Apartment Investment and Management Co (NYSE:AIV) Q1 2020 Earnings Conference Call May 8, 2020 1:00 PM ET

Company Participants

Lisa Cohn - EVP, General Counsel & Secretary
Terry Considine - Chairman & CEO
Keith Kimmel - EVP, Property Operations
Wesley Powell - EVP, Redevelopment
Paul Beldin - EVP & CFO
John Bezzant - EVP & CIO

Conference Call Participants

Piljung Kim - BMO Capital Markets
Austin Wurschmidt - KeyBanc Capital Markets
Michael Bilerman - Citigroup
Robert Stevenson - Janney Montgomery Scott
Hardik Goel - Zelman & Associates
Richard Anderson - SMBC
Alua Askarbek - Bank of America Merrill Lynch
Sumit Sharma - Scotiabank
John Pawlowski - Green Street Advisors

Operator

Good day, and welcome to the Aimco First Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Lisa Cohn. Please go ahead, ma'am.

Lisa Cohn

Thank you, and good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2020 expectations. 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, our Executive Vice President in-charge of Property Operations; Wes Powell, our Executive Vice President, in-charge of Redevelopment; and Paul Beldin, our Chief Financial Officer. Other members of management are present and will be available during our question-and-answer session, which will follow our prepared remarks.

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

Terry Considine

Thank you, Lisa, and thanks to all of you on this call for your interest in Aimco. The Aimco business began the year with record effectiveness and record profitability. And then as you all know, the world changed. Famous observation goes there are decades when nothing happen and there are weeks when decades happen. In the last few weeks of March where time went, it seems that decades were happening. My colleagues will report on the first quarter and the month of April. I will use my time to tell you how Aimco thought about the rapid changes and responded.

While there are plenty of reasons for concern, it helped that we designed Aimco with hard times in mind. That's why we give such importance to customer selection and customer satisfaction and work so hard to control property expenses. That's why we prefer short-cycle redevelopment to less flexible ground-up development. That's why our portfolio is so diversified by market and price point. That's why our leverage is primarily long-dated and nonrecourse. And that's why our intentional culture emphasizes flexibility and initiative, collaboration and personal responsibility.

As the crisis approached, we made the health and safety of our teammates our priority. We formed a cross-functional committee of a dozen or so from across all of Aimco that met daily to redesign how we work on-site to keep our teams safe, while continuing to lease apartments and fulfill service requests. We made it clear, consistent with our usual policies regarding flexibility, that any team -- any teammate who felt unsafe at work because of the virus was free to stay home with pay, without penalty and dozens did. We undertook to pay all costs related to COVID-19 testing and treatment. Importantly, we committed to keep our team intact without layoffs or pay cuts. We continued and even increased regular communications and transparency with a steady flow of written, oral and video reports to the entire team.

Customer focus led us to make our properties safer by increasing cleaning and reducing opportunities for infection and limiting in-person interactions with neighbors and site teams. We searched out ways to support those sheltering at home, for example, with enhanced Wi-Fi, and we worked to meet the special needs of the relative few who reported positive for infection by the coronavirus. We redeployed construction supervisors whose work have been paused to support property service teams. Dozens of office workers joined our shared service center team to hold thousands of structured conversations with residents to help each of these residents plan his or her personal adjustment to the crisis, offering financial advice, tips on job searches, help with errands, ideas about how to find a roommate and established payment plans where appropriate, and even in a few hard cases provided money for groceries.

We utilized our previous investment in technology and artificial intelligence to adapt to the new conditions of social distancing and sheltering at home. We knew the importance of liquidity and building on $650 million of cash and credit at the start of the year drew down $300 million on our line of credit to increase cash on hand, reduced capital spending by $150 million or almost 1/2, placed a $350 million term loan and added $370 million in net proceeds from closed or pending property loans, so that today we have or soon will about $1.2 billion of cash and credit with reduced capital spending and limited loan maturities over the next 5 years.

We kept our Board of Directors fully informed and fully engaged, including 2 candidates for the Board who are busy from March on, but not actually elected until the end of April, 8 weeks later. In those same 8 weeks, we delivered 5 management reports, made numerous calls as individual directors for specific assistance and held 4 virtual board meetings. So while the challenges continue, I'm grateful for our success to date. The books are not fully closed, but it seems clear that April was another good month in same-store as measured by customer satisfaction, rents, rental rate growth, property expense control, somewhat offset by some easing in average daily occupancy.

So what do we see now when we look forward? We see plenty of challenges. Millions are newly unemployed. More than 1/4 of the economy shut down. These are astonishing numbers. The damage to the economy rivals and in some respects exceeds the Great Depression. Even the usually stable eds and meds, universities and hospitals, are unsettled with students at home and hospitals busy treating COVID-19 are financially stressed for having shut down much of the rest of their services. So new customers will be cautious and new leasing will be very competitive, especially in our lease-ups. A wildcard that worries me is the increasing disregard for the rule of law, sanctity of contracts and the importance of personal responsibility. It will matter a lot to the apartment business if rents cannot be set in the market and collected in the ordinary course.

For income, we'll continue to work to satisfy customers to treat each individually to earn what we are owed. We do expect some easing in occupancy, but will not lower our standards for customer selection. We'll complete our 5 long cycle projects. Their lease-ups will be more arduous and initial rents perhaps lower. But in the end, we'll increase annual net operating income by plus or minus $30 million or $0.18 a share. We'll continue to reallocate capital to states with respect for property rights to markets with economic dynamism and to properties where we can benefit from our comparative advantage in property operations. We'll garner abundant liquidity and, over time adjust our leverage with income from lease-ups and proceeds from the sale of properties, both outright sales and joint ventures. We expect property pricing will be about what it was 6 months ago plus or minus, say, 5%. We'll continue to invest in our team, respecting them as motivated professionals with a sense of mission to provide housing for others.

And on that note, I'd like to take a moment to thank again the entire Aimco team for your sense of personal responsibility and team collaboration, your sense of mission to provide homes for our customers, your culture of caring, courage and commitment. One final thought. The present can be discouraging and the future is always murky, but the effectiveness of Aimco operations demonstrated once again in the excellent April results makes me optimistic.

With that, I'll turn the call to Keith Kimmel, Head of Property Operations. Keith?

Keith Kimmel

Thanks, Terry. First, I'd like to thank our entire team for your commitment to serving our residents during challenging times. Due to your efforts, we had a solid first quarter and an equally solid April. We continue to execute the same operating playbook. We focus on customer selection and exceptional customer satisfaction, that serves us well during good times and is even more critical during challenging ones. Based on 13,000 surveys in the first quarter, customer satisfaction was again 4.3 out of 5 stars. Satisfied customers live with us longer, leading to our lowest turnover ever, 42%, 160 basis point improvement year-over-year. This approach translated to solid top line growth.

Average daily occupancy was another Aimco record at 97.6%, 60 basis points better than 2019. Rates were strong with new lease rates up 1.7%, renewal rates up 5.8%, and blended lease rates up 3.6%, 50 basis points better than 2019. Bad debt expense was 32 basis points for the quarter. All of this resulted in revenues up 3.5% over last year. Controllable operating expenses were down 3.5% with improved effectiveness and efficiencies leading to lower marketing spend, reduced turn expense and fewer personnel costs. Total expenses were down 40 basis points as the decreases in controllable operating expenses were somewhat offset by increased taxes and insurance. As a result, same-store first quarter net operating income grew 5% and margins were 74%, a 100 basis point improvement over the first quarter of last year.

Now turning to April. Our frontline service teams have gone above and beyond to take care of our residents while they sheltered in place. For example, they've delivered packages, cleaned homes and even bought groceries for those that are first responders, elderly or disabled. Thanks to those efforts, April turnover reached a new low at 41.1%. We saw our leasing pace initially drop mid-March due to COVID. Today, leasing is recovering as our customers become more comfortable with the new norm and as we enter peak leasing season. The on-site teams responded with flexibility and innovation. This month, our leasing teams provided more than 3,300 live virtual tours to prospects. These efforts translated into a solid April. Average daily occupancy was 96.6%, 40 basis points lower than last year, yet higher than April of 2018 by 20 basis points. And pricing remained solid, with new lease rates up 90 basis points, renewals up 6% and blended lease rates up 4.2%, a 50 basis point improvement over last year.

Bad debt rose in April to approximately 100 basis points as we collected 96% of our residential billings for the month. An additional 3% was accrued based on security deposits available for offset and the FICO scores of the residents or his guarantor. At our lease-up communities, we have 90 units available delivered -- already delivered and not yet leased and another 360 available homes to be completed in 2020. In Boulder, Colorado, Parc Mosaic is now more than 60% occupied and rents above underwriting, leaving fewer than 90 units to lease. At the Fremont on our -- on the Anschutz Medical Campus, we have 230 units remaining to lease, with the first deliveries this summer. We remain optimistic about the location, and expect leasing to accelerate once the current COVID disruptions and hospital furloughs fade.

In Redwood City, 707 Leahy's first building has 9 of 12 units occupied. This leaves us 90 apartment homes to lease over the summer, with the next deliveries planned for June. And in Elmhurst, Illinois, Eldridge Townhomes is over 30% leased with rents in excess of underwriting. We've seen strong velocity in April for this attractive townhome product, and that gives us confidence for the remaining 40 units. In short, we feel good about April. While we anticipate there will be more challenges and choppy water ahead, our operations have been built for times like this in mind, and I'm confident in our team's ability to deliver outstanding results.

And with that, I'll turn the call over to Wes Powell, our Executive Vice President of Redevelopment. Wes?

Wesley Powell

Thanks, Keith. As Terry mentioned, the Aimco business plan has long considered that times can and often do become difficult. One example is the Aimco preference for redevelopment over development, especially short-cycle redevelopments where common area and amenity upgrades are phased and apartment homes are renovated in small batches. This approach proves highly profitable in normal times and also allows us to react quickly when times are uncertain and liquidity is valued, as has been the case over the past 60 days. When the current crisis became apparent, Aimco was able to pause all of its short-cycle redevelopment and property upgrade activities.

Together with other projects that had been slated to start later this year, we reduced expected 2020 capital spending by 45% or $150 million. We are continuing the 5 long cycle redevelopment and development projects currently underway. Their cost to complete total $210 million, an amount equal to just 1.5% of Aimco's most recently published GAV and readily funded from Aimco's abundant liquidity. 3 of our 5 long cycle projects, 707 Leahy in Redwood City, Eldridge Townhomes outside of Chicago, the Fremont located on the Anschutz Medical Campus, are expected to be completed later this year and together require just under $40 million of additional funding.

In addition, we have 2 other long cycle projects that are scheduled for completion in 2021. In Cambridge, the completion of a 136 unit property is expected early next year, assuming the current ban on construction is lifted by early summer. Our financial exposure to this project is capped with approximately $35 million remaining to be funded. In Miami Beach, the major renovation of Flamingo's North Tower is slated for delivery late next year. We project the cost to complete construction to be approximately $135 million, in line with previous estimates. So in summary, we plan to invest approximately $140 million through the remainder of this year and $70 million next year to complete all 5 long cycle projects.

When stabilized, these 5 communities are expected to contribute plus or minus $30 million of additional NOI. Given these uncertain times, the range of possible outcomes has undoubtedly widened. But we remain confident that customer demand for high-quality housing located in robust submarkets and managed by Keith's world-class team will remain strong over the long run. Finally, I would like to offer special thanks to my Aimco teammates for their dedication, quick action and positive results over these past few months.

I would now like to turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Paul Beldin

Thank you, Wes. In response to the pandemic and the economic downturn, Aimco acted decisively to increase liquidity, reduce capital spending and scrub its balance sheet, writing off assets for the downturn made future recovery uncertain. Today, I will cover these topics and our first quarter financial results, which included 5% same-store NOI growth, 10% FFO growth and 9% AFFO growth.

Starting with the balance sheet. Aimco's strong and safe balance sheet is designed for times like today. It is highly liquid, and its leverage is comprised primarily of long dated, well laddered, amortizing property debt that is nonrecourse to Aimco. Today, Aimco enjoys $1 billion of liquidity, summing cash on hand, availability under our revolving credit facility and excess proceeds on rate lock debt closing in the next few weeks. This liquidity will increase by an additional $200 million as in-process property loans close in the next 30 days.

The property debt borrowings address all 2020 maturities and $229 million of 2021 through 2024 maturities resulting in average annual maturities of $265 million for the next 4 years. In total, Aimco is placing $688 million of new property debt, generating incremental proceeds of $367 million. We've rate locked or closed approximately 50% of the new property loans. For the $326 million of loans rate locked or closed, the weighted average term is 8.3 years and a weighted average interest rate is 2.9%, lowering Aimco's overall borrowing costs by 5 basis points.

While Aimco's balance sheet provides flexibility and abundant liquidity, leverage, as measured by leverage to EBITDA, remains above targeted levels. We are comfortable with the safety of Aimco's balance sheet but expect to reduce leverage to targeted levels through the lease-up of the 5 properties under construction and property sales. Given Aimco's abundant liquidity, we have plenty of flexibility. We expect property sales to pick up as the transaction market reopens. Earlier this week, Aimco closed on the sale of an apartment community located in Annandale, Virginia, at a price of $58.9 million, equal to its gross asset value at the end of last year.

Next, as I mentioned previously, Aimco scrubbed its balance sheet, reviewing all significant assets for potential impairment, including its loan to the partnership owning Parkmerced. Starting with Parkmerced. During the first quarter, Aimco received $600,000 on its cash flow note, reflecting property operating results equal to 98% of our underwriting. The borrower has made all required loan payments, and we expect to collect all amounts due on our loan. If not, we are well secured by the remedies provided in our loan agreements. Aimco also reviewed the viability of its commercial tenants and the related accounting assets for straight-line rents and deferred broker commissions.

Based upon the twin economic impacts, COVID-19 and the recession at hand, Aimco wrote off $2.9 million of straight-line rent and $2.2 million of deferred broker commissions related to leases to commercial tenants with retail, fitness and restaurant uses. The amounts written off are associated with tenants paying about $560,000 of monthly rent. Going forward, revenue from these tenants will be accounted for on a cash basis. Aimco also revised, effective in the second quarter, its estimate of residential bad debt to consider creditworthy residents who choose to withhold rent payments. Aimco's new methodology estimates collectibility as month end based on our assessment of the creditworthiness of tenants and third-party guarantors based on their FICO scores. Previously, Aimco evaluated the collectibility of balances only after such balances were more than 30 days past due. Using the new methodology, April residential bad debt was $670,000 or approximately 1% of residential revenue, an increase of $270,000 from what would have been the result using the former methodology.

Now turning to first quarter financial results. AFFO of $0.60 per share was equal to the midpoint of the guidance provided at the beginning of the year and up 9% year-over-year. Better-than-expected same-store operating results, lower G&A expenses and the prepayment of a seller finance note combined to outperform our expectations by $0.03. This outperformance was offset by $400,000 of COVID-19-related costs and $5.1 million of charges related to the previously discussed straight-line rents and deferred broker commission adjustments.

FFO of $0.67 per share was $0.01 ahead of the midpoint of guidance and up 10% year-over-year. Lastly, the Aimco Board of Directors declared a quarterly cash dividend of $0.41 per share for the quarter ended March 31, 2020, up 5% over the regular quarterly dividends paid in 2019.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Today's first question comes from John Kim with BMO.

Piljung Kim

Terry, in your opening remarks, you mentioned an easing of occupancy going forward, if you still had very high retention rates in April. So can you maybe quantify or provide timing on when you think the occupancy will bottom?

Terry Considine

John, it's hard to know, because the future is hard to know. It's my -- I can just tell you, I started today with a meeting with 2 of key tenants discussing occupancy. And it's our sense that it should go up from here. That's our aspiration. But that gets worked out in a market where every property is competing with someone across the street or down the road. Sometimes they're offering very substantial free month -- free rent. And so the exact interplay, that will depend on the economy and the quality of our execution. We're not going to give guidance but I'm hopeful that this will prove to be the bottom, but I just don't know. Keith, you're running this. How would you add to that?

Keith Kimmel

Terry, I think you answered it well. John, I would just say, listen -- maybe one of the things that I would share as a point of encouragement that is maybe a forward-looking indicator is that March 15 is the date that we use as sort of the COVID start point. That was dictated by our Northern California property sheltering in place that -- from that point, for the next couple of weeks, as we work to the end of March, is when we saw our leasing pace falling off to about 50% and just kind of fell its way down. But starting in the first week of April, over the last 5 straight weeks, what we have seen is week over week over week increasing leasing activity, traffic. And this past week, we surpassed where we were on March 15. So while we're not at our peak levels, what I'd say is it feels as if we may have hit the bottom as far as demand. And of course, there's some existing facts around where occupancies are down and having to rebuild it back up. But as I look forward, I can see things that are starting to reemerge.

Terry Considine

Excellent point. Does that work, John?

Piljung Kim

Yes. I agree with that. So are you still committed to selling $900 million to $1 billion, which is part of your prior guidance or that has been withdrawn?

Terry Considine

No. Let's go back and look at that number. First of all, the $950 million, which is certainly in our plan, assumed the level of capital spending, which is now reduced. And because when you sell properties, you sell EBITDA, there's sort of a circular effect. So $150 million of savings brings it down to something under $800 million. I would say, let's just say, $750 million for a number. Secondly, that if you just look at what Lisa did this week, we reduced debt by almost 10%. If you think of the contribution that's going to come in from lease-ups, you're adding EBITDA there. So we're going to work our way through that comfortably. We don't feel a great sense of urgency. We think that we've got plenty of liquidity. We're at a low LTV. There's nothing at -- I think we're at 32% LTV, and our target is 30%. And so that difference doesn't merit distressed sales. And so I think that we'll see as the transaction market opens up, what is the rate at which we have opportunities to sell at what we think are fair values and that we'll make steady progress over the course of the year, but whether -- where we exactly are at year-end, I don't yet know.

Operator

And our next question today comes from Austin Wurschmidt with KeyBanc.

Austin Wurschmidt

So I wanted to touch on Parkmerced. And first off, today, I know you guys have continued to provide additional detail on that transaction, so thank you for that. But my sense is there still isn't a clear understanding of some elements of the transaction. So it would be helpful if you could tell us, one -- or clarify, what is contractual in terms of payment by the borrower? And then second, curious what you've assumed in terms of cash collection for interest income in 2020, and do you make an adjustment between the GAAP and cash in your AFFO adjustment or prior AFFO guidance?

Terry Considine

So Austin, on accounting, I'll leave that to Paul. But let me just take a second on the economics. We bought a position that has very attractive opportunity. The biggest thing to keep in mind is that this is an opportunity to participate in the largest development -- residential development in the history of San Francisco. And we have a long window to see it accomplished. The current position is one that provides an attractive rate of return. The timing of the cash receipts depend on the success of the borrower in operating the rent control portfolio. They're very confident, experienced people. They'll do fine. Differences are accrued because there is, I think, $300 million of equity subordinated to us, which over some period of time will either be liquefied or monetized by the borrower and paid to us or if there were to be a default that we would inherit that equity.

So the economics and our confidence in that payment is quite high. The details of how they operate their business are really their business, not ours. Today, we're a creditor. We perfectly understand that there are some circumstances where we like become the owner, but that's not our intent and that's not our expectation. Our expectation is that we'll be paid ratably over the -- or will be paid over the next 5 years and that any unpaid but accrued balance after 5 years will be paid in cash. And we'll look back at it and say, well, that was a pretty good deal because we'll then have an option to own 30% of the business going forward for a nominal price. Paul, what would you add on the accounting?

Paul Beldin

Terry, I think you covered it not only from a transaction perspective, but also the accounting rationale as well is because under the terms of the note, it's paid in cash out of available cash flow. And so anything amount that's accrued for the contractual provisions of the loan is accrued and evaluated for collectibility, just like all of our assets are. And as you can see, based upon our actions in the first quarter, where we wrote off over $5 million of deferred costs, we're very proactive in making sure that we don't recognize any assets on our balance sheet that we don't expect will be fully and ultimately collected.

Austin Wurschmidt

So the contractual amount is variable dependent upon the level of cash flow and collectibility, I guess, of the interest income. But then the clarification on -- do you make an adjustment to AFFO for the difference between that GAAP amount and then what you're collecting in cash?

Terry Considine

We do not. We treat AFFO, not as a liquidity metric, but as a profitability metric. And so there are lots of exceptions, as you'll see in other businesses, too, whether it's interest accrued on a construction loan or AR that's accrued and paid in subsequent months. So we look at AFFO as a liquidity metric. I mean, as a profitability metric. And so in our sources of uses of cash, yes, absolutely, we would correct for that. But in our profitability, we think that we are earning 10% on that note each year and that the timing of its payment is predictable.

Austin Wurschmidt

That's helpful. And it is helpful to get the kind of the cash number for any adjustments that can be made. Next question maybe for Keith. I was wondering if you could provide some renewal...

Terry Considine

Austin, let me go back on -- just to correct -- add one other thing. When we underwrote it, this is exactly what we expected. They're executing their business plan at 98% of our underwriting. Now you might say, well, that means they're 2% off. But let me just assure you that 98% of our underwriting will get us to the right answer. We knew from the start that this was what would be likely to happen. We knew from the start there was a possibility that it would somehow implode along the way, but we're -- we see that almost as -- that, that would be something we anticipated that would be consistent with collecting our interest. What's happening out at Parkmerced is on track and is going to be just fine. I'm sorry to interrupt your question to Keith. What was it?

Austin Wurschmidt

No. So I was just following up on some of the ops information and trying to kind of get a sense what renewal lease rate were for, I guess, renewals signed of late that may be for May, June and July? And then any new lease rate detail that you've got for May would also be appreciated.

Keith Kimmel

Thanks, Austin. So if you go to our April renewals at 6%, what we see going forward for May and June is somewhere going to be in the 4s, maybe low 5s. And so we're already out with those. We're seeing good acceptance of those, but there's still a lot of work in front of us. So before -- I wouldn't want to get ahead of ourselves, but that's what we're at and that's sort of our expectation. As you look at rates that happened in April, the 90 basis points of new lease rates, those that actually -- those -- about 50% of them actually transacted as pre-leases prior to getting into April. Those that actually transacted in the month of April were flat. So between those two new leases in April, about 4% or about 5% and renewals in the 4s.

Austin Wurschmidt

And then anything for May for any type of leases that you've signed at this point?

Keith Kimmel

Listen, we continue to see some pressure on rate, but it's a little early. And so we're -- as I was sharing with John, we're just starting to see the reemergence of front door leasing pace. And so I wouldn't want to get ahead of ourselves, but there are certainly things we're working through there.

Operator

Our next question comes from Nicholas Joseph with Citi.

Michael Bilerman

It's Michael Bilerman here with Nick. So I just want to come back on the Parkmerced. So how much cash interest income did you earn? So 10% yielding note on $275 million, so $27.5 million of interest, which would be $6.875 million that you should have received. So did you receive that full amount as cash interest in the quarter or not?

Paul Beldin

Michael, this is Paul. Thank you for your question. As we disclosed in our release, we collected $600,000 of cash rent and that's based upon the operations of the property, which were largely in line with our underwriting.

Michael Bilerman

$600 million. That was from -- the loan should have paid you almost $7 million of interest income.

Paul Beldin

I take exception to that because the loan should pay us based upon available cash. And so the loan paid us exactly what should have been paid based upon the cash flows being generated. The stated interest rate would have accrued $6.8 million, which it did.

Michael Bilerman

Right. So you just -- you carried it on to your loan balance. I don't know if that's profitability. You just -- if the debtor eventually defaults, you just have a larger equity balance outstanding.

Terry Considine

It all depends on collectability. It all depends on collectibility and understanding what happens if the loan matures and the -- or any point along the line if the borrower were to default. So you're exactly right about that. There's $300 million of equity junior to us that would be available for converting to liquidity and applying to the accrued interest.

Michael Bilerman

I guess if you step back from it, how does going into -- and I recognize none of us knew what was going to happen, but we were pretty late in an economic cycle. You made a generally pick interest rated loan, high peak pricing, peak leverage to deleverage in the future, which now is less certain. This is a massive development, which you just said that you've preferred redevelopment versus large scale development. So how does all that tie from a strategy perspective and comfort going forward?

Terry Considine

I think it's a terrific opportunity to invest across a diversified portfolio in assets that have a more significant upside than is the average in apartments. If you look at -- if you were to buy an apartment today, Michael, in any of our markets or would have last November, the NOI cap rate would have been -- would have had a 3 handle probably, and the growth rate might have been two, and you'd be signing up for an unlevered IRR of 6%, okay? So that's one where you might have said, "Okay, that's fine, you're on track." We said -- we think there's an opportunity that if you believe in the future of San Francisco, that you're going to have this window on this extraordinary opportunity, and we're going to get paid 10% with a high level of confidence as the property -- the rent control portfolio improves and as the assets and development assets are monetized. And I think that's what's going to happen. I think that's a good trade.

Michael Bilerman

Terry, you mentioned rural law at the beginning. Does that mean you may look to resume your political career if it goes down that road?

Terry Considine

No. I think the voters have spoken and in any event Mrs. Considine has. And -- but I do think that it's something to -- that if you want to know what concerns partners said, could be very choppy, but the outcome is fairly clear to me. If you want something that does concern me, it's legislation that says that we're going to set the price of rents and we're not going to enforce their collection. And I think that's a much more important issue.

Operator

And our next question today comes from Rob Stevenson with Janney.

Robert Stevenson

Keith, you've given the April occupancy and rent numbers, but how should we be thinking about operating expenses? You're saving turnover costs and probably some other expense lines, but higher insurance, maybe utility, with everyone staying at home and extra COVID expenses. How does all that offset and are operating expenses going to be higher or lower today than what they were?

Keith Kimmel

Rob, listen, there's a lot of pluses and minuses that are in there. So listen, on the more expenses side, we're spending more money on cleaning supplies and cleaning activities and things like that you might imagine. We're certainly saving some on the turnover. And that is, is that lower turnover and people staying there. So when we look at how our performance came through, particularly through April, pretty much where we were hoping it would and planned on it. Paul, what would you add on the taxes, insurance and other pieces?

Paul Beldin

Yes. And on those pieces, but also in the big picture, Rob, what I'd point you to is Aimco's long track record of being very disciplined with our operating expenses. And over the past 12 years, our controllable operating expenses have compounded at a negative rate. And so that discipline is not going to disappear because of COVID. As Keith mentioned, we might have some increases in certain costs. We'll have decreases in others. But you can rest assure that we're going to work as hard as we can to keep operating expenses in check.

Robert Stevenson

Okay. Second question on delinquencies. When you look back at the global financial crisis, what was the final collectibility rate on delinquencies and where did bad debt peak out? And then also, how big of a problem is it that you talked about in terms of people not paying the rent that could? Presumably, you're talking California, New York and Seattle, where there's extended eviction rules. But any other place that you're seeing this in size?

Keith Kimmel

Rob, I'll address those. And if I happen to miss anything, please interject and correct me. So what I would tell you on our collection percentages and delinquencies, you bring up a very good point because although we collected 96% of our rents in April, we only recognize bad debt expense of 1%. Now what that means is that 3% we expect to collect. And what will likely happen is a decent percentage of that is going to be paid by our residents just in periods after April. And so looking back on March, we had about 30% of our March unpaid AR was paid during the month of April, which was probably about as of a challenging time as any time in recent history. And so of the 3% that's accrued, we'll collect some in cash directly from the renter. We'll collect some that's secured by security deposits. And ultimately, we'll have some amounts that are unpaid and recognized as bad debt. We expect that to be 1%.

Looking forward and trying to use the great financial crisis to correlate, the situations are not identical. We do have challenges of dealing with some individuals who, because of the local rules and regulations that have been put in place, are not being compelled to pay rent, and Aimco cannot force them to pay either through collection process or eviction. And so we're going to probably carry a little bit higher balance of AR. But I think what we'll see is that the benefit of our resident base that has high average incomes that have averaged over $170,000 for the past four quarters, median incomes that have averaged around $120,000 for the past four quarters and very high credit scores, they're going to be good credits. So we'll see if the 1% bad debt rate sticks or if that increases. We'll have to wait and see. But as a frame of reference to the great financial crisis, we peaked at just over 100 basis points at that time.

Robert Stevenson

Okay. And your delinquencies in California and maybe New York and Seattle, are they substantially higher than the portfolio as a whole today? And how big of a problem is that people not paying the rent they could?

Keith Kimmel

This is Keith. I'll take -- the L.A. piece is running about 10%. So when you think about the 96% collectivity, L.A. is running about 10% and, of course, you have a combination of government meddling as well as some challenges that you have more entertainment and different types of industries that are there. So at the end of the day, it's in the range of the type of collections that we've seen. But those customers are good credits, people that we believe have the means to do it or -- and if they're having challenges now, we'll be able to recover at some point.

Terry Considine

Yes. Rob, I would just add. I know and have talked to Wall Street investment people whom you know, who think it's wise to borrow on the REIT balance sheet because it's an interest-free loan liquidity to them. That's a bad behavior. And we don't have much exposure to Seattle or New York. Both of those are kind of inconsequential. We have a big exposure to California. And particularly in Southern California, that's an issue. And that's where -- that 1% across the portfolio is really going to be a bigger percent allocated to California and to Southern California.

Operator

And our next question today comes from Hardik Goel with Zelman & Associates.

Hardik Goel

I don't want to beat a dead horse because a couple of other analysts already talked about Parkmerced. But I guess my question is a little broader. It's about capital allocation and how investment decisions are made. So right now, we have you guys earning less than 1% cash yield on a preferred, whereas your peers are getting 11% cash day 1, and they invested -- I mean assets invested in 2 deals during this environment. Just wondering how is the investment decision made on these things? Is it 1 person saying, I like the deal and nobody is allowed to disagree with that person? Is it an investment committee? What's the process like? Because I mean, there's other ways to invest in the future of San Francisco. And it's kind of -- I mean, we heard from MAB lender. I don't know how much this is true or not, but they were pretty confident that the deal was being marketed at a 20% yield, which implies that you guys internally think that it has a 50% write-down to it. And that's not been reflected anywhere. And the entire cash flow is being -- that flows straight into AFFO. So just your comments on that.

Terry Considine

The first comment is that when any lender, whether it's a REIT or not, is funding a position and taking cash interest back, they're probably prefunding their own return, money being fungible. So it's easy to advance cash and have it paid back to cash. So I don't put a lot of weight on that. The process inside is that opportunities are brought to us, and we look at them and we look at them as a team. We have an internal investment committee process, which is rigorous. And we have an external board investment committee process. So we have lots of people who have hands on it, lots of inputs. And in the case of 20% versus 10%, there's a great risk of comparing apples to bananas because it really depends on what was going to be provided at 20% versus what was gained in our position at 10%. We certainly did see the offer at 20%, but what we're interested in is the optionality of owning 30% of the business going forward for essentially free.

Hardik Goel

That's really helpful. And can you give me some additional color on -- I guess, I could move this up. Who is the Chair of the Internal Investment Committee and also the Board Investment Committee?

Terry Considine

John Bezzant and Mike Stein.

Operator

And our next question today comes Rich Anderson of SMBC.

Richard Anderson

First question is, Terry or Keith, correct me if I'm wrong, but I don't think you guys had made as big a push into self-guided and virtual tour technologies in the past. I know you said you've been having some success with some like sort of face-timing type of stuff. But first of all, am I right about that? And second of all, have you been finding the success by sort of scrapping together some existing technologies to make the leasing process work? I'd like to just get an idea of how that has all evolved.

Keith Kimmel

Rich, thanks for the question. I actually -- we started self-guided tours 8 years ago and which we did them actually audibly through iPhones. And so we actually have been doing those for the past 8 years. And what we've done is we found that there was different ways to be more effective through it. And so at the end of the day, what I'd have you focus on is, is that for the past couple of years, where we put our energy was around pre-leasing activities. And that was training our team how to be able to sell something they couldn't see. And that is that people would rent apartments, and our team members had to be better at finding a way for them to commit to a unit that someone was living in.

So today, what we did is we took existing technologies that we had in place. Think of things like SmartRent in which we have locks and keys in which people don't have to or move-ins now that can occur that are happening without having to have human interaction. And then what we did was, as we went and said to our team members, how is it that, that we can take the existing technology and improve upon it. And so when we sheltered in place, our team members basically said, here's what we're going to go do. We're going to take existing technology. We've done pre-leasing. We've done self-guided towards before, and we're going to actually go help residents in the comfort of their existing home, be able to view and tour apartments while we went and did FaceTime tours and things like that. So we were already doing some of this before. We just -- the current situation just made it so that we've made it the priority of how every one of our tours were done today.

Richard Anderson

Okay. Okay. Fair enough. And then the comment was made about future renewal activity and where rents might fall and all that. I'm wondering, in the interest of customer satisfaction, which is something you guys talk about a lot, how raising rents or offering increased rents in this environment is being received by your tenancy. And given some light to the fact that some of your peers have gone to a zero rent increase policy and so on depending on the circumstances of the residents. Just wanted to sort of get your view on that as well.

Keith Kimmel

Rich, it's Keith again. Thanks for the question. Well, I can't speak about how others approach these things. But what I'll just walk you through how we think about it. First, we don't ever approach our pricing in a blanket way. So while there could be easily a way to be -- we're just going to go zero out and be simple, we believe that being very particular is important. And let me give you a couple -- let me give you an example. So if we're in Nashville, Tennessee and we have a property that is close to the travel industry, hospitality and things like that and that property has residents that are more impacted by an industry that is feeling the stresses of COVID, we would price that property in a different way.

Maybe we would even be flat at a property like that on renewals. But now let's shift to a property that's in Northern California, this near Facebook, who -- their job is unaffected by this. Their incomes are climbing. They're hiring folks. And we make different choices about how we raise those rents and those residents are quite comfortable and not put off by the fact that we are actually increasing rents because there's a demand in a marketplace in which people want those units. So the way that we approach it is not to throw a blanket over everything, and we have the team and the operations and data analytics to make individual one by one decisions, property by property, unit by unit, geography by geography, and that's how we approach it, and that's how we will going forward.

Richard Anderson

That's very helpful. And if I can sneak a role, yes or no question in. Terry, you used the term that was familiar to me or the phrase using a REIT's balance sheet over 1 zone. I'm curious if any of those people that you feel are doing it that way have any chance at all to be an Aimco resident long term?

Terry Considine

No. Although, Rich, actually in states where they begin to have prescribed legislative standards for nonrenewal, our hands may be tied.

Richard Anderson

I'm talking about individuals decision to do that.

Terry Considine

But as far as Aimco is concerned, no, that's a bad behavior. And it's something that if it becomes more common, you'll see things like bad boy behaviors emerged after the S&L crisis. It's morally wrong. And we won't allow it or tolerate it long term.

Operator

And our next question comes from Jeff Spector with Bank of America.

Alua Askarbek

This is actually Alua Askarbek for Jeff today. Just wondering going back to collection. So you guys can talk about the different asset classes. And has there been a difference in collections that mostly A is collecting? Or any color on that would be great.

Keith Kimmel

This is Keith. I'll walk you through it. When we look at it, we think that what we've seen is as jobs have been mostly impactful that we really see. So when we look at places where we have medical professions, technology professional, so engineers, accountants, things like that, been very little impact. Those that have really felt the pressure is those are self-employed, maybe the entertainment industry, hospitality, those are the ones that have had the most stresses. That cohort only represents 10% of our resident population, and that's reflective in the 96% of collections that you see.

Alua Askarbek

And then also just...

Keith Kimmel

You had a question on As versus Bs. And what I would just say is that it really just comes down to jobs. So at the end of the day, you can have A price points more influenced by a particular job cohort than those that are in B. So As and Bs aren't necessarily the driving force through the job cohorts that we've seen that have been more impactful.

Alua Askarbek

Got it. And then just one quick question on -- okay. That's it for me.

Operator

And our next question comes from Nick Yulico with Scotiabank.

Sumit Sharma

This is Sumit Sharma in for Nick. So a couple of questions. One, did I hear correctly that you took an impairment on the Parkmerced loan in your prepared remarks? And just trying to understand what happened from a cash flow perspective. Terry, I understand your point about funding your own return. It makes sense. So could you give us some insight into whether there was -- you mentioned it's operating at 98% of underwriting assumptions. So that's fine. Was there some delay or some larger than anticipated CapEx spend that could have actually taken the loan -- the cash flow much lower than what a normalized rate should be that, I guess, a few questions ago was being asked off?

Terry Considine

I think the big picture way to think about it is that if we had a zero loan and that accrued over 5 years and was secured by good collateral, the right accounting for that is to recognize it ratably over time. And I'll give you an example where we do that inside Aimco today. We own a B piece on debt that we owe to ourselves. And so we accrue that income, which would be payable at the maturity of the loan, and that's part of our normal -- that's the correct accounting for collectible interest. So when the question comes up over, what is the right way to accrue it or to recognize income is it all turns on collectibility. And that's a very fair question. In this particular case, there's $300 million of equity that will be lost if we're not paid currently -- not paid at maturity. And so that's a number that could change. That's a number that has elements of subjectivity to it. But it's our business. We feel quite comfortable with it.

Sumit Sharma

No. I understand the point about the zero coupon bond and complete -- I mean, mortgage REITs do this kind of C&D development all the -- loan funding all the time. I'm just trying to get a little more sense on the property performance in Q1. Maybe you can shed some light on that in terms of whether there was an unanticipated CapEx spend or something related to NOI growth? Or maybe it's too early to ask? And the second thing around the same...

Terry Considine

It's really too early to ask. They don't -- there are constraints on their ability to spend NOI on purposes. John has a right of review and approval of some parts of the decisions. But broadly, it's just too early. We closed it 90 days ago, 120 days ago.

Sumit Sharma

Actually, yes. Actually, that lines up to -- really well to the follow-up, which is, are there any milestones or limitations that you have in terms of construction and leasing growth that help you as the creditor control the disbursement of funds through the five years?

Terry Considine

I'd just be happy to have John speak to that. He's right here virtually.

John Bezzant

Yes. Sumit, thank you for the questions. I think one thing to keep in mind, and Terry said it earlier, we are a lender here. We are not the operator. That's first and foremost. As we look at the operations and kind of what we underwrote, that 98% of what we underwrote for the first quarter is how they have performed. There's been no large CapEx, no other spend that has been out of the ordinary or out of line with what we underwrote. As we look at the future, right, and we look at the cash flow controls that we have in there, the deal basically provides that all excess cash flow from the property flows to Aimco to service our debt. Is that responsive to your question?

Sumit Sharma

Yes. Yes. I guess I understand the broader point about there's only so much you can tell us in terms of the property performance, but thank you for the clarification that there wasn't any unexpected CapEx. I'll shift gears a bit and look at one of the other parks in your resume -- sorry, in your release. It's the Parc Mosaic development, that 69% lease. I think I heard you earlier on the call saying that there's about 90 units there that are left to lease. Just trying to get a sense of what the rent is going at. I mean, is it in the range of the $3,000 to $3,400? Or are you moving in a few more concessions? What are you looking at in terms of the challenging lease-up environment on many of these properties?

Keith Kimmel

This is Keith. I'll take it. Our rents have been right on plan. And as we're coming through the -- there's 2 pieces about Boulder, right? The first 1 is spring is just popping here. The weather is picking up and that there's always a factor of uptick that comes with that. And of course, we're dealing with the COVID environment. What I would tell you is that we're seeing the types of things that I described generally across our portfolio, and that is upticks over the past several weeks. And our expectation is that just as Parc Mosaic was being pre-leased, sight unseen before, it looked as beautiful it is now is that we're very optimistic about finishing the project off.

Terry Considine

If I could add to that, Keith. They're -- and I mentioned this in what I had to say. There is a wildcard in a number of these areas of where -- whether or not the university is going to have students enrolled in the fall. And we don't know the answer to that because I don't think they've made the decision yet. And if they -- we don't -- we're not going to -- we don't -- Parc Mosaic is too expensive for students generally, so it's not our target customer. But it would just be true that if the university didn't open, the general market would be flatter or be softer than otherwise. I don't think it changes Parc Mosaic again because of our target customer being higher income, older person. But it will be influenced by that. And that's just a fact in a number of cases, including in Philadelphia at Penn, including Kendall Square, next to MIT and so on. That's a case where the severity of this recession is affecting even the eds and meds.

Operator

And our next question comes from John Pawlowski with Green Street Advisors.

John Pawlowski

John, could you give us an update on Parkmerced in terms of the Phase 1 of the development that you're not involved in? Obviously, it was supposed to start this year. That will likely get pushed. So just give us a sense for -- at the earliest, when Phase 2 through 9 where Aimco is involved when at a minimum or at the earliest when those could break down -- break ground?

John Bezzant

Well, John, thanks for the question. I think the -- to set a time frame for when Phase 2 will break is optimistic at this point in time. I think we've got to be able to get through Phase 1, and we've got to get through this level of disruption that's going on right now. As to Phase 1, what their status is, is that they have -- they've got that split into 2 phases. I don't want to get too far into the weeds but their A phase, Phase 1a, had buildings designed a year or so ago. They went through a value engineering process, and they are going through a pricing process on Phase 1a right now to be able to determine. They expect some pricing within the next 45 to 60 days. On Phase 1b, they are going through the design process, which is a requirement in San Francisco for the subdivision of the land away from other larger parcels to be able to build the Phase 1b buildings. They have hired the architects for that phase and are in very, very early and initial design phases for Phase 1b. If that were to start -- let's say, Phase 1a starts -- gets priced in by the end of June and starts early next year, it's going to take 2, 3 years minimum for Phase 1a to build out. Phase 1b would track in behind that and logical timing for Phase 2 is somewhere in the 5-year range.

John Pawlowski

Okay. That's helpful. And then can you help us understand what your -- we say you're well secured by your remedies on the project. What do those remedies look like in the coming months, if we enter an environment like mid-March where the capital markets lock up and Maximus needs to default? Is it more likely Aimco would support them and do another loan? Or just tell me what the most reasonable scenario looks like in the coming months if the economy starts to lock up again?

John Bezzant

What was -- I guess, first off, I would say, John, what was reasonable on March 19 versus April 19 versus May 8, it's going to be a call that we make at that point in time based on what the specific situation is. There was certainly -- we have had update calls with them on what's going on. And just to be very clear, because some people have reported on forbearance requests and other things going on, they have made their payments on the senior loan. They have paid us when there's been excess cash flow to be paid to us. They're not in default on the loan. They're not in special servicing. This is not, from our perspective, a crisis situation and -- by any stretch. Our primary remedy as a mezz lender is a UCC foreclosure. And that is the ultimate remedy that puts us into an effective lean ownership position on the asset. That is a foreclosure process that takes place outside of the normal judiciary -- judicial foreclosure process. And in a worst-case scenario, that's out there and available to us. But I think we will ultimately assess the situation based on where they're at, what their percentage of rent collections are. Again, the first call we did with them 5 weeks ago -- 4, 5 weeks ago on updates was -- and nobody knew. Everybody was concerned about May, but May looks remarkably like April and April wasn't that bad. And so we just have to see how things play out.

Operator

This concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Terry Considine

Thank you, Rocco, and thank all of you on the call for your interest in Aimco. I know it's been a long week, for many of you a long month maybe or long 8 weeks. And I wish you a restful and refreshing weekend. Be well.

Operator

Thank you, sir. This concludes today's conference call. Thank you all for attending today's presentation. You may disconnect your lines, and have a wonderful day.