Q1 2020 Earnings Call
Good day and welcome to the end total first quarter 2020 earnings conference call and what Josh.
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Thank you good day during this conference call. The forward looking statements, we make our based on managements judgment, including projections related to 2020 expectation.
These statements are subject to certain risks and uncertainties description of which can be found in our I think the pilot.
Actual results may differ materially from what maybe discuss today.
We'll also discuss certain non-GAAP financial measures, such an asset, though and the epicel user defined and reconciled the most comparable GAAP measures in the supplemental information that is part of this all earnings release.
Just on Aimcos website.
Prepared remarks today come from Terry Considine, our chairman and CEO.
Keith Kimmel, our executive Vice President in charge of property operation.
Well, how our executive Vice president in charge of redevelopment.
And Paul Beldin, our Chief Financial Officer.
Other members of management, our president and will be available during our question and answer session, which will follow our prepared remarks.
Well now turn the call the Terry Considine Terry.
Thank you Lisa and thanks to all of you on this call for your interest in Aimco.
The income business began the year with record effectiveness and record profitability.
And then as you all know the world changed.
Famous observation goes there decades, but nothing happened and their weeks when decades happen.
And the last few weeks at March were time, when it seemed that decades were happening.
My colleagues will report on the first quarter and the month of April.
I will use by time to tell you go into a thought about the rapid changes and respond.
Well there are plenty of reasons for concern, it's helping me designed aimco with hard times in my.
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, so lets flexible ground up development.
That's why our portfolio was so diversified by market and price point.
That's why our leverage is primarily long dated and non recourse.
That's why our intentional culture emphasizes flexibility of initiative collaboration and personal responsibility.
It's a crisis approach, 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 day.
Then the daily to redesign how we work on site.
Our teams safe well continue to lease apartments and fulfill service requests.
We made it clear consistent with our usual policies regarding flexibility that any gene any teammates who felt unsafe at work because of the virus was free to stay home with hey, without penalty and doesn't it.
We undertook to pay all costs related to Cobiz 19 testing and treatment.
Importantly, we committed to keep our team intact without layoffs or pick up.
We continued and even increased regular communications and transparency with a steady flow of written or oral in video reports to the entirety.
Customer focused let us to make our properties paper by increasing cleaning and reducing opportunities for infection.
And limiting in person interactions with neighbors insight.
We searched out ways to support those sheltering at home.
For example, with enhanced wife, I, and we work to meet the special needs of the relatively few who reported positive for infection by the Corona virus.
We redeployed construction supervisors, whose work have been pause to support property service teams.
Dozens of office workers joined our shared service center team the old thousands of structured conversations with residents to help each of these residents plan his or her personal adjustment to the crisis offering financial advice chips on job searches help with aarons 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 cashing credit to the started the year.
Down $300 million, what our line of credit to increase cash in hand reduced capital spending by $150 million are almost one half.
Waste, a 350 million dollar term loan and added $370 million net proceeds from closed or pending property loans. So that today, we have or soon will about $1.2 billion of cashing credit.
Reduced capital spending and limited loan maturities over the next five years.
We kept our board of directors fully informed and fully engaged including two candidates for the board were busy for March on but not actually elected until the end of April eight weeks later.
No, saying eight weeks, we delivered five management reports made numerous calls as individual directors for specific consistent and held for virtual board meetings.
So well the challenges continue I'm grateful for our success to date. The books are not fully close 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 or newly unemployed more than a quarter or the economy shut down is there a stunning numbers.
The damage the economy rivals in some respects exceeds the great depression.
Even the usually stable eds, and meds universities and hospital or unsettled with students at home and hospital busy treating told me 19 are financially stressed revving shut down much of the rest of their services.
So new customers would be cautious and new leasing will be very competitive, especially in our lease ups.
A wildcard that worries me as the increasing just regard for the rule of law sanctity of contracts and the importance of personal responsibility.
No matter a lot to the apartment business if rents cannot be set in a market and collected in the ordinary course.
Franco will continue to work to satisfy customers to treat each individually to earn what we were owed.
We do expect some easing in occupancy, but will not lower standards for customer selection.
We will complete or five long cycle projects.
Their lease up will be more arduous and initial rents, perhaps lower but in the yen will increase annual net operating income by plus or minus $30 million or 18 cents a share.
Well continue to reallocate capital the 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.
Well Gardner abundant liquidity and overtime adjust our leverage within come from lease ups and proceeds from the sale of properties both outright sales in joint ventures.
We expect property pricing will be about what it was six months ago, plus or minus say, 5%.
Well continue to invest and her team respecting them as motivated professional well the 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 gene for your sense of personal responsibility and team collaboration your sense of mission to provide homes for our customers you're culture of caring courage and commitment.
One final thought.
The present can be discouraging the future is always murky.
But the effectiveness of aim cooperations demonstrated once again in the excellent April result makes me optimistic.
With that I'll turn the call to Keith Kimmel head of property operations Keith.
Thanks Terry.
First I'd like to thank our entire team for your commitment to serving our residents during challenging times.
And your efforts, we have a solid first quarter and 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 there's even more critical during challenging ones.
Based on 13000 sort of reason than first quarter customer satisfaction. Once again 4.3 out of five stars.
Satisfied customers not with us longer leading to our lowest turned over 42% in 160 basis point improvement year over year.
This approach translated into solid topline growth.
Average daily occupancy was another income record.
At 97.6% 60 basis points better than 2019.
Rates were strong.
New lease rates up 1.7%.
Renewal rates up 5.8% and.
And blended lease rates up 3.6% 50 basis points better than 2019.
Bad debt expense was 32 basis points for the court.
All this resulted in revenues up 3.4% over last year.
Controllable operating expenses were down three and a half present with improved effectiveness and efficiencies leading to lower marketing spend reduce turn expense and fewer personnel costs.
Total expenses were down 40 basis points with 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% in margins were 74%.
100 basis points improvement over the first quarter last year.
Now turning to April.
Our frontline service teams have gone above and beyond to take care of where residents while they sheltered in place.
For example.
We've delivered packages cleaned homes.
Even bought groceries for those that are first responders elderly and disabled.
Thanks to those efforts April turnover reached a new low at 41.1 person.
We saw our leasing pace initially drop mid March due to cope with it.
Today leasing is recovering as our customers become more comfortable with the new norm and as we enter peak leasing season.
The onsite teams responded with flexibility and innovation.
This month, our leasing teams provided more than 3300 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 2018 by 20 basis points.
And pricing remains solid.
New lease rates up 90 basis points renewals up 6% and blended lease rates up 4.2%, you 50 basis point improvement over last year.
Bad debt rose in April to approximately 100 basis points as we collected 96% of our residential buildings with them up.
An additional 3% was accrued based on security deposits available for offset in the FICO scores of the residents were his guarantor.
And our lease up communities, we have 90 units available delivered already delivered and not at least in another 360 available homes to be completed in 2020.
In Boulder, Colorado, part Zagg is now more than 60% occupied and rents above underwriting.
Having fewer than 90 units to lease.
At the Fremont on our answer boots on the answers medical campus. We have 230 units remain to lease with the first deliveries this summer.
We remain optimistic about the location and expect leasing to accelerate once the current comment disruptions and hospital for most fade.
In Redwood City seven no certainly use first building has nine of 12 units occupied this leaves US 90 apartment homes to lease over the summer, but the next deliveries plan for June.
And then Elmhurst, Illinois outreach 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.
Well, we anticipate there will be more challenges and choppy waters ahead, our operations had been built for times like this in mind and I'm confident our team's ability to deliver outstanding result.
And with that I'll turn the call over to West Powell, our executive Vice President of redevelopment Wes.
Thanks Keith.
As Terry mentioned, the Immco business plan has long considered that times can and often do become difficult.
One example is the inco preference for redevelopment over development, especially short cycle, Redevelopments, where common area and amenity upgrades are phased in apartment homes are renovated and small batches.
This approach proves highly profitable in normal times. It 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 Immco was able to pause all of it 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 to five long cycle redevelopment and development projects currently underway.
Their cost to complete totaled $210 million.
An amount equal to just 1.5% of Aimcos. Most recently published TV and readily funded from Inco's abundant liquidity.
Three of our five long cycle projects, seven or seven Leahy in Redwood City Eldridge Townhomes outside of Chicago. The Fremont located on the answer its medical campus are expected to be completed later this year and together required just under $40 million of additional funding.
In addition, we have two other long cycle projects that are scheduled for completion in 2021 in Cambridge. The completion of a 136 unit property as 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 Flamingos North tower is slated for delivery late next year, we projected 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.
In dollars next year to complete all five long cycle projects.
When stabilized these five communities are expected to contribute plus or minus $30 million of additional in Hawaii.
Given these uncertain times the range of possible outcomes has undoubtedly widened, but we remain confident that customer customer demand for high quality housing located in robust Submarkets and managed by Keith World Class team will remain strong over the long run finally.
I would like to offer special thanks to my Immco teammates for their dedication quick action in positive results over these past few months.
I would now like to turn the call over to Paul Beldin, Our Chief Financial Officer Paul.
Thank you Wes and responsible pandemic economic downturn aimco acted decisively to increase liquidity reduced capital spending and scrub its balance sheet write 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% F AFFO growth and 9% at Oak Grove.
Starting with the balance sheet.
Aimco strong same balance sheet is designed for times like today. It is highly liquid and its leveraged comprised primarily of long dated well laddered amortizing property debt that is non recourse taminco today and co enjoys a billion dollars of liquidity summing cash on hand availability under our river.
All in credit facility and excess proceeds on rate locked at closing on the next few weeks.
This liquidity will increase by an additional 200 million and in process property loans closed in the next 30 days.
The property that borrowings address all 2020 maturities and 229 million a 2021 through 2024 maturities, resulting in an average annual maturities of 265 million over the next four years.
In total and goes placing in 680 million of new property that generating incremental proceeds of $367 million.
We have rate locked or closed approximately 50% of the new property laws.
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 aimcos overall borrowing costs by five basis points.
Anchors balance sheet provides flexibility and abundant liquidity leverage as measured by leveraged EBITDA remains above targeted levels.
We're comfortable with the safety of Aimcos balance sheet, but expect to reduce leverage target levels do lease up of the five properties under construction and property sales.
Given aimcos abundant liquidity, we have plenty of flexibility.
We expect property sales to pick up as the transaction market Reopens earlier. This week income close on the sale of an apartment community located in the 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 this loan to the partnership owning Parker said.
Starting with partners that.
During the first quarter anchor received $600000 on cash flow note refining property operating result, equal to 90% of our underwriting.
The borrower has made all required loan payments and we expect to collect all amounts due on our alone if not we are well secured by the remedies provided on loan agreements.
Ample also reviewed the viability of its commercial tenants and the related accounting assets for straight line rents deferred broker commissions.
Based upon the twin economic impacts coven 19, and the recession at hand, incur wrote off 2.9 million 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 ran off our associated with tenants paying about $560000 a monthly rent.
Going forward revenue from these tenants will be accounted for on a cash basis.
And we'll also revised effective in the second quarter its estimate of residential bad debt to consider credit worthy residents, who choose withholding payments.
And goes new methodology estimates Collectability as most then based on our assessment of the creditworthiness of tenants and third party guarantors based on their FICO scores.
Previously aimco evaluated collectability of balances only after such balances were more than 30 days past.
Using the new methodology April residential bad debt was $670000 or approximately 1% of residential revenue an increase of 270000 barrel would have been the results using the former methodology.
Now turning to first quarter financial results.
FFO 60 cents 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 Gina expenses, and a prepayment of a seller finance note combined to outperform our expectations by three cents.
This outperformance was offset by $400000 over 19 related costs and $5.1 million of charges related to the previously discussed straight line rent deferred broker Commission adjustments.
FFO of 67 cents per share was a penny ahead of the midpoint of guidance up 10% year over year.
Lastly, Banco board of directors declared a quarterly cash dividend of 41 cents per share for the quarter ended March 30, Onest 2020 up 5% over the regular quarterly dividends paid in 2019.
With that we will now open up the call for questions. Please limit your questions to two for time, the Q Rocco I'll turn it over to you for the first question.
Thank you Sir to ask your question Remember Star then one on your touched on some impurities and the speakerphone, please pick up or handset before pressing the key is definitely it's on your question husband address your line is what's your question. Please press Star then too.
Today's first question comes from John Kim with BMO. Please go ahead.
Thank you carry in your opening remarks, you mentioned, an easing of occupancy going forward you still had very high retention rate.
April so can you maybe quantify or provide timing in when you think.
Yeah occupancy will will bottom.
Oh.
John it's hard to know.
Because the the futures is hard to know.
It's it's my I'd just tell you I started today with a meeting with.
Two of Keith from the tenant discussing occupancy and its our sense that it it should go up from here.
That's that's our aspiration, but but did that gets worked out in a market where every properties competing with someone across the street are down down the road, sometimes they're they're offering very substantial a three month free rent and and so the exact interplay that'll depend on the economy and the quality of our execution.
We're not going to give guidance.
But I'm hopeful that that this will that proved to be the bottom, but I just don't know.
Gee, if you're running this how would you add to that.
Terry Thank you answered it well John I would you say listen.
Maybe one of the things that I would share is as a point of encouragement that is member forward looking indicator is that March 15th is the date that we use is in sort of the kobin start point on that that was dictated by our northern California property sheltering in place then from that point for the next couple of.
Weeks of the work to the end of March is when we saw our leasing pace falling off to about 50% and just kind of felt was way down but but starting in the first week of April over the last five straight weeks, what we have seen as week over week over week of increasing leasing activity traffic.
And this past week, we surpassed where we were on March 15, so while we're not 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 occupancy is hard now and having to rebuild it back up but as I look forward.
I can see things that are starting to reemerge.
Excellent point.
Zephyr John.
I agree with that.
So are you still committed just on $919 billion, which is part of your prior data.
So, let's let's go back and look at that number first first of all.
The the $950 million, which is certainly in our plan a assumed at that level of capital spending which is now reduced and because when you sell properties you sell EBITDA. The there's sort of a circular effect. So 150 million of savings brings it down to something under 800 million Ivan.
Hey, let's just say 750 for a number.
Secondly that.
If you if you just look at what Lisa did this week, we reduced that 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 is nothing it at where I think were 32% LTV at our targets 30%.
And so that difference doesn't merit distressed sales.
And so I think that.
We'll see if the transaction market opens up what is the rate at which we have a.
Opportunities to sell it what we think are fair values and that will make steady progress over the course of the year, but whether we're exactly our year end I don't yet know.
Great. Thank.
You bet.
And our next question good comes from Austin Wurschmidt with Keybanc. Please go ahead.
Hi, everyone. Thanks for taking the question. So I wanted to touch on partner said and first off.
And I know you guys have continued to provide additional detail on that transactions. So thank you for that but.
My sense is that there's still isn't a clear understanding of some elements.
On 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 and then second curious what you assumed in terms of cash collection for interest income in 2020, and and do you make an adjustment between the gap and cashing in your assets.
And then there are prior AFFO guidance.
So.
Austin on accounting I'll leave that to two Paul, but but let me just take a second on the on the economics.
We bought a.
Physician.
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 and we have a long window to see accomplished.
The.
Current position.
He is one that provides a an attractive rate of return.
The timing of the cash receipt.
Depend on on the success of the borrower in operating the rent control portfolio.
They're very competent experienced people do fine.
It 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 inherent that that equity.
So so the economics and our confidence in that payment is quite high.
The the details of how they operate their business are really their business not ours today were creditor.
We Oh, we are perfectly understand that there are some circumstances, where we might become the owner, but that's that's not our intent and that's not our expectation our expectation is that will be paid ratably over the or be paid over the next five years and that any unpaid but accrued balance after five years will be.
We 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 totaled 30% of the business going forward for a nominal price.
Paul but would you add on the account and Tara I think you covered it not only from a transaction perspective, but also the accounting rationale as well as because under the terms. The note is paid in cash out of available cash flow and so anything I'm out and that's a crude per the contractual provisions of alone is accrued and evaluate.
Good for Collectability, just like all of our assets are and is you can see based upon our actions in the first quarter, where we wrote off over $5 million deferred cost were very proactive and making sure that we don't recognize any assets on our balance sheet that we don't expect will be fully and ultimately collected so.
The answer to interact Prolexic and so the contractual amount is variable dependent upon the level of cash flow and and Collectability I guess of the interest income.
But but then the clarification on or do you make an adjustment to asset so for the difference between that gap amount and then what you're collecting in cash.
We do not we treat amp about not as and liquidity metric, but as a profitability metric and so there are lots of exceptions as you'll see in in other businesses to whether its a.
Interest accrued on a construction loan or.
Hey, our that's a crude and paid in the subsequent month. So we look at an AFFO as as a liquidity metric I mean, the profit of profitability metric and so in our sources of uses of cash yes, absolutely we would correct for that but but in our profitability. We think that we're earning 10% on that note a each year.
And that the timing of its payment is predictable.
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.
Austin I said, let me go back on has to correct, what or 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.
Might say well that means there are 2% off but let me just to assure you that ah that 98% of their of our underwriting would 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 that it would somehow impose along the way, but where we see that almost as that that would be something we anticipated that we'd be consistent with a collecting our interest what's happening out at Parker said is on track and going to be just fine.
I'm sorry to interrupt for your question Keith what was it.
No. So it was just following up you know on some of the ops information and trying to kind of get a sense what renewal lease rate.
You know were for I guess renewals signed up late that may be for May June and July and then any new lease rate detail.
You've got for May would also be appreciated.
Hi, Thanks, Thanks, often so if you if you go to our.
Our April renewals at six.
What we see going forward for me in June in summer demand the force, maybe low fives and so you know where we're already out with those were 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 adding that sort of our expectation.
As you look at.
Rates that that happened in in April the 90 basis points of new lease rates are those that actually those about 50% of them actually transacted as pre leases prior getting into April those that actually transacted in the month of April were flat so between those two new.
A new leases a in April but for our about flat and renewals in the force.
And then any anything for may for any type of leases that you signed at this point.
Listen we continue to see some pressure on rate, but it's a little early and so we were just as I, we're starting 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's certainly you know things we're working through there.
Great.
Thanks for the detail.
Our next question comes from Nicholas Joseph with Citi. Please go ahead.
Oh, Thanks, Rocco hope, you're well, it's Michael Bilerman here with with Nick I'm, just want to come back on the park more said so how much cash interest income did you weren't so 10%.
Yielding no onto 75 to 27 half million of interest, which would be 6.875 million. You should have received so did you receive that full amount as cash interest in.
The quarter or not.
Hey, Michael This is Paul. Thank you for your question as we disclosed in our release, we collected $600000 of cash rent and a that's based upon the operations of the property, which were largely in line with our underwriting.
600 that lot of from the launch of the paid you almost $7 million of interest income.
I I take exception to that because alone and should pass 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 whatever crude 6.8 million, which it did.
I can you just you you carried it onto your loan Pals I don't I don't know if that's profitability you just if if the debtor eventually defaults you just have a large larger equity balance outstanding.
It all depends on Collectability.
It all depends on Collectability and understanding what happens if that loan matures and the are at any point along the line if the borrower to default so you're exactly right about that there's $300 million of equity junior to us that would be a available for.
Liquidly liquidity liquid.
Converting to liquidity and ER and applying to the accrued interest.
I guess, if you step back from it how it is you know going into Oh, I recognize none of us knew what was going to happen, but we're pretty late in an economic cycle. You made a you know generally pik interest rate had loan I keep pricing peak a leverage off to.
Deleverage in the future, which now is less certain Oh. This is a massive development, which you just said that youve preferred redevelopment versus large scale development. So how does all that tie from a strategy perspective and comfort going forward.
I I think I think it's a terrific opportunity to invest in across a diversified portfolio in assets that have that more significant upside than is the average in an apartment. If you look at fewer to buy an apartment today, Nick in a any of our markets.
Or whatever last November it the NOI cap rate would have been but it had a three handled problem.
And the growth rate might have been true and you'd be signing up for an unlevered I or our six.
Okay. So that's that's one where were you might have said, okay. That's that's fine you're on track.
We said, we think there's an opportunity.
And if you believe in the future 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 controlled portfolio improves and is the assets and development assets or monetize and I think that's what's going to happen I think that.
The good trade.
Gary You mentioned rule along at the beginning does that mean, you may look to resume your political career.
If it goes down that road.
No I think I think I think the voters have spoken and in any but this is considine has and but I do think that it's something to that if you want to know what concerns partner 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 and we're not going enforce their clutch.
And I think that's a much more important issue.
Okay. Thanks.
Your next question comes from a Rob Stevenson the journey. Please go ahead.
Good morning, guys are good afternoon, I guess, Keith you given the April occupancy and rent numbers, but how should we be thinking about operating expenses, you are saying turnover costs and probably at some other expense lines, but higher insurance, maybe utility with everyone staying at home an extra Colgate expenses, how does all that offset in our operating expenses going to be.
Higher or lower today than what they were.
Rob.
You know listen there's a lot of pluses and minuses that are in there so listen on the on the more expensive side, we're spending more money on cleaning supplies and cleaning activities and things like that you might imagine we're certainly saving so I'm on the turnover and that is is that you know lower turnover in people staying there. So when we look at how our performance.
Came through particularly through April pretty much right, where we were hoping you wouldn't planned on it.
Oh, well would you add on it on the taxes insurance and other.
And then those pieces, but also in the Big picture, Rob What I'd I'd point, you to his aimcos long track record of being very disciplined with our operating expenses and over the past 12 years, our controllable operating expenses of compound it at a negative rate and so that discipline is not going to disappear because the cobot as Keith mentioned.
We might have some increases in certain costs will have decreases and others, but you can rest assured that we're going to work as hard as we can to keep operating expenses in check.
Okay second question on delinquencies when you look back at the global financial crisis, what was the final collectability rate on delinquencies.
And where to 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 in Seattle, where there was extended eviction rules, but any other place that you're seeing this inside.
Hey, Rob I'll I'll address those that have happened to Miss anything up. Please please interject and correct me so what I would tell ya on our.
Collection percentages in delinquencies that you bring up a very good point, because although we collected 96% of our rents in April we only recognize bad debt expense of one person and what that means is that 3%, we expect to collect and what will likely happen is a decent percentage that is going to be paid by our residents Justin periods. After.
After April so looking back on March or we had about 30% of our March on pay. They are was paid during the month of April which was probably about as of a challenging time is any time in recent history.
And so of the three person that's a crude will collect some in cash directly from the winner will collect some that secured by security deposits and ultimately we'll have some amounts that are unpaid and recognize as bad debt, we expect that to be 1%.
I'm looking forward and trying to use the a great financial crisis. So to correlate you know the situations are not identical Oh, we do have challenges of dealing with some individuals who because of the local rules and regulations that have been put in place for not being compelled to pay rent and aimco cannot forced them to pay <unk>.
There are three collection process or eviction, and so we're going to probably carry a little bit higher balances. They are but I think what we'll see is that the benefit of our resident base that has high average incomes that have averaged over $170000 for the past four quarters median incomes that have averaged around 120000 for the past four quarters.
And very high credit scores you know, they're gonna be good credits.
So we'll see if the 1% bad debt rates sticks are fed increases, what we'll have to wait and see a but as a frame of reference to the great financial crisis. We peaked at just over 100 basis points at that time.
Okay, and your delinquencies in California, and maybe New York in Seattle, or they substantially higher than the portfolio as a whole today and how big of a problem is that people not paying the rent that could.
I'll just keep the I'll take the L.A. piece is running at about 10%. So when you think about the a 96% Collectability L.A.'s running about 10 and of course, you know 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.
You know it's in the it's in the range of the type of collections that we've seen but those those customers are good credits people that we believe that means to do it or and if they're having johnson out to be able to recover at some point.
Okay, so that [laughter].
Rob I would just add I I know it talked to a wall Street.
Investment people.
Oh, you know, who think it's wise to buy borrowing the rebalancing because it's an interest free loan liquidity to them.
That's that's a that's a.
That's a that's a bad behavior.
And we don't have much exposure to Seattle or New York. Both of those are kind of been consequential, we have a big exposure to California, and ER and particularly in southern California, It's an issue and that's that's where that 1% across the portfolio is really going to be a a bigger present allocated to to California Southern California.
Okay. Thanks, guys.
Yes.
There are that's Washington today, so hard to go slow with Zelman <unk> Associates. Please go ahead.
Hey, guys. Thanks for taking my question I don't want to be they've done a board.
Couple of other I was on thoughts about Mark Saad.
Well I guess my question, a little broader well topple all teach them how investment decisions are made.
So right now we have you guys on in less than one person cash yield on.
Oh preferred Where's your peers are getting love in person can.
They won and they invested I mean ethics and less than two deals.
During this environment.
Just wondering how is the investments is made on the one person thing I like to be on nobody you're allowed to disagree with that person as an investment committee.
What's the process like because those other ways to invest in the future of San Francisco on.
The problem I mean, we heard from Melbourne, but I don't know how much that's that's rolling off a bit we're pretty confident that the deals being marketed.
20% yield which implies that.
You guys in total you think but how does that sound right down to it.
That's all been reflected on one being parts hospital is being.
The flow through into episodes. So that's no comments on that.
Well the first comment is that when a any lender whether to read or not is funding a position and taking cash interest back there probably prefunding their own return money being fungible. So it would be easy to advance cash and haven't paid back to cash shot I don't put a lot.
A weighed on that.
The.
Process inside is that opportunities are brought to us and they are we look at him and we look at them as a team we have an internal investment committee process, which is a rigorous and we have an external board investment committee process. So.
We have we have lots of people live hands on it lots of ER input and in the case of 20% versus 10%, there's theres a great risk of comparing apples to bananas, because it really depends on what was.
Going to be provided a 20% versus what we've gained at at in our position at 10%. We certainly did see the offer a 20%, but what we're interested in is the optionality of owning 30% of the business going forward for essentially free.
Thanks, That's really helpful. Can you give me some of this whole color on I guess I go to the south whose itself the in panel.
Investment Committee and also being the board and lessen comedy.
John design and Mike Stein.
Got it thank you.
No.
Our next question comes from Richard Anderson Little bit somebody Sune. Please go ahead.
Hey, Thanks, good morning, everybody.
First question is Terry or Keith <unk>, 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 it first of all my.
Right about that and second of all have you 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 how that has all evolved.
Hi, rich thanks for the question I'm I actually I, we started self guided tours eight years ago, a in which we we did them actually audit audibly through our I phones.
And so we actually have been doing those for the past eight years and what we've done is as we found that there was different ways to be more effective through it and so at the end of the day, what what I'd have you focused on 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 seat.
And that is that people would rental apartments in our team members had to be better at finding a way for them to commit to a unit that someone was living so today. When we did as we took existing technologies that we had in place thinking things like smart rent in which we have walks in keys in which people don't have to where move ins now that can occur.
The that are happening without having to have human interaction and then what we did was as we went and sent to our team members. How is that we can take the existing technology and improve upon it and so when we sheltered in place our rent 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 tours before and we're going to actually go help residents in the comfort or the existing home be able to view in tour apartments, while we went and did face time tours and things like that so we were already doing something like this before we just if you don't the current switched.
We should just made it so that we made it the priority of how every one of our tours were done today, okay. Okay fair enough. Thank you and then.
Yes, the comment was made about future.
Renewal activity and a you know were rents might fall and all that I'm wondering you know in the interest of customer satisfaction, which is something you guys talk about a lot.
How how raising rents.
We're offering increased rents in this environment is being.
Being received by your by your tenancy and you know, giving some light to the fact that some of your peers have gone to a you know 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. Thanks.
Hey, rich Keith again, thanks for the question.
Well I can't speak about how others a approach these things, but what I'll just walk you through how how we think about it up first we don't ever approach our pricing in a blanket way so well there can be easily a away to be what's going to go to zero out there and B B simple, we believe the being very.
Particulars important let me give me a couple of let me give an example, so so far in Nashville, Tennessee, we able to property that is close to a you know the travel industry hospitality and things like that and that property has residents that are more impacted by an industry that is feeling distressed as appropriate we would price that property in a different way maybe we would.
Even be flat and property like that on renewals.
But 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 raised those rents and those residents are quite comfortable and not put off by the fact that we are actually increasing rents because there.
As a demand in a marketplace in which people what those units. So the way that we approach it is not to throw a blanket over everything and we have the team in 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 to that.
And that's how we will going forward.
Very helpful things keep it up I sneak a role yes, or no question and Terry you use the term that was familiar to me or the phrase using a read balance sheet over one zone I'm curious if any of those people that you feel are doing it that way have any chance at all to be a immco resident long term.
Oh no [laughter].
Yeah, Yeah, Oh, although rich it actually in states, where they begin to have.
Yes.
Prescribed legislated standards for Nonrenewal, our hands may be tight.
But I'm talking about a individuals decision I'm, telling you that I I, but as far as Aimcos concern no. That's that's a that's a bad behavior and it's something that if if it becomes more common you'll see things like bad boy behaviors emerged after the SNL crisis itself, it's morally wrong.
And we won't allow or tolerated long term you got it. Thank you.
<unk>.
The next question comes from Jeff Sprecher with Bank of America. Please go ahead.
Hi, everyone. This is actually a little escharex just today. Thank you for taking the class just wanted going back to collection, Yes, we'll talk about the different asset classes has there been a difference in collections Hmm I sleep AIDS collecting our any color on that would be great [noise].
Hi, This is Keith I'll walk you through it when we look at it we think that the what we've seen this is jobs have been mostly impactful that we really see so when we look into places where we have you know medical professions technology professional. So you know engineers accountants things like that been very little impact those that.
I have really felt the pressures those are self employed maybe the entertainment industry hospitality those are the ones that had the most stresses the deck that cohort only represents 10% of our resident population.
And that's reflective in the 96% of collections that you see.
<unk> for studies.
And now instead of just.
Thanks.
You did you have got a question on A's versus bees in what I would just say is is that it really just comes down to jobs. So at the end of the day.
You can have a price points do we have more more influenced by a particular job cohort. Then then those that it'd be so a's and b's aren't necessarily the driving force, it's really the job cohorts that we've seen that had been more impactful.
Got it. Thank you and then just one quick question on.
Hi.
Yeah.
Okay. That's it for me thank you.
Thanks.
So next question comes from Nick Yulico with Scotiabank. Please go ahead.
Hi, Thanks for taking my question. This is Doug Sumit Sharma mine for Nick So couple of couple of questions.
One did I hear correctly that you took an impairment on the park My said loan in your prepared remarks.
And and just trying to understand what what happens from a cascade to so I can tell you I understand your point about funding your own or does it make sense and so could you give us some insight into whether there was you mentioned its operating a 98% of underwriting assumptions. So that's fine.
What there's some delay or some larger than anticipated capex spend that could have atrophy or they can dig into loan or the cash flow much lower than than you know what a normalized rate should be bad debt I guess, a few questions ago was what's being asked off.
I think I think the big picture way to think about it is that if if we had a zero.
Oh alone and that accrued over five years.
And was secured by good collateral.
The right accounting for that is to recognize it ratably over the time I'll give you. An example, where we do that insight aimco today, we own a b piece on on debt that we owe to ourselves.
And so we have crew that that income, which would be payable at the maturity of the loan and that's that's part of our our normal that's correct accounting for collectible interest.
So when when the question comes up over a one is what is the right way to accrue it.
Our to recognize income is it all turns on Collectability and that's that's a very fair question. In this particular case, there's $300 million of of equity that will will be lost if we're not paid currently I.
I'm not paid at maturity.
And so that's that's a a number that could change that's a number that has elements of subjectivity to it.
But it said, it's hard to our business, we feel quite comfortable with.
No I I understand appointed by the you don't view or zero coupon bond and complete I mean, you know mortgage rates do this kind of sandy them up and all the loan funding all the time I'm I'm, just trying to get a little more sense on on the property performance a in one maybe maybe you could shed some light.
On that in terms of whether there was an unanticipated capex spend or something they did do you know I go up or maybe it's too early to ask and the second thing around the frame.
It's really too early to ask that they don't their constraints on their ability to spend and Hawaii on purposes. John has a writer review and approval of some parts of the decisions, but broadly it's just too early.
We've invested.
90 days ago.
Under dry actually.
Yeah actually that lines up to do really well do due to the follow up which is are there any milestones or limitation that you haven't done is of construction and leasing growth that help you as the critter control the disbursement of funds through the five years.
I'd just be happy to have John speak to that he's right. He's right here I'm.
Sure virtually yes, but Ah. Thank you for the question I think one thing to keep in mind, a and Terry said earlier, we are a lender here, we're not the operator, Oh, 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 no other no other spend that has been out of the ordinary or out of line with what we underwrote.
The.
As we as we look at the future right and we look at the cash flow controls that we have in there. The deal basically provides it all excess cash flow from the property flows to Aimco to service our debt.
[noise] does that responsive to your question.
Yeah, I'm, yes, I I guess I understand the broader point about you know there's only so much you can you can download sometimes at the property performance, but thank you for the clarification that there wasn't any unexpected capex a shift gears a bit and look at one of the other parks and they were renting that into sorry in your Ah.
In your release, it's a the park mosaic a good development that 69% leased I think I heard you are they going to cause saying that that it's about 90 units that are left to lease I'm.
Just trying to get a sense of what the rent is going out I mean is it in the range of the 3000 to 2400 or are you.
Looking in a few more confessions what do you what are you looking at in terms of.
The challenging lease up environment on many of these properties.
Hi, This is Keith I'll I'll take it our rents have been right on plan and as a were coming through the there's two pieces a about older right. The first one is this spring is just popping here and the weather is picking up in that Theres always a a factor of uptake that comes with that.
And of course, a you know your we're dealing with it the co bid environment. What I would tell you is that were seeing the types of things that I described generally across our portfolio that is upticks over the past several weeks and our expectation is is that just as a part mosaic was being pre leased a sight unseen before it looked.
This beautiful is now is that we're very optimistic about finishing the project off.
If I could add to that GC. There there is that I mentioned this in what I had to say there is a wildcard in in a number these areas of where whether or not university is going to have students enrolled in the fall.
And and we don't know the answer that because I don't think they've made the decision yet.
And if they did we don't we're not going we don't have the park 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.
BB flatter or be the softer than otherwise.
I don't think it changes park mosaic again, because of our target customer being higher higher income older person.
But we'd be influenced by that and that's just a fact in a number of cases, including in Philadelphia, and including Kendall Square next MIT and so on that that's that's a case, where the severity of this recession is affecting even the exit eds and meds.
Got it. Thank you so much for taking my questions.
Thank you.
Your next question comes from John Polasky with Green Street Advisors. Please go ahead.
Thanks, John can you give us an update on park Mercer said in terms of the phase one of the development that you're not involved in obviously was supposed to start this year that'll likely a push to just give us a sense for at the earliest when phase two through nine were into is involved when.
And at a minimum or at the earliest when those could break down for break ground.
Well Hey, John.
Thanks for the question I think the does set a timeframe for when phase two will break is.
Optimistic at this point in time, I think we've got to be able to get through phase one we got to get through this little disruption that's going on right now as to phase one what their status is is that they have they've got that split into two phases, I don't want to get too far into the weeds, but.
They're a phase phase one a had building design year or so ago. They went through a value engineering process and they are going to repricing process on phase one a right now.
To be able to determine they expect from pricing for the next 45 to 60 days.
On phase one be they're going through the design process, which is a requirement in San Francisco for the sub division of the land away from.
Other larger parcels to be able to build the phase wouldn't be building a they have hired the architects for that phase and are in very very early I'm initial design phases for phase one be.
Oh, if that were to start let's let's say phase one a starts say, let's get the priced and by the end of June and starts.
Early next year.
It's going to take through three years minimum for phase one hate to build out phase wouldn't be would tracking behind that and logical timing for phase two is.
Somewhere in the five year range.
Okay.
Thanks, That's a that's helpful and then [noise].
Can you.
Help us understand what your <unk>, Yeah, we say well secured by the by remedies on the project what do those remedies look like in the coming months, if we enter environment like mid March where the capital markets lock up and Maxim This needs to do the fall or is it is in more likely aware.
In coal would support then and do another loan or just tell me what the most reasonable scenario looks like in the coming months, if ER the economy starts lock up again.
What was I I guess first off I would say John what was reasonable on March 19th versus April 19th versus.
Matt I you know it it's going to bake a call 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 a you know we have that update calls with them on what's going on and just to be very clear I because some people have reported on forbearance request and other things going on they have made their payment on the senior loan they have paid us when there's been excess cash flow to be paid us they're not in default on the loan they're not in special servicing.
You know <unk>. This is not from our perspective, a crisis situation and and by any stretch.
Our primary remedy the Mezz lender is you see foreclosure and.
That is the ultimate remedy that puts us into a affectively and ownership position on the asset.
That is a foreclosure process that takes place outside of the normal judiciary judicial foreclosure process and you know in a worst case scenario, that's 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 rent collections are you know again, the first call we did with them.
Five five weeks ago, four or five weeks ago on update was nobody knew everybody was concerned about me, but maybe a looks remarkably like April in April wasn't that bad and so we just have to see how things play out.
Yeah. Thank you.
This concludes the question that's assessments I'd like to turn the conference back over to the management team to be far worse.
Thank you Rocco and thank all of you on the call for your interesting, though I know it's been a long week for many of you long month or maybe are long eight weeks and I wish you a restful and refreshing weekend you will.
Thank you serve this includes lives. So thank you all for joining todays presentation you live in a consultant your line is little wonderful day.