, and Keith, his team and others within the organization are very focused on that. We also have opportunities to do better than what we have guided to on controllable operating expenses. And so as we look at our guidance ranges for operations, we come -- feel comfortable that we will land within that range that we've provided. But I'd also point out, that's just one factor that contributes to our bottom line results, our FFO and AFFO growth. And as we look at our redevelopment projects, of the lease-up of One Canal, of Indigo, we just feel really good about where those aspects of our businesses are going, and we feel good about the year. We look forward to the rest of it.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [6]

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And I guess -- that's helpful. Just one last follow-up is you gave the weighted average rent increase. I think you said for April, a total of over 2%. You were just under 2% in the first quarter. I mean, that number, I'm assuming, needs to go up in the next quarter or 2. Is that the assumption that, that gets back up to 3% or so in order for you to make your guidance?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [7]

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Blended lease rates do need to increase from the levels where they are now in order for us to meet our guidance ranges for the quarter. And so in real rough math, we get to the low end of our guidance ranges by having blended rate growth for the remainder of the year of a little bit below 3%. The exact percentage will really depend on how well we do in some of these other initiatives. And to get to the midpoint of our guidance range, we probably need to be closer to the 4% number. And so we know what we have to do, and we're laser-focused on getting it done.

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Operator [8]

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The next question is from Austin Wurschmidt at KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [9]

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I was just curious on the renewables, the asking rates, the 4.5% to 6.5% that you sent out for May and June, that's a fairly wide range. And I was just curious if that's across the entire portfolio. Could you add a little detail there? And then where do you expect those to come in on average for the final take?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [10]

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Austin, it's Keith. Thanks for the question. Those are the ranges as we look at them across the entire portfolio. In many cases, we'll see some of it will be a little bit higher than that, and it really just comes down to very specific regional and property by property specifics. At the end of the day, generally, what we see is about a 50 to 100 basis point melt from the ask and -- to ultimately stake rates.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [11]

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So fair to say that you'd expect some acceleration from the 4.5% renewal achieved in April?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [12]

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Austin, I think that's a good assumption. As we go into peak season, very traditionally, seasonality picks up, and that is how we look at it.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [13]

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And then, Keith, also on the occupancy that you gave for April, 95.6%, how does that compare to last year?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [14]

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The occupancy, let me see if I have that number here. Let's see. We're -- and it's 50 basis points off of where we were last year. At the same time, it really -- the big driver behind that is Denver and Los Angeles. And so as we look at Denver and Los Angeles, they're about 100 basis points off of where we were from a year ago. So those are the 2 drivers. And as we look at those 2 markets, we look for those intuitive -- we'll be battling through new inventory, very specifically in the Mid-Wilshire part of our Los Angeles portfolio, and we look to see -- to get better throughout the year.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [15]

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And that segues kind of nicely into my last one on Denver and L.A. And I was just curious, I think you guys assumed a 3% to 4% growth rate in those 2 markets. And are you still comfortable with those ranges? Or did some of the occupancy headwinds and supply headwinds at the higher price point concern you at this point?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [16]

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Austin, I'll tell you how we're seeing it now but Paul can chime on it as well. I would say that when we look at Los Angeles very specifically, it's really a tale of 2 different stories. When we look at our Ventura portfolio, which is more of our B price point, we're seeing strong growth in acceleration there, where occupancies are, in the first quarter, at 96.6%, to give you an example, and we saw north of 6% revenue growth. Really, the pressure comes in the Mid-Wilshire, in really like our Palazzo communities. And so as we look at those, we're going to need to see some acceleration throughout the balance of the year. And some of those headwinds are things that we're fighting through. Paul, what would you add?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [17]

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Yes, I would just add that with a portfolio such as ours, where we have diversification by price point and geographies, it's natural for some markets to maybe underperform our expectation at the beginning of the year. But those will hopefully and likely be offset by markets that are doing better than what we had hoped for the beginning of the year. And I would tell you that to the start of the year, Boston has done extremely well, and we're pleased to have that offset. We also see continuing strengthening in the D.C. area. And so there's always a balance and there's always an offset. So let's keep that in mind as you think about things.

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Operator [18]

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The next question is from Nick Joseph at Citigroup.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [19]

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Just staying with L.A. Can you talk about what the impact of the decision to delay the stabilization of Palazzo at Park La Brea has on your expected return for that redevelopment?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [20]

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Yes, Nick, as -- what we decided to do at Palazzo, we've been turning and doing the construction a floor at a time. And so as we have seen the absorption of the units during the first quarter, we've decided just to slow down the pace. And so it delays the construction of the entire project by about 6 months, but it's not really going to impact the overall economics. And I'd actually tell you, for the 120 or so leases that we have signed, we're well ahead of underwriting.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [21]

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And then just, I guess, on Indigo as well, you mentioned almost being fully occupied. How is the lease-up on a rate basis relative to your initial expectations?

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John E. Bezzant, Apartment Investment and Management Company - CIO and EVP [22]

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Good. As you noted, and this is John, by the way, we're several months ahead of our pace of where we thought we would be on Indigo at this point. It's literally crossing the 90% threshold this week. And we are mid-90s on our -- versus underwriting. When we take -- and we made a conscious decision last fall to accelerate pace. And we took a little dip back then, and our rate versus underwriting has actually has been building since that point in time. And we anticipate by the time we're full, we'll be up into the high 90s and chasing into our underwriting very quickly next year.

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [23]

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Yes, and I would just add that as we made that decision, we looked at the expected IRR impact, and the decision to forego a little bit of rate to fill up the building quicker was a net benefit to our return.

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Operator [24]

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The next question is from Juan Sanabria at Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [25]

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Just a question on L.A. again. Is your -- is the second-store revenue guidance to midpoint, does that need a recovery in the L.A. market to get to that midpoint? And can you talk about the cadence of supply in that market? And do you expect any improvements as the year goes, particularly in the peak leasing season?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [26]

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Juan, this is Paul. I'd say that as we think about our revenue growth achievement for the year, it's portfolio, it's not market-specific. L.A. is a large market for us. It is impactful. But it's just one of many factors. As we look at supply, we updated our supply expectations for the next 12 months this week based upon a new third-party data, and what we saw as we reviewed that information is that we have seen an uptick of supply in the Mid-Wilshire submarket of LA. And so while that was an area that we had forecasted during the 12-month period, ending December 31, '17, of not having significant level of supply, that has now ticked up to be over 2%. And so the supply is impacting us there, and we saw that in our results for the quarter. And we expect that L.A. will continue to be a slog for these A price-point communities.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [27]

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And what percentage of your L.A. market is being hit by that exposure in terms of NOI?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [28]

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It's really 3 properties. It's Broadcast Center, it's Palazzo East and it is The Villas of Palazzo.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [29]

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Do you have the percentage of NOI though, like 80% of your NOI in L.A?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [30]

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Pardon me, Juan?

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [31]

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What percentage of NOI with regards to your L.A. portfolio do those 3 assets represent?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [32]

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Let us follow up with you on that. I don't have the exact breakdown at that level of detail.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [33]

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Okay. And one more question for me, just what are you guys thinking in the latest odds in terms of potential scope and timing with the Yacht Club in Miami?

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John E. Bezzant, Apartment Investment and Management Company - CIO and EVP [34]

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Sure. Juan, this is John. We continue in an early phase view of scope and plan there. I would -- we've kind of talked a little bit about it, and there have been a few press releases about scope of the project there. But we are looking at a rehab of the existing building and potentially adding another tower there. If we proceed with that project, we will do it with a development partner that's got some expertise in the market in high-rise construction. And I would anticipate a go-forward decision on that no sooner than probably middle of next year. We're very early days on this.

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Operator [35]

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The next question is from Rich Anderson at Mizuho Securities.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [36]

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So just -- I didn't want to kind of wrap up on the future sort of progression of FFO. At $0.58 in the first and second quarter, if you get your guidance this quarter, you don't really get anywhere near the midpoint. I know you've talked about some of the items, but is it redevelopment ramping and bringing to market and getting NOI from that? Is it the reversal of property taxes? What are the -- can you kind of break out the drivers that get you to a run rate in the second half of the year that get us to that 2 45 type number?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [37]

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Yes, Rich. What will really drive the FFO and AFFO acceleration in the second half of the year is the impact of our lease-up buildings, so One Canal and of Indigo. And if you recall back, in July 1 of last year, Indigo was completely empty. In July 1 of this year, it will be completely full. And so the impact of our lease-up buildings for NOI in 2017 is about $0.13. And so it's a powerful factor.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [38]

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Okay. That's helpful. And aided a little bit by some callback on the property tax line item?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [39]

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There will be some benefit in property tax. And you also have the typical seasonality of expenses, where the first quarter is our period where our controllable operating expenses, particularly around contract maintenance for snow removal and utility costs, are the highest. And so we'll see some easing of that as we always do.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [40]

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Okay. And then second question, you mentioned kind of like a wind-down of your tax credit partnership business in 5 years. Is that at that point where Aimco becomes basically a conventional, multi-family company with a redevelopment angle, pretty beautifully boring-type stuff?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [41]

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Actually, Rich, I would say we're there today because what we are doing with that asset management business is that we are earning a fee stream, and that fee stream is fairly certain because of where we are in the life cycle of those partnerships. And so while there will be some earnings contribution to those fees that will diminish over the next 5 or 6 years, our business is truly the operation of real estate. And that's where we're laser-focused.

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Richard Charles Anderson, Mizuho Securities USA Inc., Research Division - MD [42]

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Great. So -- but there will be a need to replace those income streams. How do you respond to that? How do you replace that?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [43]

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Well, sure. As we look at that, we can look at it from 2 perspectives. Starting with net asset value, the IRR on that fee stream is about 7%. And so if you think about our redevelopment activities, where we typically do IRRs of 9% plus, mostly in excess of 10%, it will be very accretive from the NAV line. Now what there might be is some AFFO and FFO dilution as these partnerships are wound down and our investment opportunities might take a period of time to ramp up. But as we look out the dilution, there's 2 elements of earnings dilution. The first is in our deferred tax credit income, which we have long scheduled out for everyone in our supplemental schedules, and the second is the reduction in fees earned from the operations of the properties as those underlying partnerships are slowly liquidated. And we don't really see much of any impact of dilution from that piece of it until about the 2021 period. And at that point in time, we'll have dilution of, call it, $0.04 or $0.05 or less per year. And so looking at that today, that's about less than 2.5% of FFO. But as we expect FFO to continue to grow and to expand, it will become even less of a factor. So we have...

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Operator [44]

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The next question is from John Kim at BMO Capital Markets.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [45]

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Your percentage of As in your portfolio have gone up from 43% a couple of years ago to 51% today. And given the outperformance of Bs and supply coming online over the next couple of years, do you sense that you want to have a better balance between As and Bs going forward?

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [46]

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John, it's Terry. We're happy with something in the neighborhood of 50-50. There will be different times in the cycle when a change in that mix might favor one or the other, but that rough proportionality balances the defensiveness of the Bs and the income growth that's possible inside the As.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [47]

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50-50, and then no fees. Is that correct?

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [48]

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The C-pluses we have are basically in high rent markets, so their rents are quite comparable to the Bs.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [49]

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Okay. The weakness you're seeing in L.A., is that supply pressure coming just specifically from the Mid-Wilshire submarket? Or are you also finding that Downtown is having a bigger impact than previously expected?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [50]

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John, it's Keith. There's no question that the inventory that's down in the Staples Center is impactful. It's more of a trickle-down effect as people move within the different neighborhoods, whether it's in Hancock Park or North Hollywood. What's of interest is that when we really look at it, it's our entry-level 1 bedrooms and 2 bedrooms are that -- those higher price points that we see the pressure.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [51]

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Okay. And then just a question on Airbnb and now that the lawsuit has been public, any update on that? And any impact on residents pushing back on your restrictiveness policy?

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Lisa R. Cohn, Apartment Investment and Management Company - EVP, General Counsel and Secretary [52]

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This is Lisa. Thanks for the question. In terms of the litigation, it's early days. And since you asked the question, I'll just add a little commentary around our views on it. We've been really pleased with the positive response that we have received from so many apartment owners who, like us, object to Airbnb's trespass on private property rights, and that is they should not be permitted to profit by using property without the property owner's consent. And even more, we're gratified by the positive response that we've had from our residents. You've heard us say many times before, the most important job we do is pick your neighbor. And to that end, we screen potential residents on credit, we screen them on criminal background checks, and we hold our residents accountable for being good neighbors. And Airbnb circumvents that and puts our neighbors -- puts our residents at unnecessary risk. And so that's simply unacceptable to us. From a revenue standpoint, I'll let Keith or Paul dive into that, but it's a really small percentage of our portfolio at any one time, but from a philosophical standpoint, incredibly important to us.

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [53]

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John, I just -- this is Keith. As we think about it, it's typically maybe a couple of hundred units, 200 units or so, at any given time that we've been navigating with this Airbnb issue.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [54]

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You got a sense if any of the REITs are going to join you as far as their stance against Airbnb?

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Lisa R. Cohn, Apartment Investment and Management Company - EVP, General Counsel and Secretary [55]

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Hard to say. People are cheering us on. But we'll see what makes the most sense as we proceed through this.

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Operator [56]

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The next question is from Conor Wagner at Green Street Advisors.

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Conor Wagner, [57]

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So on the revenue growth assumptions, Paul, you mentioned what you guys have to do to hit the midpoint, but it seems like what you have to do to hit the high end is pretty aggressive, especially given the trends that you've already disclosed for April. Do you see the high end as a realistic possibility?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [58]

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As we set guidance for the year, we knew it was going to be a year of uncertainty, and that's why we provided a wider-than-typical range. And I would agree that based upon what we know today, the high end of the guidance looks to be challenging, but the environment could change as we progress through the remainder of the year.

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Conor Wagner, [59]

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Great. And then, John, on the Calhoun redevelopment, just on my simple math, it looks like you're getting a 5.5% yield on the increased rents versus the cost there, and that's assuming 100% contribution from the rents. Is that fair? Is there something I'm missing? And then given that level of return, what was the -- what was your decision-making process there versus selling the asset or doing something else with it?

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John E. Bezzant, Apartment Investment and Management Company - CIO and EVP [60]

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Sure. I'm going to tell you, we're in the early phases -- this is the early phases of the project, but I'm going to hand it over to Patti Fielding to give you some of the detail around the underwriting and the future phases.

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Patti K. Fielding, AIMCO Properties LP - EVP of Securities & Debt at Aimco-GP Inc and Treasurer of Aimco-GP Inc [61]

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It's Patti. Thanks for the question. When you think about Calhoun, you've got to realize that it's a multi-phased redevelopment project. And we are in the planning process on Phase II and Phase III. We believe that we've got an ability to increase the yields overall. When we made the decision to proceed, we considered the IRR, which is north of 10% overall on the entire project. As far as yields on the rest of the pipeline and the portfolio as a whole for redevelopment opportunities, we're very comfortable that everything we're looking at is north of 6% overall.

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Conor Wagner, [62]

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Okay. So the 10% IRR is based on completing all 3 phases at Calhoun?

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Patti K. Fielding, AIMCO Properties LP - EVP of Securities & Debt at Aimco-GP Inc and Treasurer of Aimco-GP Inc [63]

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It is. It's a -- and it should be north on all 3 phases at Calhoun. And so you've got to look at it holistically. I mean, when you look at the project, this is a really unique and special piece of dirt in our portfolio. And Calhoun is like nothing else in the Minneapolis market. It's surrounded by multimillion-dollar single-family homes across from Lake Calhoun. This submarket benefits from highly educated workforce. There's 16 Fortune 500 companies that are there. Their headquarters are there, including UnitedHealthcare, Target, Best Buy, CMC. It's a very, very strong market. The property itself contains 332 units that's highlighted on the schedule. The first phase is the non-historic portion of the development, which is the 12-story tower that was built in 1998, 275 units. Phase II and Phase III is comprised of a 57-unit vintage building that's 9 stories high. And the 2 towers are joined in the middle by a 4-story parking garage and about 38,000 square feet of commercial and retail space. We can't replicate this location, and we can't -- the history and the nostalgia of this building and its position in the market is second to none. It's an invaluable piece of real estate. And so we have to look at it holistically as to what the long-term positioning and value plays on this property, and we're in it for the long haul, where this is a long-term hold and this is a very long-term, stable market that this property is in.

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John E. Bezzant, Apartment Investment and Management Company - CIO and EVP [64]

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And Conor, I'd remind you too, in these multi-phase projects that we do like this, like Park Towne, like Sterling, oftentimes, the first phase, we've got some heavy lifting around some core in the building, just maybe a little bit of deferred opportunities to catch the building up. And so the heavy lifting is in the first phase, and some of the gravy is in the later phases.

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Conor Wagner, [65]

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And so then, what is the total expected cost for all 3 phases?

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Patti K. Fielding, AIMCO Properties LP - EVP of Securities & Debt at Aimco-GP Inc and Treasurer of Aimco-GP Inc [66]

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We're not at this point where we're ready to discuss that. As we get Phase II and Phase III through investment committee, we'll be in a position to give you the details on that.

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Conor Wagner, [67]

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When you say investment committee, it sounds like you've already decided to do it or that the only reason you do Phase I is because of the gravy that John just mentioned on phases 2 or 3. So it seems like the whole thing has already been spoken for. So I'm just trying to understand that, one, just understanding the cost so I can understand the full scope, but then two, probably the focus on the redevelopment program has been to do it more incrementally so that if things aren't working out, you can pull back quickly or you can be a bit more nimble. But as you describe in this project, it seems like, well, it's going to be done in phases, it really only makes sense financially to do the entire scope of work.

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [68]

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Conor, this is Terry. And I think you make a very good point. And if we stop on Phase 1, the returns will be accretive but not extraordinary. We haven't finished our work on 2 and 3. We expect that we will finish it. We can see what's coming, and I think you'll be satisfied by it, but if not, you're exactly right if we stick it in Phase 1.

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Conor Wagner, [69]

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Just ballpark then. Is it like an all-in $100 million type project? Or just can you give us a range?

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [70]

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Let's talk about it maybe in June when we're together.

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Operator [71]

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The next question comes from Michael Kodesch at Canaccord Genuity.

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Michael B. Kodesch, Canaccord Genuity Limited, Research Division - VP and REIT Analyst [72]

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Just a quick one. I'm kind of looking at guidance differently, Paul. You kind of -- you reiterated guidance. Your bottom line's kind of the same. Your fundamentals, you're expecting to get back to the midpoint. You mentioned G&A and interest expense were favorable to expectations in the quarter. I mean, do you see that playing out for the rest of the year? Is there anything driving that? Or is there anything else in kind of driving guidance to be the same there?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [73]

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Yes, Michael, thanks for asking about interest expense in particular. We were slightly ahead of our expectations for the first quarter for interest expense, and we actually think that's going to carry forward as we progress throughout the remainder of the year. A part of that is that the -- as we set our expectations for interest rates on our 10-year financing that we're going to do, the 10-year treasury has dropped a little bit since that time. Who knows where it's going to go in the future, so there's some risk to that. But -- and looking at it today, we see opportunity. And then another factor impacting interest rates is a decision that we have a couple of maturities that are upcoming in the second and third quarter, where we're just going to take advantages of the arbitrage between the floating and fixed rates and carry some of those maturities on our line balance for a period of 3 to 6 months and get a little bit of a pickup out of that. G&A costs, we were a little bit lower than expected in the first quarter. But as we look at the full year, the range of G&A cost that we provided in connection with our guidance in January still looks to be on track.

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Michael B. Kodesch, Canaccord Genuity Limited, Research Division - VP and REIT Analyst [74]

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Great. That's really helpful. And then just I guess a little bit more generally. We talked a lot about L.A. So I'll pass on that one. But any supply in other markets that's either coming in more favorable or less favorable to where you thought? Is there anything -- are you guys see it bleed out to later in the year? Any delivery delays there, or anything like that?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [75]

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I'll talk about the deliveries that we have seen versus what third parties were forecasting for our markets, and then maybe Keith can add some extra color. What we had expected, as we've spoken in January, was there to be about 7,000 deliveries in our high-impact submarkets during the first quarter. We actually only received a little over 4,300 of those. And so there has been some delay. But the areas where the units were delivered were in some of the more impacted markets. We've talked about Denver. But another market that's impacted is Center City, Philadelphia, and we did see a fair number of deliveries there. And so as we look forward on a 12-month basis, our supply outlook has improved slightly in Philadelphia, it's improved slightly in San Mateo, which comes as our Indigo property, it's improved in Atlanta, Buckhead and Midtown, and also improved slightly in Downtown Denver, although we expect Downtown Denver to continue to be a challenge. Keith, do you have any other color?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [76]

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And Michael, I just -- what I'd add to it is just -- and maybe to just think back to some of the conversations we had about Washington, D.C. a couple of years back. When we look at this quarter, we're almost a full percentage point more occupied in the first quarter of '17 compared to '16 in Washington, D.C. And so very much likely to see cyclical process of different markets doing different things. We're starting to see some more acceleration in Washington, D.C. as we compare it to over year-over-year.

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Operator [77]

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The next question is from Drew Babin at Robert W. Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [78]

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Following on the last question about debt maturities, you mentioned second quarter and third quarter debt maturities being able to hold out on the line for a while. There's a bigger slug coming in 4Q. Is there any ability to prepay that, that you're looking at, with that carrying a rate above 6? I would think that, that's something you're looking at pretty hard.

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [79]

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Yes. We not only evaluate the ability to prepay any debt positions that are upcoming during '17, but we're also looking very hard at our opportunities in '18, '19 and '20. So we're having conversations with folks. We're seeing

(technical difficulty)

for any potential modifications. And as we have real news to report, we'll share it with you.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [80]

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Okay. Is any of that assumed in guidance as it currently stands?

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Paul L. Beldin, Apartment Investment and Management Company - CFO and EVP [81]

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No, it's not.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [82]

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Okay. One question just on the markets where you are facing new supplies of L.A., Denver, Philadelphia. Has anything surprised you on the demand front that's compounded that issue? Or is there anything about the nature of the supply that there's been a surprise in terms of timing?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [83]

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Drew, this is Keith. I'll jump in. I would say that as far as the demand is concerned, we see sufficient demand to meet our needs. It's just there's definitely been some more pressure as far as how it's being absorbed, and that's pretty atypical when you think about new inventory being -- coming into a marketplace.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [84]

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So as you head into the spring and summer, is there -- are you planning on holding pricing? Or is there kind of a decisive move being made to manage your occupancy as long as new lease spreads are negative?

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Keith M. Kimmel, Apartment Investment and Management Company - EVP of Property Operations [85]

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Drew, we make that decision truly building by building. And so some buildings, we'll be more defensive in really making sure we're retaining our residents, if we're seeing more front-door pressure. And others, we start seeing some acceleration in easing and we get more aggressive. So those decisions are made literally building by building.

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Operator [86]

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The next question is from Buck Horne at Raymond James Financial.

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Buck Horne, Raymond James & Associates, Inc., Research Division - SVP, Equity Research [87]

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Just a quick one for me. Just with Sears trading at a pretty wide discount to your internal view of NAV, just wondering if you have any updated thoughts on potential stock repurchases at these levels? Or would you potentially think of accelerating asset dispositions or any other activities?

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [88]

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Buck, it's Terry. And as you know, we regard it as a tool in our toolkit, and we look at it and we evaluate it compared to other options. We think we still have better returns in Patti's business in redevelopment. But you're right, it's very price-sensitive, and we'll keep a look at it.

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Operator [89]

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

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Terry Considine, Apartment Investment and Management Company - Chairman of the Board and CEO [90]

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Well, thank you all for your interest in Aimco. We appreciate your following. If you have any questions, please call Paul Beldin, our Chief Financial Officer, or Lynn Stanfield, our Senior Vice President in charge of Investor Relations or me, and we'll try and give you a straight answer. And we wish you all the best, and look forward to seeing many of you in June. Thank you.

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Operator [91]

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