Q4 2020 Independence Realty Trust Inc Earnings Call
Yeah.
Thank you for standing by and welcome to the Independence Realty Trust fourth quarter and full year 2020 earnings release call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press.
Star one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to Lauren Torres Ms. Torres. Please go ahead.
Thank you and good morning, everyone. Thank you for joining us to review Independence Realty Trust fourth quarter and full year 'twenty total any financial results on.
On the call today with me are Scott Schafer, our Chief Executive Officer, Jim <unk>, Our Chief Financial Officer, and Farrell Ender President of IRT today's call is being webcast on our website at www Dot IRT living dotcom, there will be a replay of the call avail.
<unk> via webcast on our Investor Relations website, and Telefonica, the beginning approximately 12 P M eastern time today.
Before I turn the call over to Scott I'd like to remind everyone that there may be forward looking statements made on this call. These forward looking statements that reflect the irt's current views with respect to future events and financial performance actual results could differ substantially and materially from what IRT has.
Project at.
Such statements are made in good faith pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of $19 95.
Please refer to Irt's press release supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations participants may discuss non-GAAP financial measures.
During this call.
A copy of Irt's press release, and supplemental information containing financial information other statistical information and a reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measure is attached to Irt's. Most recent current report on the for them.
8-K available at Irt's website under Investor Relations Irt's. Other SEC filings are also available through this link IRT does not undertake to update forward looking statements in this call or with respect to matters described herein, except as may be required.
By law with that it's my pleasure to turn the call over to Scott Shafer.
Thank you Lauren and thank you all for joining US this morning two.
2020 was the year like no other for our company our industry and our country. We were faced with unexpected challenges brought on by the global pandemic, but due to the perseverance of our team and focus on accomplishing our objectives, we were able to deliver strong fourth quarter and full year results and better positioning our company for long term success.
We prioritize the needs of our people, which included protecting the health and wellbeing of our residents and employees, while providing flexibility to those residents demonstrating financial hardship, we focused on growing the occupancy and drive increasing traffic, while sustaining our financial flexibility of lowering leverage, thereby strengthening our balance sheet as a result of of successfully executing.
Against these priorities our same store average occupancy increased 250 basis points to 94, 9% in the fourth quarter.
One of year over year basis, with average effective monthly rent per unit growing two 6% in the quarter. We have collected 98, 7% of fourth quarter rents our same store NOI increased four 4% in the fourth quarter at three 1% for the full year compared to a year ago, our core <unk> improved more than 10% in the <unk>.
<unk> and for the full year 2020.
And we notably reduced our leverage this past quarter, having normalized net debt to adjusted EBITDA of eight two times at year end, reducing our overall leverage has been of long term objective of ours and I'm very pleased that we're able to make meaningful progress against this commitment during the year when we faced unprecedented market conditions.
We are pleased to note that this momentum continues the strong results of our into 2021, our total portfolio of average occupancy was 95, 2% of January of 290 basis point improvement compared to the end of January last year.
We have collected 96, 9% of January rent, which is consistent with the collections of December rent and given our low lease explorations at high occupancy in the fourth quarter, we continued to drive rent growth.
Another key component of our strategy is the advancement of our value add and capital recycling programs. While we post these efforts in the first half of last year due to the pandemic, we resumed activity in the second half of 2020 after seeing more stable conditions in our markets and a rebound in demand for renovated units.
Since the inception of our value add program in January of 2018, we have completed renovations on 3719 units due December 2020, achieving of weighted average return on investment of 18, 3% on interior renovation of course.
This momentum continues and we expect to renovate another 1300 units from 2021.
Courted by an improving market environment growing rental demand.
Regarding our capital recycling program, we expanded our presence in markets, where we saw attractive long term fundamentals like Huntsville, Alabama in Dallas, Texas, and exited markets, where we had a small presence such as Chattanooga in Baton Rouge.
In addition to acquiring and divesting properties under our capital recycling program. We are exploring the potential for JV relationships focused on new multifamily development. This program would provide capital from preferred equity investments in joint ventures with third party developers, we will target assets in core non gateway markets, where we see opportunity for growth with a particular focus on the south of Houston.
Broader sunbelt region.
Our expectation is that these investments will deliver unlevered IRR of approximately 20%, while giving us the ability to own the newly developed communities outright at attractive cap rates.
So I think about developing the initiatives getting the IRT another avenue for accretive capital allocation.
Looking ahead. The 2021, we expect the gradual market recovery in industry fundamentals to improve we are confident in our resilient portfolio of assets in non gateway markets that is well positioned to benefit from migration of employment trends, particularly in the sunbelt, we will remain focused on maintaining high occupancy levels, while driving rent growth when appropriate and tightly managing our costs.
And we will continue to engage the attractive investment opportunities under our value add and capital recycling programs supplemented by the potential for bird equity investments in joint ventures.
In sum, we exited 2020 from the position of strength with ample liquidity and reduce debt and we look forward to executing on our strategic priorities and delivering value to our stakeholders.
Before I turn the call over to apparel I'd like the once again, thank our team and highlight their dedication and the ability to adapt and learn from the challenges presented over the past year, while the pandemic undoubtedly impacted our people and the way we do business. It also enabled us to squarely focused on accomplishing our vision of being a trusted and respected provider of apartment communities by offering an unparalleled living it.
Hearings for our residents on a world class environment for our employees. This goes hand in hand, with our recent announcement to increase the size up and further diversify our board of directors with the appointment of lease of Washington, Lisa brings the IRT more than 25 years of experience of corporate governance and public company compliance as an accomplished legal executive corporate officer, we welcomed Lisa and her assured.
She will bring the valuable perspective to our company and with that I'd like to turn the call over to Cheryl for an operational update for <unk>.
Thanks, Scott and good morning, everyone.
We are pleased to report the IRT closed out 2020, the strong fourth quarter results led by the diligence of our onsite teams.
Due to our ongoing effort to support resident retention and build occupancy during the pandemic. Our occupancy grew substantially in 2020 and was 95, 3% at year end.
We continued these efforts into 2021 and a source of support occupancy ending January at 95, 4%.
On the lease over lease basis for the same store portfolio during the fourth quarter, new lease rates increased four 5% and renewals were up one 6% yielding of combined lease over lease rental rate increase of three 3%.
Strong trends continue in the first quarter to date with new leases, having increased seven 7% led by our value add communities, while renewed leases are up for 4% with a blended lease over lease rental rate increase of five 4% for our same store portfolio. While we are encouraged by these trends we are also.
So cautious as we continue to manage through the pandemic and therefore remain focused on maintaining occupancy.
Given our occupancy in the fourth quarter of 2020 and into the first quarter of this year, we've taken a targeted approach to renewal rates of communities, where we have high occupancy and very little exposure.
We remain optimistic about our initiatives behind our value add and capital recycling programs, which both experienced the pickup in activity in the second half of last year.
First on our value add program, we completed renovations on 230 units in the fourth quarter and 1004 units in the full year, realizing average rent premiums of 21% in the quarter and 18, 8% in 2020 as compared to on renovated units.
Performed renovations at 17 of our communities for of which are nearing completion, as we have renovated 85% or more of their units.
What is really important to note is that we continue to believe there are additional properties within the remaining portfolio that will that will offer value add opportunities and provide outsized rent growth in the future.
Prior to the pandemic, we identified an additional six communities to end of the value add program.
We will commence renovations at four of these communities in the first half of 2021 and continue to evaluate the remaining two based on market conditions.
We anticipate completing renovations on approximately 300 units in 2021 with the bulk of these occurring in the second and third quarters. When we experienced the majority of our lease expirations.
In the third and fourth quarter of 2020, we re engaged our capital recycling program, which is focused on reallocating capital from markets, where we have of small presence and do not plan to grow and invest those dollars into markets with better long term fundamentals, where we have a larger presence and are looking to expand.
With that being said we closed on the sale of three assets in the fourth quarter for a combined gross sale price of $59 7 million at an adjusted blended economic cap rate of 5%.
Thereby exiting the Chattanooga in Baton Rouge markets.
We realized a net gain on sale of $7 8 million from these dispositions.
On the acquisition front as mentioned on last quarter's earnings call. We purchase of 421 unit property in Huntsville, Alabama for a gross price of $94 million, which represented a five 1%, 2% cap rate on our year one underwriting.
This acquisition expanded our footprint in Huntsville to 599 units from 178 units and will allow us to unlock value through a combination of organic market rent growth as well as growth from the implementation of our revenue management and institutional ownership.
Looking ahead, we will continue to grow and strengthen our presence in middle market suburban communities in non gateway markets that have favorable demographics job opportunities and population growth.
We are particularly optimistic about our portfolio in the Sun belt, a region, which accounted for 75% of U S population growth over the past 10 years and is expected to add another 19 million residents over the next decade.
We have not currently identified any acquisitions or dispositions, we plan to continue our capital recycling efforts and expanded in regions like the Sun belt, where we see outsized migration unemployment trends.
I'd now like to turn the call over to Jim.
Thanks for all and good morning, everyone today, I would like to begin with an overview of our fourth quarter and full year 2020 results. Then provide a brief review of our balance sheet and capital structure and wrap up with the discussion of our 2021 guidance.
Beginning with our 2020 performance update for the fourth quarter of 2020 net income allocable to common shareholders was $13 3 million.
Down from $23 $8 million in the fourth quarter of 2019.
The decrease was due to $9 4 million of gains on the sale of real estate assets in the fourth quarter of 2020 as compared to $27 million of gains of the sale of real estate assets in the fourth quarter of 2019.
For the full year 2020, net income allocable to common shareholders was $14 $8 million down from $45 $9 million for the full year 2019. Similarly, the decrease was due to the gain on sale of real estate assets of $7 $6 million in the full year 2020, and $35 $2 million for the full.
Year 2019.
During the fourth quarter core <unk> grew to $28 million up 11, 7% from $18 $6 million in the fourth quarter of 2019.
Core <unk> per share during Q4 was 22.
10% higher than Q4 of last year at <unk> 20 per share.
For the full year core for <unk> grew to $75 $9 million.
Up 10, 8% from $65 million in 2019.
<unk> for the full year was 80 per share in 2020.
Up from 76 cents per share for the full year of 2019.
Turning to our same store property operating results NOI growth in the fourth quarter was for 4% driven by revenue growth of five 4% rental rates increased year over year with an average monthly rent of $1117. This quarter up two 6% since the fourth quarter.
Of last year and has accelerated to an annualized 4% growth rate sequentially from the third quarter.
While this includes the value add communities, we did see rental rate growth of at our non value add same store communities with rental rates in Q4, increasing of 120 basis points over the prior year.
For the full year 2020 same store revenue grew three 6% almost entirely driven by the three 4% increase in average rental rates.
We have collected 98, 7% of our fourth quarter of buildings and we have collected 99, 3% of our 2020 billings as a result, we have evaluated our outstanding receivables for the Collectability of increased our reserve for bad debt by $124000 during the fourth quarter two of tow.
<unk> of $927000 the $927000 reserve for bad debt recorded as of December 31 reduces the future risk of any build revenue that we have not yet collected.
To put it in context, we ended the quarter with $1 $9 million of gross receivables, including those that were part of our deferred payment plans.
Subsequent to December 31, we've collected $557000 of those gross receivables and expect to continue receiving payments in future periods.
After considering the reserve for bad debt, our net accounts receivable leftover as of December 31 was for $133000 about a third of the penny per share as a result, we feel that we're adequately reserved and feel good about collecting those remaining net receivable.
On the property operating expense side same store operating expenses grew by seven 3% for the fourth quarter of 2020, primarily due to higher real estate taxes and insurance of theme that continues from earlier this year as well as increases in repairs and maintenance and contract services as a result of delays caused by the pandemic.
For the full year total operating expenses grew by only four 5%, which was at the low end of our original 2020 guidance range.
Turning to our balance sheet as of December 31 of our liquidity position was $186 million, we had approximately $9 million of unrestricted cash of $165 million of additional capacity throw of unsecured credit facility.
$12 million of proceeds from the November sale agreement.
In November we issued 900000 shares of common stock under our at the market sales program at a weighted average per share price of $14 and then entered into a forward sale agreement associated with the shares we have until December 15th of 2021 to settle the forward sales agreement and received those net proceeds.
After commissions of approximately $12 million.
During the fourth quarter, we took down the remaining portion of our February of 2020 forward equity raise an issue the remaining $6 9 million shares of common stock receiving $99 million of net proceeds.
We use these proceeds to pay down borrowings on our line of credit as.
As of December 31, 2020, our normalized net debt to adjusted EBITDA was $8 two times down from nine one times in Q3.
We will remain focused on reducing leverage and achieving our midterm net debt to adjusted EBIT target of around the mid sevens rigor.
Regarding our dividend Irt's board of directors declared a quarterly cash dividend of <unk> 12 per share, which was paid on January 20 seconds.
With respect of guidance, we've decided to provide some parameters for 2021 based on increasing visibility on business industry and economic conditions.
Our guidance for 2021 EPS is the range of four cents per <unk> per diluted share and for core for faux has a range of 78 to 82 per share.
Our per share guidance is based on the assumption of $102 6 million shares and units outstanding in 2021, which is an increase of $8 2 million shares from our 2020 weighted average share count.
This increase is a result of the shares issued during 2020 as part of the February 2020 forward equity raise for the proceeds were used to fund a portion of our Huntsville acquisition and to Delever, our balance sheet down to eight two times as previously mentioned.
For 2021, we expect NOI at our same store of communities to increase between one 5% and three 5%. This reflects expected same store revenue growth of between 275% and for two 5%. This revenue growth assumes that our average rental rates grow by two 4% and our bed.
Debt expense is 125% of our revenue.
For 2020 of our bad debt expense finished out the year at about 90 basis points of revenue for.
For 2021, while we believe our properties will continue to perform well we are conservatively, increasing our bad debt assumption as we expect further pressure from eviction moratoriums and other government regulations in response to the COVID-19 pandemic.
Moving on to expenses, our projected growth in same store real.
Real estate operating expenses of 4% to 525% is the result of our expectation that controllable operating expenses should increase between 2% and 3% and our non controllable expenses, including real estate taxes, and insurance should increase between 7% and 9%.
Lastly, we like to note that beginning of the first quarter of 2021, we plan to change our definition of core fulfilled and will no longer exclude stock compensation expense and the amortization of deferred financing costs are currently issued 2021 core for guidance does not reflect these adjustments, but we will provide all historical results.
And update our 2021 guidance when we report our first quarter results.
Now I'd like to turn the call back to Scott Scott.
Thanks, Jim.
In closing I would like to highlight that our strong full year results reflect irt's commitment to retain residents maintain our high occupancy levels and provide quality homes and communities during a time of uncertainty where per.
Proud of the efforts of our team and thank them for their dedication looking ahead, we remain confident in our operating and investment model that we built not only the weather near term volatility, but also to grow and strengthen over time.
We thank you for joining us today and look forward to speaking with many of you at cities Global property conference in early March the operator, we would now like to open the call for questions.
Certainly again as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Neil Malkin with capital one Securities Your line is open.
Great. Good morning, guys. Thank you for taking the questions and nice quarter.
For.
First one you mentioned.
G sorry JV.
No commentary on JV potentially other structures to more aggressively pursue acquisitions.
Can you just maybe elaborate on that and then why that seems like an appropriate.
Endeavor, just given your favorable stock price.
Currently issuing equity to delever and and grow as opposed to.
Doing sort of I guess complicated.
JV.
Structures. Thanks.
Thanks Neil.
Well first we don't we don't look at it as being overly complicated and we do look at it as.
<unk> Avenue to growth.
I'm confident or comfortable looking at it at this time.
Relative to looking at it the path.
Yes.
We were able to just go out in the acquired properties directly.
Because I think I've mentioned this in prior calls debt.
Some of the values in the cap rates and pricing of.
The our historical type asset the <unk>.
Plus Inc.
Some of the prices.
We think getting a little bit for.
So.
So you look at the situation, where you can you can buy a brand new.
At.
Very similar to what people are paying for.
Sure.
12 to 15 to 20 year old product.
And we think Theres a real opportunity now.
To have some new construction within the portfolio. So so not only do we see this as being a.
Benefit pricing wise, but we also see it.
As a way to build pipeline for for future growth.
It's a situation where.
The company is now with the de Levered balance sheets, I think in a stronger position and we're willing to take on some limited risk at this time.
Yes that makes sense of just to clarify that.
Is it mostly focused on.
The development.
Or just sort of newer five years of younger vintage.
I know you mentioned preferred zone. So how does that go in terms of the priority for you.
It's the I mean, we're looking at we're looking at both the <unk> going to look at what is giving us the best risk adjusted returns.
But we haven't done any transactions, yet and that's why we said we're exploring.
Got it okay.
Other one for me.
<unk>.
Just in terms of the guidance.
It seems to be honest pretty conservative just given you're accelerating from already strong levels of the blended.
Blended leasing spreads.
Obviously, you've taken your balance sheet of I think the lowest leverage in your history. So congrats on that but.
Do you.
I guess, how do you.
Book position do you take to sort of get to that that current range.
I mean, just given kind of the things you've talked about on the call in terms of strength in terms of what youre looking at from a growth standpoint.
In terms of favorable stock price.
To get you the current range of not a little bit higher.
So I'm going to let Jim answer the question completely but I just wanted to start out with saying that we feel the work very very good place right now our portfolio is well positioned where in the area of the country. It's growing.
Jobs and population.
With limited regulations.
But there is still some uncertainty so the.
Eviction moratoriums still out there we don't know how the B, we don't know how it will and we've done a very good job of of collecting rents.
And we continue to collect rent from last year and from from January still to this day.
As people are able to catch up so.
Again, if you were in a good place, but there is some uncertainty in the.
The guidance, we put out I think reflects a little bit of that Jim do you want to expand loans.
Yeah, No I think that's I think that's absolutely right I mean I think.
We've done a good job of continuing to build occupancy we feel like we're in a strong position, but there is aspects of of the next few months of it are unknown and sort of the time will tell.
As Scott mentioned collections continue the good velocity continues to be good.
Inc.
Good rent growth so far of the month of January.
Specifically the for the first quarter, but we're just being cautious about kind of what the aspects of the world that we don't know as Scott mentioned, we did in the nice job of collecting so far January rents and we continue to collect rents every day for January and January ranch actually of slightly the collections are actually about 30 basis points better today than they were.
As of yesterday so.
Life continues to improve and obviously, we will continue to evaluate market conditions and update guidance throughout the year as time unfolds.
Thank you guys.
Austin <unk> with Keybanc Your line is open.
Great. Good morning, Thanks, guys. Yeah, just wanted to hit again on some of the new news around the preferred equity and joint ventures, and just hoped you could talk a little bit more about how youre underwriting these deals and how large this investment or platform could become as a percent of enterprise value.
However, you are thinking about it and then you also mentioned that this is a source of potential future acquisitions in and help building that pipeline.
But how much would you guys be willing to expand into kind of more <unk> type assets.
Is this really hasnt been the focus.
Historically.
Thanks Austin.
So we've identified are targeted no more than $100 million.
At this time for this program.
We think ultimately would be will be very accretive.
As far as.
New construction that is not being what we have done.
Remember we were looking at.
Portfolio of the assets really because we felt that it was a better investment better long term.
<unk>.
The better opportunities for for <unk>.
Good.
Share of accretion and growth.
The.
The equation becomes a little more difficult today when you see.
Again, Youll 15 to 20 year old product trading.
Some of our markets sort of forecast. So we look at it as a good alternative way to allocate capital at higher returns.
And a way to.
Continued growth within the markets that we like and as far as the the.
Competition.
Don't forget the the areas of the Sunbelt are growing tremendously in the years Theres One report after that.
There will be of 19th to the $19 million 19 from excuse me people of.
The population growth.
The region over the next 10 years, well, that's 19 million homes that don't exist. So we think theres an opportunity obviously, it's going to be somewhat limited as I said, we're still exploring and we haven't done anything.
But we think it could be of very good way to allocate capital Accretively.
Again looking at risk adjusted returns, but but not getting out over our skis, we're going to do it in the limit and measured way.
And make sure it's the right thing to do for our company.
Got it certainly think it could make a lot of sense I appreciate the thoughts there. So as we think about kind of.
The funding. This investment you guys did issue some shares under the ATM. Some additional shares under the forward program and curious what your thought is on how much appetite you have to do anything additional.
They are on that front and kind of related to I guess funding. These initial this initial preferred equity investments either through the ATM or just capital recycling.
So we're looking at it really as part of the capital recycling.
<unk> debt.
We're not going to go out and the initiatives.
Issue equity in order to fund us.
But it would be part of the capital recycling, but again money is fungible. So we are we do think there's opportunity for growth notwithstanding the.
The.
The swap the cap rate environment.
We have very good relationships, we continue to mine them we.
We have the ability to execute and transact quickly, which some sellers once and we will continue to take advantage of those opportunities as we have in the past.
But this is just an alternative.
Use of capital and nothing different.
And.
Current earliest will come from the recycling program.
Got it thank you for the time.
Thank you.
Nick Joseph with Citi. Your line is open.
Thanks for having just following up on that.
Obviously nice to see the leverage.
Aggressive sort of made so far but.
When do you expect to get to the target of mid Sevens I think give the guidance.
And then the line.
Now some of it this morning, where do you expect leverage to be at the end of 2021.
Hey, thanks.
As it relates to our mid mid to low to mid Sevens target, we're still on target to hit that.
At the end of 2022.
We will continue to make progress on that front between now and the end of 2021.
And obviously, we'll continue to work.
Everything we can to kind of grow those earnings and reduced debt net debt to EBITDA through just normal accretion obviously there is.
Aspects of future growth, it's still a little bit on the owner we will just continue to just moderate and update guidance throughout the year of that come through.
And so what does the current guidance consists of the end of the year.
It's a slight downtick to the kind of upper sevens from where we are today of about eight point too.
Thanks for that.
Just following up on the on kind of the JV or this new external growth opportunity why is now the right time not necessarily from the opportunity, but just given the uncertainty still from.
Covid and the.
Fiction moratorium and everything like that and the progress that you've made on leverage.
Why is now the right time to execute on that versus waiting a little while longer until you have a little more clarity and stability.
Thanks, Nick its Scott.
It's one of the reasons the issue or I should say the the the things you mentioned of the reasons for that we're exploring and we haven't jumped in headfirst.
Looking at it.
We believe that.
<unk>.
The Covid will come to an end.
There is an opportunity.
Some of the lenders have pulled back making making capital.
A little.
More needed by the developers and it gives us the opportunity for better pricing.
At this time, but we are exploring and we do recognize the uncertainties and Thats why were going slow.
Now with the.
The leverage downward is and to.
To Jim's point, we can see it in the into <unk> by the end of this year.
Just feel a little more comfortable to add.
It goes those different risks.
When you look at what the rewards will be.
Could be.
Thank you.
Amanda Sweitzer with Baird. Your line is open.
Thanks, Good morning, guys.
To start with your value add pipeline and the two projects that are still on hold can you go through the fundamental of the triggers you're looking for it to become more comfortable with restarting those projects and then as we think further out do you see opportunities in the industry.
The portfolio to add properties for that pipeline beyond the six that you've outlined.
Sure Matt It's Farrell the morning, so the two properties that we haven't commenced on out of the six that we identified one is our Asheville community.
It's a market debt is heavily dependent on tourism and service. So if you look at the results were down in that market and we're looking to.
Get an 18% to 20% return on any renovation projects. So right now we just don't feel that given where the market is that we would be able to generate those types of returns. The other property is of property in Raleigh.
Same type of situation given the sub market, we are not confident right now, but we think in the future we will probably add that to the value add pipeline.
I think as you know we've built out teams in all of these markets that we're doing value add in the Columbus, Memphis Tampa Raleigh. So we're self performing all of the work and saving a considerable amount of them.
Money compared to somebody that would have to bring in the general contractors. So there is still several markets that we have not done this in that half commute.
Community that we think will eventually the added to the value of that pipeline, such as indeed, Indianapolis and Oklahoma City and Dallas. So it's just a matter of.
Again building out those teams and not doing this really really thoughtfully.
That's helpful. And then following up on the most recent forward sale can you talk more about how you thought about your cost of capital at the $14 per share issuance price I guess relative to your NAV likely increase the into the recent decline in private market cap rates.
Yes, I mean I think.
When we look at kind of raising raising equity capital we tend to look at kind of how we can deploy in.
Assets that are with the cap rates of our of assets and just making sure that it's accretive from an earnings standpoint and from the NAV standpoint. So that's the kind of how we think about the cost of capital per se. We always look at it also as a kind of incremental deleveraging. So we may not use those proceeds to fund something where its leverage neutral, but rather the leverage.
Improving through time, it just kind of take that on the account in terms of.
Making sure it's accretive from an earnings and in any of the standpoint.
That's helpful. Thanks for the time.
John <unk> with Ladenburg Thalmann. Your line is open.
Good morning.
Good morning day.
Yes.
You mentioned that the class B market appeared kind of frothy, but how has that trended recently just curious if you've seen any impact on competition for assets from kind of.
Some of the recent changes in interest rate expectations.
Yes, John Good morning, It's Farrell, yes, we've definitely seen some pressure on cap rates of our market I mean, it's a.
Pretty favorable asset class right now in the markets. We're in are desirable. So we're seeing cap rates at four 5% and trending down so as Scott mentioned, even sub for and circuit certain circumstances, where people are underwriting significant value add because of its gotten pretty competitive.
But I mean, even as even got more competitive since day like November December as maybe theres been some expectation of a little bit of the interest rate increase on the long end of the curve.
I would say that even before coming out of the summer there was pent up demand because there is a lot of deals that just when.
Sideways because of the market.
So I would say that the fourth quarter in general and into this year you have just seen a lot more people get a lot more aggressive because they haven't been able to put out capital for six months.
Okay, and then I know it was talking about the JV kind of AD nauseum at this point, but.
Yes.
In light of the discussions around JV, what is your view on kind of a supply dynamic for class a assets in your markets I mean, historically, there's been some headwinds the yen to those assets from new supply in the it doesn't existing class b.
The pandemic just kind of extinguished all of that concern given kind of population movement of some of the growth in some of your core markets.
I don't think it's distinguished that concerned, but I think debt.
We're going to come at this in a very targeted way.
<unk>.
And make sure that we are in locations in markets that we'll be able to absorb.
Any new supply and debt.
But you are well located and.
Appropriately match, so it doesn't eliminate the concern but.
We expect that we'll be doing it in a way.
Debt, we take all of that into consideration.
Okay, and then one last detail one on the balance sheet as some of the mortgage bullets come do should we expect those to be refinanced as mortgage debt or are you kind of moving to a completely unsecured balance sheet.
Yes. This is Ed.
Jim Yes, we will be moving to a unsecured balance sheet. So we will not be refinancing those at the mortgages.
Okay.
That's it for me. Thank you all very much.
Thank you.
There are no further questions at this time, it's now my pleasure to turn the call back over to Scott Schaeffer for closing remarks.
Well, thank you all for joining us today.
We are excited for.
For 2021, and look forward to speaking with you and giving you an update on our next call.
Okay.
This concludes today's call. We thank you for your participation you may now disconnect.