Q2 2022 Washington Real Estate Investment Trust Earnings Call
Welcome to the Wall Street second quarter earnings Conference call.
As a reminder, today's call is being recorded at this time I would like to turn the call over to Amy Hopkins Vice President of Investor Relations. Amy. Please go ahead.
Good morning, everyone and thank you for joining us on our second quarter earnings call on the call with me today are Paul Mcdermott, President and Chief Executive Officer, Steve Ritchie Executive Vice President and Chief Financial Officer, Grant Montgomery, Vice President and head of research.
Hammond, Vice President Chief Accounting Officer, and Treasurer, and Steven <unk>, Vice President Finance before we begin I would like to remind everyone that this conference call contains forward looking statements that involve known and unknown risks and uncertainties, which may cause actual results to differ materially and we undertake no duty to update them as actual events unfold.
We refer to certain of these risks in our SEC filings reconciliations of the GAAP and non-GAAP financial measures discussed on this call are available in our most recent earnings press release and financial supplement which was distributed yesterday and can be found in the Investor Relations page of our website and with that I'd like to turn the call over to our president and Chief executive of.
Sir Paul Mcdermott.
Thank you Amy good morning, everyone and thank you for joining our second quarter 2022 earnings call.
These are obviously quite interesting times.
Capital markets have been disrupted.
As a result of the Fed's response to rising inflation as well as other macro events, yet apartment market fundamentals remain historically strong.
Interest rate movement has caused that market to pull back and as a result transactional markets have slowed down substantially.
However, as an all cash buyer, we continue to receive calls about acquisition opportunities at certainty of execution is now Paramount.
We have completed the deployment of the commercial asset sale proceeds and are working on additional opportunities.
To continue our growth and geographic diversification.
Steve will cover where our portfolio is one year after launching major transformation steps and the anniversary of turning the corner from a worst.
Pandemic leasing conditions as well as our second quarter results.
Gross Apple.
But first I would like to talk about the environment, We now face in the near term as we continue our geographic expansion.
As interest rates have risen.
Competition has subsided as leveraged buyers faced negative terms and have moved to the sidelines.
Our underwriting has been conservative.
We plan for the potential of a lower growth economy.
We underwrote the expectation for 2023 rent increases to trend down to high single digits.
This is the unprecedented double digit trade outs, we are continuing to experience, thus far and to approximately to historical levels. After 2023.
Depending upon the market sub market that vintage of assets. We believe cap rates have expanded 30 to 50 basis points and we will continue to monitor price movement as the markets are still volatile.
That said, we have capital to deploy and are being judicious with our underwriting and continue to insist on full due diligence on each acquisition we pursue.
Recently, we pass on a transaction as our discipline due diligence discovered additional capital requirements.
While market conditions had changed we were not able to be compensated adequately by the seller.
Although this decision delays are assumed acquisition timing and lowers near term guidance.
We still have a good pipeline of opportunities and are confident we will.
Acquisitions meeting our requirements this year.
In May we closed on the acquisitions of all the park and Marietta crossing for $178 million, bringing.
Bringing the total size of our Atlanta portfolio to approximately 800 units or just over 20% of our total ops.
Our acquired portfolio returns continue to exceed the expectations that we underwrote as we assume that the current very strong rent growth levels would moderate in the coming years.
Maintaining this discipline along with focusing on growth starting with firm initial yield targets has proven to be prudent as the environment shifts.
Thus far we've executed on our geographic expansion by targeting specific assets, but we are also evaluating private portfolios and other opportunities, which would allow us to scale our portfolio more rapidly in line with our strategic direction.
While there is currently less product in the markets of sellers are assessing conditions, we are working on opportunities to continue to grow.
Including exploring ways to structure transactions based on net asset values.
These kinds of opportunities take time, but may provide excellent mutual value creation opportunities ahead.
With that market backdrop, I'd like to comment on the operating environment in our markets.
We continued to benefit from good fundamentals driven by strong demand for value oriented hubs in the D C Metro and Atlanta.
Nearly 80% of our same store portfolio is located in northern Virginia, where effective rents accelerated into the summer months.
Rising nearly three 5% on average during the second quarter and 13% year over year. According to real page.
New lease trade outs for the Washington region, which continue to have positive momentum increased 15, 4% for the second quarter.
430 basis points from last quarter.
In Atlanta year over year effective rents grew by 16, 8% in the second quarter as reported by real page and remain at near record levels.
Our communities are benefiting from strong demand and high retention in addition to significant growth in market rents.
Even as the outsized market rent growth that we're seeing today moderates, we foresee sustained demand for our value oriented price points.
As interest rates have increased home ownership has become even less affordable for middle income lenders, which comprise the largest share of renter households, and our current and target markets.
Housing shortages continue to worsen overall and the lack of affordable housing options is even higher.
According to a recent study the Washington Metro has a shortage of 151000 housing units in Atlanta has a shortage of 81000 housing housing units.
Within our Washington Metro markets, the premium to own the starter home compared to our current average asking rent is over $700 per months.
In Atlanta, that's approximately $1000 and widening as Atlanta home values have risen nearly 60% compared to three years ago and.
In fact, the differential cost between renting versus owning nationally is the highest it's been the century.
We're seeing the impact of rising cost of homeownership and our move outs statistics as the number of move outs related to home purchases declined 20% year over year during the second quarter and over 25% on a year to date basis for our same store portfolio.
Move outs driven by home purchases were even lower in our Atlanta communities, representing less than 9% of our second quarter move outs.
Furthermore, the majority of new supply coming into our markets is concentrated outside of the areas where our communities are located.
Only 11% of the new supply in Atlanta, and less than a third of the new supply in the Washington Metro is delivering into wash REIT Submarkets in 2022 and 2023.
Moreover, our price points do not compete with new deliveries.
Our average effective monthly rent is $800 lower than newly delivered class a communities in the Washington Metro and $480 lower for Atlanta communities.
Given the recent rise in construction and debt costs, we expect supply levels to decline past 2023.
So far this year, we've achieved higher rental rates, we had expected in market rent growth has remained very strong into the summer.
Over 30% of our leases expire between July and September and.
And we expect same store NOI growth to be higher in the second half of the year as the combination of rate increases earned into our rent roll and final pandemic leases rolling off drives higher overall growth in rental income.
Additionally.
Income growth remains robust and can support continued rent growth.
Medium incomes for our Washington Metro communities have risen 12% over the past year.
14% for Atlanta communities from the second half of 2021 to the first half of 2022 under.
Underscoring that strengthening credit profile of our resident base as market rents grow.
Given the strong demand levels that we're seeing today combined with rent increases we have experienced since last July we are well positioned for strong same store NOI growth for the rest of 2022 and 2023.
The acquisitions, we have made throughout 2022 will provide even greater NOI growth.
We expect strong NOI core <unk>.
And core <unk> growth going forward beginning this third quarter of 2022 and further strengthening in 2000 22023.
In fact with this growth building I want to be clear that the reason we are lowering the balance of 2020 twos guidance is because we delayed the timing of the assumed acquisition and are capitalizing less interest because now is not the time to activate development at Riverside as Steve.
We will cover our growth is now getting stronger.
As we continue our transformation, we are rolling out new and improved operational infrastructure that will position us to deliver better service to our residents and operating leverage for our shareholders as we grow.
We are making great progress on this part of our transformation and we continue to uncover new opportunities to improve property level operations.
We're executing a major overhaul of our operating model technology platform.
Resource infrastructure and branding strategy ahead of internalizing property level residential operations later this year.
This transformation includes three phases in total and we are now moving moving into phase III.
Since our last update we have designed our near term and future state human capital models and have filled several key positions and are continuing to recruit for corporate positions that will support our internalize the model.
We are redefining our culture, but further support and meet resident needs, while incorporating diversity equity and inclusion and belonging into all people related aspects of this project.
As we look forward to welcoming the onsite property teams to the company. We are building out our training program and developing compensation and incentive packages to align all team members with our resident centric mission and long term vision and ultimately support our business strategy and growth.
We are implementing our core technology platform and our testing and planning for cutover of third party data into a new core operating system.
We are also creating a resident focused brand strategy with plans to launch our new name brand and website later this year.
A significant component of our marketing will be focused on customer experience and technology enablement.
Along with our infrastructure overhaul, we aim to elevate the value living experience for mid market renters by rolling out a pilot program that brings ease of living and operating cost avoidance provided by smart home and smart building automation.
It's a well known fact that class B properties have lagged class when it comes to technology investments, but we believe that by tailoring, our technology investments to needs and priorities of our residents. We can improve our business day to day experience at investment levels.
For mid market price points with technologies that will reduce our operating expenses and advance our environmental goals.
Our initial pilot program includes smart door locks thermostats.
Water leak sensors and community wide Wi Fi designed to ease the resident move in and living experience.
We plan to rollout this pilot initiative as part of our broader plan to improve and streamline the technology used to add communities as we start to bring property level operations in house starting later this year.
We expect the process of Onboarding property level operations in each of our communities onto our internal systems to be completed by mid 2023.
And for most of the costs related to the broader infrastructure transformation to be absorbed this year in line with our updated guidance range.
By year end, we expect to have the G&A expense base in place going forward, which will not be substantially different from the ongoing level, but it is today to support a doubling of our unit count when conditions are appropriate to do so.
The future should provide additional opportunities and benefits to scale, the business and optimize our expense base.
Meanwhile, we now have significant growth earned into our portfolio as we creatively wait for the best opportunities to further scale.
Steve will expand on that further.
Before we cover that I'd like to provide an update on a couple of our Es recent ESG initiatives.
We've nearly completed the installation of solar panels to our apartment communities in D. C. When activated these systems will generate enough clean energy to regroup reduce greenhouse gas emissions equivalent to the impact of 7800 trees each year.
Additionally, this past month, we kicked off the installation of electric vehicle charging stations across all our Maryland communities.
We are coordinating with the state of Maryland, as well as the local electric utility to take advantage of rebates that will potentially cover 100%.
Installation costs.
We are actively coordinating across our Virginia and D. C properties to identify and take advantage of other similar great opportunities to lower the entry cost of installing EV charging for our residents given the increased demand in the past year.
Now I'd like to turn the call over to Steve to discuss our growth outlook in more detail capital allocation and planning and our second quarter results and outlook.
Thank you Paul and good morning, everyone I'd.
I'd like to cover where we are at this point, having launched our most significant steps in our transformation one year ago and talk about our operating results trends and outlook before covering our second quarter results and guidance.
We are now in the third quarter of 2022.
Which represents the first quarter performance that includes the full allocation of the net proceeds from exiting our commercial businesses.
It will also be the first quarter were substantially all of our multifamily leases that had at least one post pandemic inflection lease rate increase.
Our transformation was designed to provide tailwind of growth as opposed to the headwinds facing the commercial office and retail sectors.
We have had historically strong rent trade outs since we reached the pandemic rental inflection point beginning on average last July .
By the end of this quarter nearly all of our leases will have captured strong year over year rent trade outs substantially all pandemic lease consumptions will now burned off.
The growth that we are capturing as we signed new leases remained in the double digits for leases signed to date with July and August commencement states, reaching get a new same store peak for effective new lease rate trade outs of 13, 9% for July .
Our total loss to lease that 11% at quarter end and combine this gives us true visibility into the growth that is ahead.
Starting with the third quarter of 2022, we expect to average double digit same store multifamily NOI growth for the next five quarters.
All things considered we have excellent visibility into very strong NOI and core <unk> growth for the second half of 2022 and all of 2023.
On top of our historically strong same store growth, we have strategically and geographically expanded and invested in southeast communities, where the year over year growth for the months owned in both 2022, and 2023 will be much higher than our same store growth.
While we are forecasting inflationary impacts on our cost base, most notably payroll and utility costs we.
We have a rent roll with fully embedded year over year rental growth that is further enhanced by the burn off of the pandemic induced lease concessions.
As we capture our loss to lease it will build on top of the growth that is already embedded in our rent roll.
Driving higher NOI growth, which will carry into 2023.
Given that most of this growth is either <unk> or embedded in our loss to lease is now visible as we begin the third quarter and again, we expect it to drive strong core <unk> growth through 2023 as well.
Another main objective as we launched this final step of our transformation into a multifamily company, what's the geographically diversify our portfolio.
As Paul just gave an update on our recent acquisitions, we've made great progress thus far.
Annualized NOI for Atlanta communities is expected to be approximately 20% of our multifamily NOI by the fourth quarter of 2022.
We continue to evaluate southeast acquisitions on an ongoing basis and are exploring additional opportunities to further diversify our geographic concentration.
We will monitor capital markets and pursue opportunities to scale and diversify by recycling some lower growth assets in our DC metro portfolio into higher growth southeastern communities that align with our investment strategies, we will be disciplined about accessing capital markets and we certainly see the disruptions to them.
We are creatively exploring our opportunities to scale grow profitably and further expand geographically, including through private portfolios to be a possible NAV structured acquisitions that could make sense for both parties.
These pursuits take time to evaluate and execute and they provide excellent opportunities to further accomplish our three objectives of profitable growth geographic expansion and profitably scaling the company when.
When it makes sense to do so.
Nevertheless, our primary objective of delivering value and profitable growth is now visible and we're experiencing it.
Again, the third quarter.
Now turning to our operating highlight same store occupancy averaged 95, 8% during the quarter and retention was 63% during the quarter, representing a 6% year over year increase.
Our same store move ins that took place during the second quarter effective do lease rate growth was 11, 7% and effective renewable lease rate growth was 10, 9%, which blends to 11, 2%.
We are continuing to achieve mid teen effective new lease rate growth for our same store communities, averaging approximately 13, 9% for July move out.
For Atlanta move ins that took place during the second quarter effective new lease rate growth was 17, 7% effective renewal lease rate growth.
Was 16, 3%, which Glenn to 16, 9%.
For July move in new lease rates increased 18, 2% and renewal lease rates increased 16, 3%, resulting in blended lease rate growth of 17% in our Atlanta communities, we expect blended lease rate growth to moderate after the seasonal summer months, but remain above historical levels through 2023.
Beyond what's already reflected in our loss to lease average effective market rent growth is expected to be approximately 11% for the Atlanta region and 6% for the Washington Metro area for 2023, According to real page data.
Our loss to lease stands at 15% of our non same store portfolio and just over 10% for our same store portfolio, which blends to a total loss to lease of 11%.
We expect to capture our loss to lease over the next 12 months to 16 months, allowing in place rents to grow as the portfolio turns.
During the second quarter, we renovated 75 unit for a return on investment up a little over 12%, excluding the rent growth that we achieved comparable on renovated units.
And if you included total rental increases in your ROI It will look more like 25%.
As we continue to acquire communities with renovation potential we expect renovation led value creation, we have an increasing impact on our growth trajectory alongside our geographic expansion.
In particular, we expect renovations to extend the tail of our rental rate and NOI growth going forward.
We expect to return to our historical annual renovation run rate of approximately 600 units per year as we look forward and then grow as we continue to scale.
Our forecast contemplates inflation pressure on wages utilities insurance and repairs and maintenance costs into 2023.
When considering those factors at this point, we expect strong NOI growth in 2023.
Now turning to our financial performance net loss for the second quarter of 2022, with approximately $8 9 million or 10 cents per diluted share compared to a net loss of $7 million or eight cents per diluted share in the prior year.
Core <unk> was <unk> 21 per diluted share, reflecting a year over year decline of 2014.
Due to the impact of our commercial asset sales as well as the timing of reinvestment.
Multifamily same store NOI grew five 1% over the prior year, driven by higher base rent and occupancy compared to the prior year period offset in part by higher bad debt.
The increase in bad debt was largely due to some increasing delinquencies as a result of an extended eviction timeline, while the Virginian government assistance program with winding down prior to ending on July one.
We expect repossessions to increase during the third quarter for bad debt to show a visible decline in the fourth quarter.
Average effective monthly rent per home for the quarter increased 7% compared to the prior year on a same store basis, which also represents a substantial improvement compared to the 3% year over year growth achieved last quarter.
As we mentioned last quarter, we expected growth in average monthly rent to remain strong over the course of the year as more and more rental growth has been captured in our rent rolls today.
Still have one third of our leases expiring during the third quarter, replacing leases signed what rents were just beginning to recover starting July of last year.
Other NOI, which represents Watergate 600 grew nine 6% in the second quarter compared to the prior year driven by higher rental income for new leasing and rent increases as well as increased parking usage.
To date 600 is an architectural landmark in an amenity rich neighborhoods with high quality institutional kind of thing.
Now turning to our outlook for the balance of the year, we are slightly lowering and tightening our guidance range by <unk> at the midpoint due to a delay in timing of further acquisitions and increased interest costs, including lower capitalized interest and higher interest rates. Neither of these adjustments have changed our outlook for 2023.
We are raising and tightening our same store multifamily NOI growth guidance and now expect it to range between $8 five to nine 5% at the midpoint. This represents 11, 5% NOI growth for the last two quarters of 2022.
25 basis point increase over our prior guidance.
<unk> growth for same store and drove combined also increased and is now expected to be between 12 and a quarter in 13.25%.
Trove was fully invested in both years and represents true year over year growth on the same capital investment.
Non same store multifamily NOI, which consists of trove, the Oxford Assembly Eagle planning Carlisle Sandy spring Waterpark marijuana crossing and the Riverside development site is expected to be between 22 and $23 million.
Which drove represents approximately $7 million.
This is slightly lower than previous guidance as operating expenses and bad debt are expected to be higher and capitalized costs related to development are lower.
We have raised the midpoint of our guidance for other same store NOI.
Which consists solely of Watergate 600 to a range of 13% a quarter.
13 of three quarters of $1 billion.
Our <unk> guidance range incorporates approximately $125 million of additional acquisition now expected in the fourth quarter of this year later than previously guided.
Delay in timing net of carrying costs lowered our 2022 guidance by approximately a penny per share.
Other factor that impacted our prior guidance is that we suspended development activities at Riverside for now and.
And are no longer capitalizing interest for taxes as I said, our guidance includes $125 million of additional acquisitions later this year and when completed we expect our net debt to adjusted EBITDA to be in the mid five times range on an annualized basis.
Yes.
G&A at a core adjustments for severance restructuring costs is expected to range between 25, and a half and $26 $5 million, excluding the impact of transformation investments for our future platform at our full integration.
Interest expense is now expected to range between 25, and 26 in a quarter million dollars.
Which reflects the net impact of higher interest rates later acquisition and lower capitalized interest during the second half of the year.
We expect our core <unk> payout ratio for the year to be in the mid seventies, and establishing an <unk> growth profile that should provide us with additional flexibility to grow the dividend.
And finally, we continue to expect transformation costs, which represent costs related to our strategic transformation, including core systems implementation branding and human capital initiatives operating platform design and retention of termination benefits to range from $10 $511 $5 million.
By the end of 2022, we expect to have the infrastructure in place to manage all of our communities in house and we expect we will incur a residual transformation costs in 2023.
Operating fundamentals are historically strong and while we expect the current pace of market rent growth to moderate we see a lot of momentum as the year progresses, which will carry over into 2023.
Much of this near term growth is embedded in our portfolio today is being extended further as our in place leases catch up to increasing market rates.
Looking forward, we continue to expect outsized market rent growth in our markets over the next over the near term.
Which will drive the top end of our loss to lease higher as our in place lease pool times.
Trove will provide meaningful growth experiencing a full year at stabilized occupancy coupled with initial lease up concessions burning off in.
And finally, our value add renovation and affordability gaps strategy and our strong renovation pipeline provide opportunities that we've already captured further extend profitable growth beyond market rent growth levels for the next three to four years.
And with that I'll now turn the call back to Paul.
Thank you Steve.
Before I conclude I want to take a moment to welcome our New Board member Jenny banner, who will serve on our audit and governance committees.
He is a highly accomplished senior leader with 14 years of CEO experience and 20 years of public company Board experience among our many accomplishments she has been a public speaker and consultant globally on the board's role in digital transformation, which is an area of focus for us as we continue to improve.
And streamline our corporate and property level technology infrastructure.
Our technology expertise and leadership will be a great asset for wash REIT.
I'd also like to thank the entire board for their ongoing support and commitment.
To conclude as we enter the third quarter, we have a line of sight on the best growth outlook, we've had in recent history.
It's been a year since we embarked on the final phase of our multifamily transformation.
With same store NOI growth expected through the third quarter of 2023 expected to average in the double digits and even higher growth from our non same store communities. Our outlook is certainly much better than it was a year ago.
Our internal transformation continues.
And we are actively preparing to begin bringing our community operations in house.
Looking forward, we have several exciting announcements on the horizon include.
Including our new resident focus brand rollout later this year.
While our plans to scale our company might take time as the capital markets disruption subsides, we are confident in our ability to execute on opportunities and grow profitably and to further expand geographically and look forward to delivering very strong growth from our existing communities.
Through 2023 and beyond.
And with that I will now open the call up to answer questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We asked about while posing your question you. Please pickup your handset if listing on speaker phone to provide optimum sound quality. Once again. Please press star one if you have a question from the lines. Please hold while we poll for questions.
And the first question today is coming from Blaine Heck from Wells Fargo blend your line of sight.
Great. Thanks, good morning.
So clearly acquisition expectations are delayed a little bit contributing to your guidance reduction it sounds like that delay as it related to the specific situation you have with that seller, but more generally Paul can you give us a sense of whether you expect opportunistic or somewhat distressed situations to emerge given the disruption in the <unk>.
Capital markets, whereas the overall decline that we're seeing in transaction volume just more attributable to just price discovery on all deals given the meaningful movement, we've seen in the cost of capital, but maybe fundamentals are holding up well enough that there isn't going to be much distress.
Well, let's start with the capital markets, where you did I mean, and let's start with looking at that first.
If we look at the agencies right now.
Their coverage ratio constraints.
And they are underwriting on trailing 12 has really started taking the amount on deal I would say over 55% LTV the debt funds, who we talked about a couple of calls ago, who we're normally very aggressive well their costs have increased.
And so as they're stabilized debt.
That yield requirement. So they were really I think they owned a lot of the higher LTV deals.
And where they were extremely competitive.
And now that that those types of requirements on the debt yield have really hindered them from from reaching out and doing those those higher LTV deals I still think you're going to see deals and we are seeing deals because we're known to be an all cash buyer.
And the deals that are going to get done in this market are going to be all cash or lower leverage, 50% LTV 55 or lower.
I think the biggest thing that has changed.
Probably in the last quarter is the premium that is being given to certainty of execution and I think look we've.
We've tied up five deals and we've closed five deals.
I think we are known in the target markets that we're in.
That.
We do offer certainty of execution, we're not we're not shying away from our underwriting.
And as I said in my remarks I believe.
Our observations are the cap rates have expanded.
30 to 50 basis points I would say Blaine if I was talking.
About office product that number is probably going to be higher same with retail, but I do think there is.
Because capital costs of increase Youre definitely seeing some repricing of assets.
And I think the larger deals are are the portfolio deals.
If I had talked to you six months ago I would've said, there probably would have been a premium for portfolios and now were seeing discounts.
The other big thing blame we're seeing now is that.
Loan packages or loan sales or really just as important on an investment sales platform as one off there has definitely been a bifurcation kind of.
When I look at the market.
And especially Blaine if youre looking at D. C in the office market trophy versus commodity.
One of those is getting financed and really one of those has been hit pretty hard, but it really depends on the asset class the submarket and the vintage in terms of the types of discounts that we would apply but we've got more calls probably in the last 60% to 75 days on deal.
<unk>.
Then we have probably.
18 months, we've been in the capital markets.
Brokers most of the brokers that we talk to and even some of the owners I think people are taking a little bit of a pause.
For the next 30 days, but we expect to see a surge in product coming to the market after labor day.
Great that's very helpful color.
As you mentioned you guys are halting development at river side at this point and business related to the first question, but on the other side of the deal is there anything to read into that decision with respect to a potential monetization of that asset or even part of that asset or would you say it was driven more by kind of the other factors that you mentioned in prepared remarks.
I think it's driven just because we are being prudent in our underwriting and.
When we when we look at.
Our requirements our initial going in yields on that we want to see more data points from that market that market is certainly moving in a positive direction, but when we combine that with the increase in construction costs from when we first started the pre development work on that I think construction costs Blaine have gone up probably 20%.
Over the last two plus years.
That's the only reason, we're still very committed to that asset we like what we're seeing in our current same store pool.
From the Riverside asset itself, and we think that that that project will be a long term winner for us, but just right now we're really focused on current income as we make this transition.
Okay great.
Last one from me Steve wanted to ask about same store results in the quarter and particularly on the change in rental and other revenue at five 3%.
The context of average rent per home.
7% year over year, along with a <unk>, 7% increase in occupancy I guess I would've expected the total revenue number to be up more.
Was there anything in the other property or elsewhere that offset that rent and occupancy growth.
Well first of all I think what Youre seeing is that we've really been building. It I think you'll see that kind of growth in the third and the fourth quarter.
So for us.
I think we hit our inflection point a year ago.
In terms of post pandemic, maybe a little slower than some other markets that started in July thoughts in concessions and all that sort of differ continuing to burn off through June that were amortizing. We did have a little bit of timing noise in the quarter on both <unk> and <unk>.
Fence item.
A couple of expense items and also that would have affected revenue.
We had probably what we think will be our peak bad debt quarter, which affected revenue a little bit in the second quarter. It's just literally.
We've got projections going out for the year, but I think the second quarter was our peak as we've looked at just the aging of receivables.
Whole cloth from getting repossession units back flips at the beginning of the third quarter and we were it was just a little bit extended there. So that may have affected the second quarter, a little bit and then on the expense side, which was not what you are asking about but we had just a comparative year over year, we had a real estate tax.
Reassessment credit.
In the second quarter of last year, and so it looks like expenses went up more other than that in couple of the assets that we bought in Atlanta is just we were we have a little bit of timing differences, we were forecasting exactly when we would incur a few costs and we hit a couple a month or two earlier than we thought we would just as we were onboarding those assets.
But I think when you really look at what we tried to put out there in our prepared remarks Blaine.
We are seeing incredible.
Our historical levels trade outs new.
Renewable effective blended.
Blended.
Our loss to lease was.
It was 11% into the quarter.
And we just see this momentum now coming into the third quarter.
So I feel.
The revenue is really building and again I guess, one other thing just to emphasize from their prepared remarks.
This is the first quarter, we launched.
A year ago this transformation.
Now finally fully invested as of July one for a whole quarter from the reinvestment of the transformation and we're also finally, reaching the pandemic leasing collection. So we were setting up for growth. It starts really July one for us and we've been positioning ourselves throughout the last year to get there.
Got it very helpful. Thank you guys.
Thank you and the next question is coming from Mike Lewis from tourists Securities. Mike Your line is flat.
Great. Thank you.
I wanted to follow up and ask a little more specifically about cap rates.
And on.
The cap rate on your second quarter acquisitions versus what you expect for the fourth quarter ones, you mentioned cap rates moving 30 to 50 basis points. So.
Bye.
It's unfortunate that you got delayed on an acquisition.
Case, but are you benefiting.
Sitting here in other words it becomes a drag this year, but you think it will maybe cap rates are a little higher than you thought on the acquisition side, maybe that becomes a little bit more of a tailwind next year or am I am I kind of overstating that movement in acquisition cap rates.
Well, let me, let me make a couple of points on your question Michael.
It never unfortunate to walkaway of deal walk away from a deal that doesn't meet your underwriting criteria because.
Somehow some way, we think that thats going to come back and rear Ted and this particular deal that we had tied up.
Would have met and exceeded our acquisition goals this year, but I'm proud of my team for having the discipline.
When we didn't get the capital improvements adjustments that we needed.
Nearly the market was moving while we tied it up.
And.
We also think that there could be some some credit challenges potentially moving forward.
No.
This is the time you need to maintain your discipline, but to your point I think we will probably see.
As I said to <unk> question number one I think we're going to see a lot more deals.
In the second half and.
Just the.
The bid ask I would expect that a lot of brokers that are taking on listings right now and even some of the owners I think theyre, becoming more realistic on the bid ask I think some of the sellers, particularly in the southeastern markets were a little bit in denial that the market had moved.
And we were watching deals get re traded all around this Michael.
These are deals that were probably.
In the mid to upper three deals that were now going at four in a quarter to $4 35, and seeing even even in some of the submarkets those deals getting price to upper fours I think our investors and our portfolio will be a beneficiary.
Longer term and coming in at a better basis.
Okay and then.
Second I wanted to ask you to.
The portfolio now Atlanta is only about 8% of total NOI <unk>.
How aggressively do you go about getting sunbelt that as a percentage of the portfolio from here I know you have like you said more acquisitions in the back half of the year do you think there is a.
Does this involve a next stage.
Either DC area dispositions and sunbelt acquisitions are.
Is it more of a gradual shift in the portfolio over time and kind of where do you want to end up on that Matt.
Michael Steve I'll start and Paul ill hand, it over to you to kind of round it out.
Some of those acquisitions came in late in the quarter.
Our models show is it 20% in the fourth quarter in terms of Atlanta NOI as part of it. The other thing I would say is.
Obviously, they are growing really well and we would have talked and then I'll get to kind of what we will do transactions.
What we were targeting for when we rolled out the transformation to try to get approximately a four cap rate or a little better.
As of today for the assets that we've acquired are 12 months yield forecast looking forward from June 30 to now is a four six so obviously, we're getting growth and good returns on what we've acquired so far so that's growing there.
We have three objectives.
I may have mentioned this in the prepared remarks.
One we wanted to get out of the headwinds and get the tail winds behind us and to generate profitable growth. While we're at that one year point, where we've repositioned the company and we've got.
Really significant growth ahead of us as I laid out in our remarks, and I think if you model. It falls all the way down to.
To the Bottomline and hopefully we'll be able to give guidance for next year are fairly soon.
In terms of all the way down.
Secondly.
The.
The goal was to geographically expand and I think we want to continue to do that 20% is not where we're stopping and we want to make it more and more a part of the asset.
Asset base of the company.
It really diversifies, our business risk, but it also we believe with our research allows us to participate and even higher growth.
The third thing is continuing to scale to scale profitably that will require external capital and we will do that at the time that it makes sense, but we're not we're not we're not pausing here, we're actually looking at some creative solutions with private portfolios. They can accomplish geographic expansion and scaling if we could agree on NAV <unk> NAV versus just current <unk>.
Capital market pricing et cetera, so, let's take a while but there are people we're talking to along those lines. So we're going to continue to be creative.
But we also.
Can and will.
We're getting ready to do some of this we will recycle out of some low growth assets here and use those proceeds to.
Allocate capital more to the southeast and higher and generate higher growth. So.
We're going to the playbook some of it we're not using right now, but we have a big playbook, we wanted to create optionality.
And.
We get a portfolio deal done I think we can move faster.
It's just we're going to execute what makes sense at each point along that.
The way I don't know if you want to add to that.
Yes.
Over to Steve Yes. Thanks, that's really helpful. And then just one last quick one for me.
I have almost no debt maturing in the next several years so of course I'm going to ask about the <unk> piece, you do have which is the term the two 3% term loan next year.
Should we just assume youll grow that into another term loan and how much do you think rate has moved on that.
Well look I think.
That's part of the Optionality, we have because that is that is.
That we can.
Pay without penalty.
So.
<unk>.
We have the option of rolling that back into the bank market into another term loan, but I also want to keep open the possibility that we could pay it off if we got a hold of the portfolio and had to assume another kind of debt instead.
We're going to have both of those options I think we could definitely.
Extended if we needed to.
I think it also might be the way that we can structure.
The potential portfolio transaction, where we need to pay off some of our debt.
Alright, great. Thank you.
Thank you.
Question is coming from Michael Gorman from BTG, Michael Your line is live.
Yes. Thanks, good morning, Paul sorry, if I missed it but did you mentioned the deal that you walked away from because of the discipline on your underwriting did that ultimately trade with another buyer did that they pull it off the market is that something that you think will come back as you talk about the next 30 days as sellers reset expectations, what's the status there.
<unk>.
To our knowledge and as of this call.
That deal was.
Paul.
And we would expect it's not a it's not a fund that is monetizing, but we probably would expect to see that deal.
Potentially in the fall and I think we've we've done our homework and I think we've underwritten the asset appropriately and calculated the risks and.
We stand behind our number that we would we would acquire that asset.
Okay, Great. That's helpful. And then maybe as you talk about your underwriting and then what youre seeing in the market.
And obviously wall Street is being disciplined here have you gotten more conservative with your underwriting in terms of rent growth over the past 30 to 60 days as you've looked at the macro environment do you have a sense obviously the capital markets have been having an impact on cap rates, but if you had a sense that buyers are.
Shifting their underwriting expectations for rent growth in the apartment market as well.
Michael Let me answer that in two pieces.
<unk>.
Okay.
I would say that our team from the get go has always been disciplined in the underwriting.
And we really never thought that these growth rates, we are seeing now.
For sustainable and.
Last year, when we were losing deals.
We took the market rent growth the first year, we pared that down to high single digits.
In year, two and then we return to.
Normal historical rates, which were mid mid to low single digits in the beginning of the third year.
I think we are still comfortable with those although we're hedging.
A little bit and we're also.
Digging deeper now into historical on accounts receivable bad debt. In addition, I think we have a great physical team, but we're counting on that that are more moderate.
Kris other buyers that we've seen come in especially Michael because right now the people that are.
Active in the market or are getting deals done like I said earlier, either all cash buyers or they are in the mid level ltvs.
They're they've tightened there.
Underwriting approach and there is a particular focus on there is a particular focus on the credit envelope.
Around that NOI.
Okay. That's really good color and then maybe one more on the underwriting as you're doing this transition to in house property management, you're doing the technology rollout all of those things how does how does that factor into how you consider the expense side of your underwriting when youre looking at these assets your ability to maybe drive.
Drive better NOI through the efficiency side as you're underwriting assets is that something that youre not kind of putting through the models yet just because youre still early in the transition or how does that factor into how you are looking at assets.
So we certainly factor Mike Michael Steve, we factored into our modeling of Onboarding. All of this I don't know that we'll get the full benefit of it until we actually have everything in house.
It is running.
But as we look at property management expense is about 70% of that is what we pay third parties and then.
The balance of it is split between our own internal management overseeing it doing our overnight pricing and asset management in all of our properties today, and then our own technology charges.
On top of that.
We believe that when you cut out the third party services.
<unk>.
We have a very scalable base of technology and corporate structure ourselves that theres a net savings.
All of that plus in terms of efficiency in staffing.
When you own it yourself.
You can operate it consistently across all your properties. According to your own model. So there are things like centralization of certain functions et cetera that are factored into our long term cost structure.
We're factoring it into it I think it is.
Take until about mid year of next year before all of the properties, we currently own or internally on the same system, but thereafter.
We believe we'll start to realize some of those savings too.
Great that's helpful. Steve and maybe one last one for you you talked about some of the.
Potentially interesting or an innovative transactions on the <unk> side for private portfolios, just taking some of the $125 million of acquisition guidance targeted for kind of fourth quarter of this year are any of those private portfolios kind of targeted in that number or are those more traditional one off deals that youre seeing in your pipeline.
Youre underwriting right now.
Traditional deals that we have sight on and our pipeline and as Paul said, our pipeline is probably going to expand after labor day.
On top of that plus maybe some other deals that we passed or it might be visible again at that point in time, but we're actually working on assets that could possibly do more than that that's what we're guiding to right now that is not.
The portfolio <unk> type structure with.
Those are hard to work out but.
But there may be ways to do that that creates value and scale and get our geographic expansion kind of accelerated so we're doing those things kind of in addition to our normal in the market working with brokers and owners.
Acquire assets.
Great. Thanks for the time guys.
Thank you.
The next question is coming from Bill Crow from Raymond James Your line is less great. Thanks, Hey, good morning, guys.
Couple of quick easy and then more theoretical or strategic question first of all on the bad debt I think youll, probably be talking about it more than anybody else in the multifamily side.
I'm just curious whether it is a issue that's kind of.
Walmart versus target sort of issue of sub market issue or why you are having seem to be having a little bit more challenge.
Bad debt front than than your peers.
Well first of all I think it's timing because I think we had a pretty light bad debt in the first quarter and they had a heavier one when you look at it I think it's just literally where we are in terms of the program in terms of.
Just a couple of the macro things that I think that you are implying.
Which is a fair good question Bill.
It's not a question about income where people's ability to pay.
And I'll, let grant out a little color in a second to that too but.
Right now we are back to pre pandemic rent levels and incomes are much higher and it's really more about the ability to get possession of space versus.
The ability of renters to pay in fact in the UCITS, where we've had some aides delinquency until we hit this the opportunity to start Repossessing, we're getting $14 15, 17% trade outs in some cases in the same property. So there's a deep market with the ability to pay behind it but grant maybe you could.
Comment if you don't mind, just on sort of the macros in incomes and off.
If you would.
Sure happy to.
Yes so.
In our in our portfolio.
Average rents increased approximately $350 since March 2020, the onset of the pandemic. Meanwhile, though.
Washington Metro.
Incomes across the region have grown about $570.
We mentioned in the call within our portfolio are actual residences.
Incomes are up 12% year over year.
In the Washington region, and really just over the last six months compared to the end of 2000.
'twenty one with the beginning of 2022 incomes up over 14% of our residents and our Atlanta property. So.
As Steve said, it's really not a wherewithal issue at all in terms of incomes versus rents.
Alright, I appreciate that.
Second question I think you said retention was $68.
<unk> I think it was somewhere in that range of 60%.
Curious how many of those people are leaving to buy houses and whether you think you have seen any benefit over the last month or two from the.
Shoot up and mortgage rates.
Grant once again.
Yes.
We certainly have.
Both in our Washington market and in our Atlanta market.
Washington market.
For move out to home purchase has declined about 20% compared to the prior year.
We're in Atlanta, it's been even more dramatic and it's about a 50% change it's actually under 9%.
Move outs and that had been more in the high teens.
Recently.
The beginning.
Beginning of the year.
Okay. Thanks.
And then I guess.
Bigger picture, Paul one of the things that I've admired view.
Since we first met was your aggressiveness.
And you really focus on driving shareholder value and I'm just curious as you as you continue to trade 100 basis points wide of.
The multifamily REIT group.
Cap rate basis.
But also as you continue to build out.
Your company and they had a lot of in place does it change the way you might think about selling the comp.
If you were to get a bid.
How you might react to that.
Bill I think in our first discussion.
Way back when.
I said first and foremost we're going to do the right thing for the shareholders.
I think right now we're.
We're trading.
Down along 52 week lows in that in that region.
90 days ago, we were at a much different number and have brought our options but.
I think what we're doing right now is creating value for our shareholders I think everything we're doing with project re imagine, bringing the operations back in house.
Diversifying our portfolio.
Recycling out of lower growth assets into higher growth assets.
Our thesis and our execution has always lend itself to creating value for our shareholders.
I know the cap rates that we're trading at right now.
Do I think that we can do better I think when you start seeing our next quarters performance maybe the next five quarters performance I think our stock will improve and we're not a group that picks up our Jackson goes home.
We hit a speed bump.
I still think theres a lot of value to create here, but of course, we're always.
We're always going to.
Do what.
In the best interest of our shareholders.
We're going to be consistent about that bill.
Okay I appreciate that thanks, guys.
Thank you.
Thank you and the next question is coming from Adam Peterson from Green Street Allen Your line of size.
Hi, everyone. Thanks for the time.
Just hoping to get some more color around the lower growth D C assets <unk> and.
In terms of the initial marketing or when you guys are having those margin discussion can you share what pricing is looking like for those types of assets and amongst the three submarket locations, Maryland, DC, and Virginia, where we could potentially see some of those dispositions come out of.
I think right now I mean, we are.
I'll start with DC.
I think the trade out we're seeing are strong in DC. The challenge that youre seeing in D. C. Right now there's a couple of them.
First is that we had.
Caps on our ability to increase rents.
And.
Over the last 24 months basically.
Now that those have come off.
A lot of the buyers that we talk to in a lot of the brokers.
Investors want to see a little bit more seasoning, and particularly flush out the AAR numbers.
But we're definitely we definitely know the market is there.
People are DC does perform well when other market don't.
So I still feel like there is there is a lot there the biggest challenge in D C right now.
Is is we still have TOBA, so for buyers that want to use leverage.
They are in a little bit of a jam on let's say.
Forward rate lock deal, where total might take six months, you can't get a spread lock.
So I think that hindered.
The deal pace.
But overall I think D C. Like like we said before in our prepared comments D. C is back to and it's better than pre pandemic. So I just think it's a matter of time since I think more prudent investors are being sensitive to credit standards applied by operators.
If I turn to Virginia, I'd say, Virginia, Northern Virginia is the most active in our region.
The macro economy is outperforming and deals are getting more attention I think there's probably two or three times as many deals apartment deals in northern Virginia right now as there are on the market in DC, there aren't really any accounts receivable bad debt issues in northern Virginia to seeing excellent trade outs as we've.
As we've also said.
Maryland is still seeing activity not to the level of northern Virginia.
I think again another market, particularly in Montgomery County, when you look up the 270 corridor rent caps are coming off and job and wage growth are keeping investors interest, particularly in the life sciences quarter up on 270, So we feel good about.
What we have.
Here right now we think the market is coming back to us and in terms of.
What we would sell we look at opportunities where we can allocate.
From let's call it a moderate growth to a higher growth those will be those will be the assets that we.
That we choose and we're not really expecting a lot of dilution.
And this recycling.
I appreciate those comments.
Steve you mentioned, the capital market discipline and back.
Back in <unk> 21 in <unk>, you guys brought to market. Some ATM issuances is ATM issuance is still part of the go forward funding plan for acquisitions today.
We anticipate any ATM issuances over call. It the next two quarters at least.
These pricing levels.
Well first of all I wouldn't indicate in advance of issuing equity and create an overhang on the stock but.
And Atms are part of the playbook, but it's not a part we're using today at these stock prices. So I don't think it makes sense to us to issue equity at these prices now.
I think potentially exchanging units on an NAV basis in a structured transaction youre getting a different relative value for those so those are the kind of.
We were at $26.
Three days after this call a quarter ago, and we're not there today so not at these levels, but we'll be prepared to use that if it makes sense and if the if the equity markets come back.
Understood maybe just one last one from me on the transition.
I appreciate the comments on the human capital side are you guys running into any difficulty either at the corporate level or at the onsite level in terms of hiring and what positions are you running running into the most difficulty with.
Steve Stephen I'll Ham and egg this one.
Yes.
First off yes, it's a very competitive labor market, not just attracting but retention and so we're.
All eyes on that in terms of our human capital model and our our head of HR has been very proactive.
Especially on the retention side, but in addition.
I would say that.
We're trying to build up our corporate infrastructure to prepare for the on boarding later this year and as Steve said into mid next year.
I think it's really been.
At the property level I think we have a good start on that obviously with our third party managers.
And we expect a lot of.
A lot of seamless transition there as we bring as we onboard those employees that come along with the properties.
I think at the corporate level it would probably be very job specific Steve I don't know if you I think anything you want to add I think you hit it I mean, we have.
Literally weekly status by position of what positions, we want to onboard and we're building the infrastructure and the leadership and the regional leadership it all out.
I think you would say Paul we've been recruiting our own third party management staff now for a couple of quarters and.
We're communicating with them.
And were part of our program of really.
Assimilating multiple cultures into our mission and vision for the renters that we target and so we're bringing together.
Three cultures into one and so there's been a lot of work done on that to try to make sure that this is a place.
Our employees are going to want to work.
And be proud of so we're looking at everything from what the incentive program or two.
How we reward people, how we will make them feel they have access to are included.
And what we're trying to do.
So a lot of that is we have provided.
People that are in the in the communities already target specifically to come aboard we're going to have to add to it because it is.
It will be a challenging job market, but.
I think we've got pretty good visibility and they've been working on it.
A couple of quarters.
Yeah, and the only thing I would add Alan is just obviously workplace flexibility.
Hi on eye on a number of People's agenda, we're trying to incorporate that into our human capital structure moving forward.
Perfect I appreciate all the comments and thanks for taking my questions.
Thank you al.
Thank you there are no more questions in queue I would now like to hand, the call back to Paul Mcdermott for closing remarks.
Yes.
Thank you again I'd like to thank everyone for your time and interest today.
We will continue to update you as we progress our multifamily transformation and we look forward to speaking with many of you over the next several weeks.
Thank you everyone.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.