Q2 2022 Apartment Income REIT Corp Earnings Call
Okay.
Good afternoon. Thank you for attending my name is Matt and I will be your moderator for today's call. At this time I would like to welcome everyone to the air communities second quarter 2022 earnings Conference call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, Chris sorry won't all your telephone keypad.
I would now like to pass the conference over to our host Lisa Cohn, President and General Counsel Air community.
Thank you, Matt and good day My name is Lisa Cohn and I am President and General Counsel of Air community. During this conference call. The forward looking statements. We make are based on management's judgment, including projections related to 2022 expectation.
These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings.
Actual results may differ materially from what may be discussed today.
We will also discuss certain non-GAAP financial measures such as funds from operations.
Find and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on <unk> website.
Prepared remarks today come from Terry Considine, our CEO .
Keith Kimmel President of property operations John .
John Mcgrath, our co CIO and chairman of our investment Committee and Paul Beldin, Our Chief Financial Officer.
Other members of management are also present all of us will be available during the question and answer session, which will follow our prepared remarks, we'll now turn the commentary Considine Terry.
Thank you Lisa and thanks to all of you for your interest in air.
In the past few months era has largely completed its separation from the old aimed Coe 18 months ahead of schedule.
And Erez IPO, 12% of Air was entangled remain co now it is less than 30 basis points.
The acceleration of the Aimco note and the cancellation of the Haynesville Master lease of four properties created noise in the quarter, making modeling more difficult.
They are important milestones and simplifying gears business, which is growing steadily.
Air was designed to be the most efficient and effective way to invest in public ownership of multifamily real estate.
With the separation from old Aimco now behind US we can see more clearly what are will be.
We can see the strength of the air operating platform with Keith calls the area.
For example challenged by inflation.
Peers peers increased second quarter operating expenses year over year.
<unk>, 5%.
Eric costs were essentially flat.
Our emphasis on customer selection and satisfaction results and stable communities with good neighbors.
And pure leading margins.
Coupled with low G&A air enjoys the highest conversion of rent to free cash flow.
Rent growth matters a lot.
What matters more is how much of that revenue gets through distribution to our investment for shareholders.
We can also now seeing the safety of the air business model.
Thanks to Paul Air has low financial leverage limited refunding and repricing risk.
But the business model also has none of the supply chain risks and ongoing cash requirements of unfinished developments.
And no need to replace the run off of maturing loans as is the case with lending programs.
The safety of the air business.
And its laser focus on ownership of stabilized properties allows air to invest at a time when so many others are on the sidelines.
The power of the air edge makes the properties, we buy where it's more wind and because added to the air platform.
Our paired trade discipline makes clear that acquisitions are accretive.
And leverage neutral.
And after reinvestment of more than $1 billion.
Our excellent portfolio is now even better.
Average monthly rents approached $2600.
Among the apartment Reits.
But more important to shareholders.
<unk> purchased have expected returns, 50% greater than the properties, we sold to fund their purchase.
And when we do when considering investments we regularly compare proposed purchase to the buyback of shares.
And then the second quarter, we purchased about 3 million shares for $125 million.
Okay.
Economists debate, whether we're in a recession.
When we look inside the business of air.
We see no sign of a recession, none now.
But you and I, both know that a recession will come some day and maybe soon.
Our customers have good incomes and high credit scores our buildings are in good repair.
Teams are well paid and stable.
Balance sheet is not exposed to higher interest rates or near term maturities. We have no buildings to finish we have no lease ups to complete.
For us a recession will be an opportunity to grow by accretive investments.
He always as people.
You have heard from Lisa you will hear shortly from three others of our best.
In the second quarter, Keith and his ops team delivered outstanding results.
We're raising same store guidance based on expectations for this year.
The momentum earn enough leases made this year.
Loss to lease releases to be made next year plus.
Plus their remarkable ability to manage costs through productivity.
Just that next year will also be a very good year.
John will report on sources and accretive uses and the faster growth, we see in our portfolio of properties newly added to the air platform.
Paul will report on our balance sheet.
And white tax characteristics make the dividend on aim coe shares, especially attractive to individuals' C. Corp's foreign investors and all who are interested to reduce income taxation.
Okay.
Paddy Schrader has been called away by family duties that are happy nature soon.
So at least it will be her backup ready to report on a recently published targets based on the UN sustainability goals.
And our commitment to measurement and public reporting of our ESG undertaking.
Lisa May also express our gratification that air teammates high engagement exceeds the kidney.
Kingsley index rising when others are falling.
And perhaps one reason for another Kingsley report this one that era's ranked first among public apartment companies and second among all apartment companies for customer satisfaction.
Finally, I. Thank my teammates for your help hard work and friendship.
And I. Thank my colleagues on the airborne your remarkable engaged and committed to making air excel.
That I would like to turn the call to Keith Kimmel to discuss our operating results.
Thanks Terry.
The second quarter was outstanding with.
With over 80% of our leasing volume now complete for the year I'd like to share a number of takeaways.
First.
Great performance has historically strong leading indicators pointing towards elevated lease to lease performance in the second half of 2022 and into 2023.
In the second quarter, new lease rates were up 18, 4%.
<unk> were up 10, 6% leading to a blended average increase of 14, 1%.
And July rate strengthening further.
With new leases up 24% and the blended average up 16%.
Going forward, our loss to lease remains above 10% and indicates transacted rates will remain strong for the balance of 2022 and into next year.
Second.
Demand is robust and occupancy is tracking on plan.
Average daily occupancy in the second quarter was 96, 8%.
160 basis points from last year.
By design, we saw sequential declines in average daily occupancy associated with higher move out volumes during the summer leasing season, a trend, which peaked in July and will reverse in August .
Our forward indicators of occupancy signal an acceleration as we move out of peak just like we saw in 2021.
Third.
<unk> is the most efficient multifamily operator.
Our approach starts first with resident selection and World class customer service, which led to a record low trailing 12 month turnover of 38, 4%.
Was amplified by our decade, plus of exceptional expense discipline and productivity gains.
In the second quarter expenses were up 10 basis points year over year with controllable expenses up two 7% due to timing of increased maintenance of communities offset by lower taxes and insurance.
I have three thoughts on expenses as we navigate inflation.
We focus first on avoidance of cost.
Using process design investment or technology to remove the cost altogether.
We next work to increase productivity right.
By hiring the most talented impossible and creating jobs in which they can maximize their skills through the elimination of administrative work red tape and repetitive tasks.
Last and most importantly, we do the right thing.
Solving not to managing expenses and maximizing long term margin growth.
We recently invested in additional compensation for our team members to recognize their importance to our success.
All that said for the full year controllable expenses will be on plan roughly flat to last year.
Our efficiencies are realized and net operating margin.
Which for the second quarter was 73, 6% up 310 basis points from one year ago.
Fourth.
We are edge when applied to newly acquired communities is a tremendous engine for growth.
Our five 2021 acquisitions are expected to have revenue growth 600 basis points above our stabilized portfolio in the fourth quarter. The first time period, we have a year over year comparison.
The air edge transforms the entire operation strengthening the customer relationship sharpening the team's approach implementing our technology platform for efficiency and improving the physical community.
As a result, we see improved resident satisfaction and increased value for both current and future residents.
This leads directly to pricing power.
With weighted average lease to lease increases of 26% in the second quarter that further increased to 28% in July .
Our 2022 acquisitions coconut point, Nextera, Florida watermark in Miami Willard towers in Chevy Chase, Maryland, and now the district get Flagler and Fort Lauderdale are often running with the implementation of the <unk> well underway.
And finally.
The business activity happening today is not only securing a blockbuster 2022, but earning into strong performance in 2023.
Eventually the tail winds that are in the industry are experiencing will subside.
But the signals, we see indicate that time it has not yet come.
My Thanks to all the <unk> team members, who are dedicated to serving our residents and your drive to continuously improve our business have made this quarter a great success with that I'll now turn the call over to John Mcgrath, The chairman of our investment Committee John .
Thank you Keith since the separation with Aimco the air portfolio has been materially enhanced in terms of quality and risk and capital allocation.
Our portfolio strategy is focused on profitable growth and reducing both systemic and.
Socratic risks our transactions have supported this strategy.
Over the past 18 months, we completed $3 1 billion of transactions $1 7 billion of equity sources $1 4 billion of which was used to acquire nine properties located in South, Florida, and Washington DC.
And we currently have another $500 million of sources and $200 million of uses under contract.
Sales supported the deleveraging efforts, which Paul reported on in the past improve the quality of the portfolio as measured by criteria, such as rents H and physical condition and reduce concentration risk and regulatory exposure.
Through acquisitions, we invested in high quality properties, which will benefit from the air edge and we reallocated capital to Submarkets that exhibit high growth due to durable demand factors and constraints on competitive supply.
These acquisitions are expected to be highly accretive with IRR spreads 350 basis points or more over our cost of capital.
While we measure by IRR, we tested by reality.
The class of 2021 acquisitions for example.
We purchased the properties last year at NOI cap rates in the mid threes and we now expect yields to be in the fives later this year.
And in fact, our portfolio is bifurcated into a fast growing same store portfolio and an even higher growth air edge portfolio.
Today, the air edge represents about 11% of the portfolio.
Over time, we expect the allocation to increase to approximately 30% provided we can find opportunities, which produced an attractive spread over our cost of capital and are within leverage policy.
This shift in mix will yield higher quality earnings will help insulate us from macroeconomic pressures and will enable greater alpha generation.
For reporting on our second quarter transactions activity allow me to offer a few thoughts.
Macroeconomic factors are top of mind.
Recession, and inflation fears and interest rate volatility have sidelined many buyers.
Having lived through the recessions of 2001, 2008, nine and 2020 errors seasoned investment professionals have the real world experience to navigate choppy waters, which may lie ahead.
Despite market uncertainty, we see the opportunity to make profitable trades and we remained focused on the continued systematic enhancement of our portfolio through disciplined accretive growth funded by paired trades.
Fair trades allow us to be relatively agnostic to changing market conditions by locking in our cost of equity capital.
Market conditions fluctuate, we adjust our target return thresholds accordingly simply.
Simply put arison, our spread business it.
It is important to note that we are firmly committed to disciplined capital allocation and we have no fixed scope for further acquisitions while.
While we do expect future transactions to be highly accretive we will only transact when we can earn an attractive spread over our cost of capital b within our leverage policies and are able to deploy the air edge.
Now for our recent transaction activity.
During the quarter, we raised equity capital through sale and fortuitous timing and pricing.
Four of our lower ranked properties located in California, and Virginia for approximately $203 million.
On top of these sales we have another $500 million under contract with non refundable deposits.
Turning to external growth, we invested $467 million to inquire three properties located in the Washington, DC Metro area and in South, Florida, and as previously announced we entered into an agreement with AME Coe for the cancellation of its master lease of four properties for $200 million.
Additionally earlier this week, we acquired one property located in South Florida for $173 million.
In accordance with our investment policies. These acquisitions are expected to earn IRR spreads of at least 200 basis points over our cost of capital on a leverage neutral and will be enhanced 30 are edge with that I will turn the call over to Paul Beldin, Our Chief Financial Officer, Paul. Thank you John .
Today, I will discuss our strong and flexible balance sheet second quarter results, our expectations for the balance of the year and conclude with a brief comment on our dividend.
We made significant improvements to the balance sheet during the quarter the details of which can be found in our earnings release.
To focus my remarks on three key points.
Our deleveraging effort is complete.
While we target a leverage to EBITDA ratio of five 5% to what we expect that the actual ratio will vary from quarter to quarter based on the timing of transactions.
As part of our pair trade discipline, we seek to keep our sources and uses imbalance.
Rarely does the timing of the transactions the line such that our sources and uses are in perfect balance at quarter end.
For example, today, we are slightly out of balance due to the $125 million of second quarter share repurchases and the July acquisition of the district at Flagler.
This imbalance will increase when we closed on our agreement to cancel the flooring Coe leases.
We expect that the imbalance will be completely eliminated before year end by the closing of the $550 million sale of properties $500 million of which are under contract today.
As such our expectation of year end leverage to EBITDA at $5 five to one is unchanged.
Second our balance sheet is insulated from interest rate volatility and any potential economic slowdown.
98% of our Leverages fixed with rates and maturities fixed for about the next seven years in fact, only $205 million or about 7% of our leverage is subject to re pricing in the next 30 months.
Third we have abundant liquidity with $840 million available on our revolving credit facility 84.
$4 million of cash and properties unencumbered by debt with an estimated value of almost $8 billion.
Now turning to second quarter results and our expectations for the balance of 2022.
Second quarter <unk> was <unk> 66 per share a penny above the midpoint of guidance pro forma the timing of the Aimco note repayment.
We anticipated the ampco note will be fully repaid in the second quarter instead, approximately 30% of the payment was deferred into July .
The effect was to shift <unk> of the prepayment penalty from June to July .
The aggregate prepayment penalty was approximately three and a half cents below our expectations. A result of short term treasuries.
Creasing significantly more than forecast.
This was offset in our second quarter results by the sale of a small residual cost basis investment the aimco ANC holding the note payable to air.
With the payment of an aim Coe note there was no longer necessary for <unk> to maintain this ownership position.
Looking forward, we are narrowing our expectations for full year <unk> to be between $2 38, and $2 44 per share maintaining the $2.41 midpoint.
Similarly, our expectations for run rate <unk>, which is pro forma <unk>, excluding the earnings effect of the aim to note and the gain on sale of the cost basis investment is also unchanged at $2 19.
Relative to one quarter ago, we now expect <unk> <unk> of incremental <unk> from stronger NOI growth in our same store and acquisition portfolios offset by <unk> <unk> of lower contribution from the cancellation of the four anchor leases and a penny of other items.
As Terry commented in his remarks first 18 months of <unk> existence has been a period of transition during which the vision and promise of the air business model was implemented with deleveraging complete and entanglements between air and aimed coe greatly reduced simplicity of the air business model is clear.
Best in class property operations, delivering strong operating results from our same store portfolio and even faster growth from our acquisitions as they benefit from being added to the air operating platform and low G&A results in predictable high quality income and faster earnings growth.
Hopefully the Arab board of directors declared a quarterly cash dividend of 45 per share.
We believe the tax characteristics of our dividend makes our stock compared to our peers more attractive to taxable investors such as foreign investors taxable individuals and corporations or.
For example in 2021, two thirds of Eris dividend was a tax free return of capital while the remaining one third was taxable at capital gain rates in the same year approximately 60% of peer dividends were taxed at ordinary income rates with the remaining 40% tax to capital gains.
That we will now open the call for questions. Please limit your questions to two per time in the queue.
I'll turn it over to you for the first question.
Okay.
Thank you.
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We'll pause here briefly is questions registered.
The first question is from the line of.
Joseph with Citi. Your line is now open.
Okay.
Hey, it's Michael Bilerman here with Nick Terry Hi, Good afternoon.
If you step back obviously, you've articulated a lot of the go forward positive for the year.
When a company as well as portfolio.
Your stock is at the lowest multiple on 23.
Yes.
<unk>, any which way you measure it.
Where do you think the company should trade relative to peers do you think there are any impediments left to achieving that.
And if it doesn't close what are you and the board plan to do about it.
Michael Thank you very much for your questions I think.
I'm not.
Going to compete with you and giving advice to people about which stocks to buy but what I would say is that.
What we have set out to do and I think have accomplished.
As a business model with which deserves a very favorable risk premiums.
Very low risk because we don't have the <unk>.
<unk> of development today, we don't have lease ups supply chain issues and so forth.
We don't have the.
<unk>.
Issues implicit in a loan business, where you have a run off we have a business of owning stabilized properties and operating them better.
And the key to that is is revenue and expense.
And if you look at the last many years.
Keith and his team have excelled at doing just that.
So that's what we're going to try to focus on and I think that.
What we'll see is.
Above average growth and I think that the market will reward.
Right, but I guess, if you extend that you talk all about the things that you've been able to accomplish recently to be fair carry a number of these should have been an issue for when there was created and I was surprised that you mentioned that this was an IPO because this was a spin did not have a shareholder vote.
Even though shareholders wanted to have their input.
So a lot of what you call entanglements.
Alone. The fact that you were too highly leveraged coming out of the box. In fact, if you didn't have an ATM to go issue direct equity at a big discount and while the balance sheet six today, let's not forget it wasn't and that was a risk.
The company took and so.
I am not undermining it now we have to go forward, which is effectively my question right. We sit here today, you've now done all of these things and you've cleaned it up.
I need a little bit more from you in terms of the <unk>.
Stocks at a big discount reflective of the fact that you purchased.
Stock in the quarter at 43, good execution balance sheet fixed you've talked about the air edge in the operating platforms and everything that Keith is doing so it doesn't appear to be that there isn't any tenants left and so I guess.
How do you sort of see value of the company you had historically, we've known each other decades used to put out.
A very good sense of value you compare yourself to peers and everything else in that presentation. So can you give a little bit more detail about how you sort of see value.
And if the stock doesn't achieve that what are you going to do about it.
Michael.
I. Thank you for your prepared remarks, and but I would say is that you are entitled to your opinion, but the market has answered. The question. If you look at whether the spin was a good idea or not.
You look at the <unk> for the seven large apartment Reits the two coasts of the two sunbelt rates have done the best but but the area I'd combo has outperformed handsomely the remainder so so thanks very much and please call. It another time, if you want to continue.
Thank you for your question.
Next question is from the line of Rich Anderson with <unk>. Your line is no man I got a fall add up.
So.
So so Keith.
To your question or your comment about earn in Prague.
Probably predictable can you give.
Wrangler, what what youre seeing in numbers of and what the assumptions might be in that in terms of where you think rents sort of peak out this year, if they haven't already.
And you know sort of hazard and estimation about what we're what we have in front of us as a starting point for 2023.
Rich thanks for the question.
What I'd say about sort of where we're at and the season is that July has come in with new lease pricing that does hit our hit the high watermark for the year at better than 20%.
What we see as we look forward between now and the balance of the year is some number that is similar to that or maybe in the high teens. So we think that we continue to maintain strong pricing as we work our way through the balance of the year.
Ultimately.
That will translate into something that will be an earn in and call. It the mid to high fours when we get to 2023.
And then I would couple that with what we believed to be a loss to lease of about 10% in January . So it gives you a couple of data points to know that we think that we're going to have a strong 2023.
And we have more.
Strength as we finish up the balance of this year Alright. So you started mid fours and then you have this loss to lease which could could go up or down depending on the market, but the starting point for with some upside essentially is what you're saying.
I think that's a good way to think about it Richard Okay. Second question is.
You talked a lot about air edge and you know I appreciate.
The.
The terminology and all that but I think all of your peers have their own version of air edge.
That's what makes you kind of separate us from the pack so.
Relative to the private market of ownership of multifamily so with that in mind now that you've cleared a lot of the entanglements.
Why would a IRC air.
Grow more than your peers, assuming you all kind of operate at a similar level of sophistication.
Whats whats the bull case for outperformance.
Keeping in mind that you know you have some tough competitors in the public world.
Rich we have.
Tough competitors and.
They will.
They will get better and we will too.
What we have today is is really two important advantages.
With the highest margins.
We retained more money out of every bit of increasing rent.
And so it's one thing to say rents up 10%, but the question is how much of that gets to NOI.
The second thing with an advantage also in G&A more of that gets through to where it can be either distributed to our invested for the benefit of shareholders.
Okay. Thanks very much.
Okay.
Yeah.
Thank you for your question. The next question is from the line of very little with Mizuho. Your line is now open.
Okay.
Thanks, Malone Orhan Dallas San Jos.
I was wondering if you could talk through the expense principally media expenses stayed flat year over year.
And do you decreased your guidance. So I was hoping you could break out the line items, particularly for repair maintenance and how we should think about property taxes for the backup and Gulfport.
Hey, Barry This is Paul Beldin, so nice to meet you and thank you for filling in for handle but we missed them. So please wish handle well.
Five star expense expectations.
Did.
Thanks.
For our expense expectations, we did both narrow our range for expected growth and reduced the total growth at the midpoint by 25 basis points and that is a function of continued excellent work from Keith and his team on managing controllable operating expenses and I'll, let Keith kind of fill in some of the details there but also it reflects the.
Fact that were now halfway through the year and we have greater visibility into the items that are outside of that bucket, most notably real estate tax expenses, where we had.
<unk> had a good year to date were actually negative 2% on a year to date basis, and we expect that for the full year real estate tax growth will be quite moderate maybe in the 1% to 2% range.
Mary just some color around it is that really where we focus is the avoidance of cost through greater retention and that comes from the customers' customer selection process on the front end and then and then having exceptional team members, who are highly effective and highly efficient who provide exceptional customer service.
When we match those things with the business needs and our highly qualified team we get this high Tech high touch combination.
And so through that we get as you point out lower repairs and maintenance costs. We also find our way to have lower marketing costs and seasonal staffing opportunities that we take advantage of so those are some of the inputs.
Got it thanks for that color and.
So actually on turnover so.
I noticed some really low turnover numbers as well.
Some of your peers are.
Trying to turn turnover to get push rents higher on they're taking a couple points of occupancy on that is that kind of a strategy youre thinking about or Michael.
Barry we don't think about it as individual single inputs. We think about is total contribution.
So it's the combination of one having low turnover, but having rents on both new and renewal rates and ultimately avoidance of cost it find its way all the way down to margin and the cash that comes through so we don't we don't just focus on a single data point, but we really look for the total.
<unk>.
Return.
Thank you.
Thank you for your question. The next question is from the line of <unk> with Goldman Sachs. Your line is now open.
Hi, Thank you. Thank you for taking my question.
You guys talked about you know these bad treats that you've been doing.
Any sense of what's going on in the transaction market how much of that has come down and you know has anything changed in that spread that should typically.
Maintain.
If you could give any color around that would be great.
Hi, This is John Thank you for your question.
I'll first start by saying when we think about cap rates on our first comparing them an imprecise science, but with that said we've seen the cap rates across the board and have expanded about zero to 25 basis points on core assets and about 25 to 50 basis points on our non core assets.
Valuations, we're seeing about 5% to 7% down however, I should note that demand does remain strong and the prices continue to hold for our best asset for the best assets in the best locations.
As far as the bid ask spread what I'd say on that is if I used for an example.
The dispositions, we have in the market, including the $500 million, we have under contract.
<unk>, we're not seeing a big bid ask spread we're seeing really that the spreads have tightened compared to maybe where they were a few months ago and we're only seeing on our own deal.
A small spread of maybe a couple of percent.
Okay.
Got it and if I if I could please get a quick follow up on bad debt what are your expectations for the back half of this year.
Yes, Chinese nice to hear from you and thanks for joining the call. This is this is Paul so FERC for bad debt as we've looked out to the balance of the year and Theres been a lot of discussion of this in other calls is around what can you expect around government assistance payments, particularly for our portfolio.
And the state of California, and so.
As we look at our second quarter bad debt, our bad debt expense on a net basis was about 20 basis points of revenue, which is in line with our typical long term results, but in part and to note within that is the benefit of having about $3 million of government assistance payments. So if you look at bad debt as we do.
For those payments that was about one 9% of revenues and as we are projecting to the balance of the year that assuming that our bad debt experience is going to get any better in order to make our guidance, we hope that a little improve we're working hard with local jurisdictions to accelerate the eviction process.
We don't necessarily anticipate within our guided numbers to do much better than what we saw on a gross basis and lift in the second quarter.
Okay.
Thank you for that.
Thank you for your question. There are currently no further questions registered so as a reminder, it is star one on your telephone keypad.
Well.
Thank you all on the call. Thank you Matt for managing this call if you have.
Two questions, please call, Paul or Matt Grady or main Terry Considine and enjoy the summer b well.
That concludes the air communities second quarter 2022 earnings Conference call. Thank you for your participation you may now disconnect your lines.