Q3 2022 Apartment Income REIT Corp Earnings Call
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[music].
Hello, and welcome to the <unk> communities third quarter 2022 earnings conference call. My name is Alex and I will be coordinating the call today, if you'd like to ask a question at the end of the presentation. You can press star one on your telephone keypad, if you'd like to withdraw. Your question you May Press Star two.
Now I'll hand over to your host Lisa.
Please go ahead Lisa.
Thank you Alex and good day, My name is Lisa and I am President and General Counsel and Erik community.
During this conference call forward looking statements, we make are based on management's judgment, including projections related to 2022 20.
'twenty three expectations.
These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings.
Actual results may differ materially from what may be discussed today.
We will also discuss certain non-GAAP financial measures such as funds from operations.
These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on <unk> website.
Prepared remarks today come from Terry Considine, our CEO .
Campbell, our president of property operations John .
On the graph, our co CIO and chairman of our investment Committee.
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, I will now turn the call to Terry Considine Terry.
Thank you Lisa and my Thanks to all of you for your interest in air.
We live in interesting times as an executive at a department read.
This year, it's been a great success.
As the REIT shareholder, it's been a pretty tough year.
When I talked to other investors. They tell me they've already put this year in the past and instead are interested to talk about next year.
I want to help.
But I'm also mindful of the wisdom of Yogi Berra, it's tough to make predictions, especially about the future.
In preparing for this call.
Impressed by the wide range of estimates for air <unk>.
12% from high to low 28 cents per share.
I was also struck by the thought that any one of them might be right.
Depending on the economy.
So here's how I look at it and where I can speak with conviction.
It was in good shape, right shape and executing well.
He and his team will do an excellent job in leasing apartments and controlling costs next year no matter the economy.
But how their work translates into <unk> will be unusually dependent on macroeconomic conditions.
So with that in mind, we set up the structure of the earnings release and this call to provide you information about the effectiveness of the air business model.
And also about how we're prepared for different economic scenarios.
Most of the call will focus on the execution of the <unk> business for example, John's continuing transformation of the air portfolio with.
With average rents up 19% in two years.
And then intentional diversification by geography and price point.
Target economic growth and reduced volatility.
Or cheeks remarkable success managing two distinct portfolios.
Same store revenues were up year over year by almost 10% and up three 8% sequentially.
Continuing strong through the end of the year.
And managing also the acquisition portfolio, where the class of 'twenty, one and sequential revenue growth of nine 2% more than twice the growth rate of the same store portfolio.
In both portfolios chief gifts for innovation and productivity.
As such the costs are almost flat no matter the highest inflation in 40 years.
Org.
It might be pulse Midwestern caution.
On display at our balance sheet.
We're allowing for a few smallish closings in the next few weeks, there's no debt maturing before mid 2025 and no exposure to higher interest rates for the next three years.
Except for a 70 million dollar piece.
2024.
$285 million in the second half of 2025.
While a similarly conservative it is accounting.
Where for example, we have almost no exposure to rent that is owed.
But not yet collected.
Egypt, Keith John and Paul will provide other interesting facts that are proofs of the air business model.
It's above plan results in 2022 and.
And it's excellent prospects for next year.
Mindful of conversations with other investors.
The earnings release also addresses such questions as.
What is the outcome.
If inflation proved stubborn.
And as higher for longer.
Well the area answer as inflation is good news for apartment owners that can raise rents annually.
And air leads all peers and conversion of rent growth to free cash flow because of our ability to control operating expenses and G&A costs.
Second question might be what if interest rates continue to increase.
The answer interest rates next year will make little difference to air.
After completion of the small refunding already underway that I mentioned, just a minute ago, we have no maturities for the next.
Two or three years till mid 2025.
And outside of our revolver, which will be paid down to $150 million from property sales later this month.
Our interest rates are fixed for even longer.
Yeah.
And then there's a third question, but what if the fed succeeds and causing a recession.
Well the air answers recessions are always tough.
But air errors ready.
Our current highly occupied departments have rent rolls with stable cash flows backed by the high income to lofty credit ratings of our customers.
Our high quality portfolio is diversified across markets.
There is a recession focused on tech companies.
Adelphia students and Washington National government are likely to be affected differently.
And finally, our high quality portfolio was about one half b.
And so benefits with customers become more price sensitive.
So we're not giving guidance today.
But even with Paul It gives guidance in January .
It's best estimates will be subject to subsequent macro events.
What we are attempting today is to show how air is managed through the macro events of the third quarter and the full year of 2022.
And how are is designed to manage through whatever may wait us.
Latest all in 2023 and beyond.
My optimism.
And I'm optimistic is based on my confidence in my ear teammates.
Sense of mission attracts and retains residents.
And then the art culture of collaboration.
And then an engaged board directors have joined me and many of you in the Investor meetings.
And as Beth bent and energetic two days here in Denver earlier this week.
We operate as a team.
Working together collaborating ready for whatever the future may bring.
And I, thank each and every one of them.
And with no more I'd like to turn the call over to Keith Kimmel head of Iraqi Thanks Terry.
The third quarter was another good quarter for air.
Well over 90% of our leasing volume now complete for the year.
I'd like to share four takeaways from the past three months.
First is <unk>.
Anticipated revenue growth was exceptional.
<unk> revenue was up three 8% triple our typical third quarter growth.
We achieved peer leading rate growth.
With blended rates up 14, 5% during the quarter with our Pic transaction volume.
In line with expectations noted on our last call occupancy.
Occupancy increased each month from.
From 95, 5% in July to 96, 3% in September as frictional vacancy feet.
In October occupancy was 96, 7% and has grown to 97% today.
Our lease percentage and sales pipeline point towards continued strength throughout the fourth quarter.
My second takeaway is air continues to be the most efficient operator of multifamily real estate.
And we are offsetting inflation pressures through superior team productivity and relentless innovation.
Expenses grew just 10 basis points from last year more.
More importantly.
Full year controllable operating expenses are anticipated to be roughly flat with 2021.
Our expense performance starts with resident quality and customer satisfaction, leading to low turnover or.
Our trailing 12 month turnover of 38, 5% represents a 320 basis point improvement from one year ago.
We recognize that our service team plays a critical role in customer satisfaction and expense control.
With that in mind, we continue to invest in compensation for this team.
Including a 2% increase this year.
This has led to low employee turnover and record high satisfaction.
And results in a highly productive team.
Ultimately our efficiency as demonstrated by net operating margin.
<unk> margin of 74, 3% represents a 240 basis point expansion from the third quarter of 2021.
Sure.
<unk> edge continues to be impactful.
We think it would be your edge is a combination of enhancements to our physical communities, our team and staffing model, our technology and our business processes.
Which resulted in revenue and margin outperformance.
Our impact is most notable when applied to new acquisitions.
Our five communities in the class of 2021 had sequential revenue growth more than double that of our same store portfolio.
And our class of 2022 acquisitions revenue was on plan and rates are ahead of our initial projections.
Fourth.
Eric is well positioned for the balance of 2022 2023 and beyond.
Prepared for whatever the market brings.
This fall was brought normal seasonal patterns back from a two year hiatus.
<unk> teams for which ear is well equipped.
Despite the seasonality signed.
Signed blended rates in October were up 11, 8% all while air occupancy remains strong.
2023 starts with an earn in of 5% an exceptional foundation to begin the year.
And while there is some broader uncertainty around market trends at air we anticipate above average rate growth in the year ahead.
It was built to navigate any choppy waters that may come.
With our focus on quality residents, who have rent to income ratios of 18% and high credit scores and we'll be resilient during any economic challenges with our innovative and efficient platform, which continues to offset the headwinds of inflation.
And with our seasoned and talented team the most important element of the ear ache.
My Thanks to all air team members your dedication to serving our residents and your drive to continuously improve our business have made this quarter a great success and with that I'll now turn the call over to John Mcgrath, The chairman of our investment Committee John .
Thank you Keith.
The economy is unusually turbulent in the transaction markets are showing signs of uncertainty and stress.
Can't speak to what others are experiencing.
But in the market and by year end, we will have closed approximately $2 1 billion of transactions with another $298 million set to close at the beginning of January .
This coupled with another $5 billion or so of underwritten deals provides me insight into the current market environment.
On average, we're seeing valuations down about 10%.
That said prices continue to hold for the best assets in the best locations. However, the risk of a downside is increasing.
We think that the stock market may be too pessimistic about property values, perhaps not considering the substantial increase in property rents and income, which offset about one half the increase in cap rates.
We think that any further decline in property values will more likely be due to reduced liquidity and we see this as an opportunity for <unk> to be a buyer.
As for cap rates across the board, we're seeing expansion of approximately 50 to 100 bps from the beginning of the year.
As I mentioned previously this expansion continues to be largely absorbed by robust NOI growth.
Do not have a crystal ball, but I expect this dynamic to continue and as cap rate expansion Decelerates, perhaps early next year, obviously, we'll reset.
Given current market conditions, we remain cautious.
Ever experience has taught the periods of economic turbulence are ripe with opportunity.
We feel our prospects for growth in 2023 are terrific match.
Match funding allows us to be relatively agnostic to changing market conditions by locking in our cost of equity capital.
As market conditions fluctuate, we simply adjust our target return threshold.
Certainty of execution is top of mind for many sellers and air has a demonstrable track record of closing this.
This gives us a competitive advantage and shallow about buyer pools provide an opportunity for us to buy at discount to peak values and acquire high quality assets with lower competition.
We are beginning to see signs of distress in the market. However, it is not yet systematic if and when opportunities arise we are ready to strike.
Finally, and perhaps most importantly, as Keith described earlier through the air edge.
These are worth more in our hands than they are to someone else.
The transformative work we've completed since the separation with income in regards to our operations balance sheet culture and portfolio position us well to execute our disciplined capital allocation strategy.
We have no fixed goal for future transaction activity. However, we expect to grow through accretive acquisitions, while at the same time, optimizing our capital allocation, including diversification by market and price point and continuing to improve the quality of the air portfolio as measured by such criteria as it.
Expected rent growth average rents.
In household income customer credit asset age physical condition, and regulatory and political risk.
Future portfolio growth will be driven primarily through opportunities, we identify within our core markets.
However, we will also look to invest in top rated submarkets that exhibit high growth global demand drivers and our landlord friendly.
We will look for accretive acquisitions, and Western Florida, the front range of Colorado and in the research triangle.
Turning to recent transaction activity.
During the quarter, we acquired one property in Fort Lauderdale, Florida was $173 million.
30 is 350 apartment homes and was newly constructed in 2021.
We also canceled existing master leases at four properties owned by Air and least aimed coe for development.
<unk> 200 million to aim Coe pretty added improvements.
Additionally, during the quarter, we committed to purchase Southgate towers for $298 million.
<unk> is located in South Beach, and is 495 apartment homes and approximately 30000 square feet of retail space. The acquisition is expected to close in early January 2023.
Southgate is being funded by a pair trade and consistent with our recent software acquisitions will be enhanced through the air edge and is expected to earn an unlevered IRR greater than 10% with a spread of more than 200 basis points over the cost of capital.
In addition to property acquisitions year to date, we have bought back approximately seven 2 million shares or four 3% of shares outstanding at the beginning of the year at an average price per share of just under $40, representing a long term IRR greater than 10%.
We evaluate share buybacks as part of our broader capital allocation strategy and analyze the opportunity as I look through the real estate.
With any of our investments we are in the spread business and will utilize our pair trade framework to lock in an attractive cost of equity capital.
Going forward, we will continue to evaluate the opportunity to buy additional shares and would expect to deploy a balanced portion of any incremental new capital is share buybacks consistent with our allocation to date.
On the disposition front, we completed no sales in the third quarter. However, later this month, we anticipate closing the sale of six properties located in new England for approximately $500 million, representing a trailing 12 month NOI cap rate of four 4%.
We are bullish about the future and our ability to deploy capital externally, we remain firmly committed to disciplined capital allocation and are confident in our ability to execute highly accretive trades, even in trying times with that I'll turn the call over to Paul Beldin, Our Chief Financial Officer Paul.
John .
I will discuss our strong and flexible balance sheet.
Third quarter results and our expectations for the balance of the year and conclude with a brief comment on our dividend.
<unk> balance sheet is well positioned for a period of elevated interest rates and potential economic uncertainty.
<unk> Leverages low.
Reduced by the repayment of the remaining Amesville note balance in July and reduce further by this month's anticipated sale of New England area properties just discussed by John .
Pro forma of the closing of the sale third quarter leverage to EBITDA is five nine times to one within our targeted range of five to six times looking forward to year end I now anticipate leverage to EBITDA to be approximately 6% to one slightly above our previous expectation of five five times the increase in <unk>.
And leverage is primarily a result of our opportunistic third and fourth quarter share repurchases consistent.
Consistent with errors investment policies the share repurchases will be funded on a pair trade basis, keeping our sources and uses imbalance and maintaining our leverage levels.
Second we have little or no exposure to higher interest rates.
Other than short term borrowings on our revolving credit facility, 97% of our debt is already fixed are subject to an interest rate cap. We are working to fix the interest rates on the 3% that remains floating.
Borrowings on our revolving credit facility are expected to be largely repaid from the proceeds of property sales later this month.
Third we have little or no exposure to near term debt repayment. We expect the next few weeks to close loans extended $170 million of maturities.
<unk>, we will have no maturities before mid 2025.
Fourth we have abundant liquidity with $510 million available on our revolving credit facility for $160 million of proceeds expected to be received from the November property sales of $100 million of cash and properties unencumbered by debt with an estimated fair value of about $8 million 8 billion.
Yes.
<unk>, our triple B flat credit rating from S&P in October we applied for an issuer credit rating for Moody's we anticipate receiving their rating later this month.
The ratings from S&P, and Moody's will make fully available both private and public debentures.
Now turning to third quarter results and our expectations for the balance of 2022.
Third quarter <unk> was <unk> 58 per share two pennies above the midpoint of guidance due to the timing of transactions originally anticipated to occur in the fourth quarter.
For the third time this year, we are raising the same store NOI guidance.
At the midpoint, we now expect NOI growth of 13, 9% 90 basis points higher than the high end of our beginning of year expectations.
Our improved NOI outlook as a result of Keith superb cost control.
<unk> operating expenses are negative year to date.
Total operating expenses are now expected to grow between 50 and 150 basis points at.
At the midpoint, we expect such costs to be 125 basis points lower than the low end of our beginning of year expectations.
We are narrowing our expectations for full year <unk> to be between $2 39, and $2 43 per share maintaining the $2.41 midpoint.
Incremental same store NOI offset by higher than anticipated G&A costs well.
G&A costs are increasing these costs are expected to remain equal to or lower than our 15 basis points of JV commitment.
Similarly, our expectations for run rate <unk> are unchanged at the midpoint.
Lastly, the air Board of Directors declared a quarterly cash dividend of 45 per share we.
We believe the tax characteristics of our dividend makes our stock compared to our peers more attractive to taxable investors such as foreign investors actual individuals' incorporations further details can be found in our earnings release.
With that we will now open the call for cliffs, Cleveland Institute for timing of Covid.
I'll turn it over to you for the first question.
Thank you as a reminder, if you'd like to ask a question you can press star one on your telephone keypad.
If you would like to withdraw your question you May Press Star two please.
Please ensure you're on mute locally when asking your question.
So last question for today comes from Matt <unk> from Goldman Sachs Shandy. Your line is now open.
Hi, good afternoon.
Thank you for taking my question.
Guys. If you could please understand how it performed.
Contrary to some extent.
Here I mean, obviously controllable expenses hopping.
We will control this here.
What are the drivers that you think would also be applicable.
Especially as you know this inflationary environment continues and then how should we think about.
Non controllable expenses going into 2023, particularly property taxes.
Shaun This is Keith I'll start and then I'll give you some insight to property operations and then I'll turn it to Paul.
<unk> together.
Xiaomi one of the things we think about is that when.
When we think about expenses it really starts with resident quality.
And in the recent strikes with resident quality, then follows with customer satisfaction and the quality of our team because ultimately that where do you find that isn't our low turnover numbers and so in my prepared remarks, I talked about 38, 5% as our turnover number that the more we have residents to stay with us longer and therefore team members have stayed with us.
Us longer giving exceptional customer service, we think that's really the big driver to expense control now what will happen in inflation with Makena paint cost me more next year and then it does this year it may or may not.
But that's not where our emphasis comes in.
Our track record over the past 10 years, plus I think demonstrates that this is this is an area of focus for us and we believe that we will continue to put up superior numbers those will be pure leading particularly when we think about controlling expenses on site.
Thank you Keith outside of the controllable expenses that we have three categories of non controllable items.
<unk> insurance costs as you all know the insurance market has been difficult and prices are increasing and so we'll provide specific guidance around our expectations of cost and insurance in January but I think you can assume there will be higher than where we were in 2022.
Utility costs would be the second category and those costs well.
Anticipate them also to be higher next year.
About 75% of our costs are reimbursed to us by our residence. So there will be a net effect, but the bottom line impact will be muted.
And the last piece you asked about in particular Xiaomi is around real estate taxes.
So we're in the midst of our planning process, so I'm not going to give specifics, but I would ask you to think about two different factors one about 40% of our portfolio is located in California, and so subject to prop 13, which limits property tax increases to about 2% per year. So that provides an important offset to the increases in value of our portfolio.
And then for the remaining 60% of the portfolio property taxes, usually increase at a pace similar to NOI growth, although often that a lag and so we'll provide more particulars, but we've had very strong NOI growth. This year, and so that will likely put a little bit of pressure on that 60% of the portfolio next year.
Yeah.
That's all very helpful. Thank you.
For my follow up question. So you guys noted in your prepared remarks that there is opportunity for and communities can be buying that you're seeing beginning to see signs of distress in the market.
How much of P&L prices come down at what point would it make sense for you to pivot into buying those assets and how would you think about funding those opportunities and you know in that odd how should we think about capital allocation between buybacks, where you'll focus obviously has been a bit more aggressive.
Thank you.
Sean This is John Thank you for your question.
First I would say I am very bullish on our opportunities when we look to 2023 for buying.
Some of the distress in the market.
Again, not systematic that across things will provide opportunities for us such as levered buyers are on the sidelines.
Because they are worried about negative leverage and other dynamics like that.
Are we don't have that same problem first of all or a pair trade philosophy makes us relatively agnostic to those changing conditions second we look at all of our deals on an unlevered basis.
And so now as long as I can look at and I have my match.
Trade and I see my cost of capital is locked in and I have an appropriate spread above it.
I have an opportunity to continue to improve the quality of our portfolio.
As to where we'll be looking and how we'll be looking at deals.
I would say that as Ive said in my remarks will look primarily to our existing core markets, but we'll look to others.
Markets that exhibit high growth due primarily to durable demand drivers and landlord friendly regulations as.
As far as the buybacks to acquisition of real estate I would say, we run all of it through our capital allocation model and I would expect as we look to the future and things of course could change, but I would say that we'll be looking at and allocations similar to what we've seen recently.
Where we've bought about 80% real estate and about 20% shares.
And at the end of the day everything Ron It gets run through our pair trade model.
And we will look to what the most accretive use of our cash will be.
Thank you very much.
Thank you. Our next question comes from Rich Anderson of SM BC Rich. Your line is now open.
Hey, Thanks, good afternoon everybody.
Good morning, excuse me.
So Paul I want to go to the the leverage going up to six one I think you said.
Fully understand the math I mean, if you are funding the repurchase with.
Net sales at a sub four four ish type cap rate your implied cap rate is much higher than that on the stock. So why would you have an uptick in leverage or is it that the $5 nine ending point of September already assumes those sales and so the impact is purely from from the stock buyback.
That gets you to six one is that correct.
Rich Yeah, I believe you haven't correct, but let me let me walk through the moving parts. So as of the end of September We had acquired in addition to the $125 million of stock that we acquired in the second quarter. We also acquired another just under $50 million of stock in September that has been supply.
<unk> by about another $120 million of shares repurchased through October so as of September 30th cutoff. It doesn't reflect the full share repurchases, but our calculation of leverage.
It does include the benefit from the sale of the New England area assets that are expected to close in the next few weeks. So that is what brings us to $5 nine.
At 930, and then looking forward at year end without any additional property sales, but incremental share repurchases. That's expected to bump leverage up by about a 10th of a turn but we are committed to maintaining our leverage in that five to six times range and as John mentioned. This is all a pair trade, but at this particular moment in time, we haven't.
The sales leg of that pair trades and that'll be something that we'll look to accomplish in 2023.
I mean, I guess my question would be in this environment.
You ultimately want to see leverage.
Trending down not bright and I presume that states that will be the game plan for 2023.
Our views on leverage are unchanged, where we see it as a range when we see it in that five to six times area.
Okay second question.
We did an exercise at some point a month or two ago comparing leap.
Rent levels to your competition and that includes all of your competition in all of your markets.
It turns out that air ran about 15% to 20% above your market rent and that I think is by design you know you've you've obviously upgraded your portfolio through your pair trade and so on.
First of all do you agree with that that estimate and second do you feel as though that might put you at a in a vulnerable spot if people are looking for.
A cheaper alternative to their living arrangements. They are already at the top of the market on average with you guys.
The only thing they might do is leave you and go to a cheaper cheaper place that perhaps you don't offer as much as some of your peers. What do you think about that that observation. If you agree or disagree any color would be great. Thanks.
Hey, rich, it's Keith I'll start and then.
And then I'll turn it over to John .
I'll speak to it, particularly when you think about the residents in.
And those living in our communities and.
I think the emphasis here really comes down to the quality of the residents that are in those higher price with first of all we are 50, 50, and the and the BS and the as and the price points, but the incomes that are at those plays at the higher rent leases.
Are quite good and in fact.
The averages are over $250000 and so when we look at their ability to be able to pay the rents. We don't have any concern with that they have high credits.
And so we feel like we're well positioned and very in a very good spot on the A's and then of course, our BS are the nice blend to go along with that if should there be something that comes into the economy John Yes.
Yes, so what I would add from an investment perspective is that we don't believe that people are pricing in today, the substantial increase in property rents and incomes other little more bearish on what the future may look like.
My opinion is that will prove to be wrong and what we'll see is rents will continue to increase and valuations will a reset to appropriate levels.
Okay, great. Thanks very much.
Yeah Rich this is Terry and I just.
So good to hear your voice I, just want to I want to chime in too.
It really is is keith's point.
Customers.
If we were dealing with with.
Sort of a.
A more common.
Customer who's younger lower income less settled.
Then you are right there is more activity there more trading down.
That sort of segment, we have older settled customers high incomes good jobs high credit scores.
And they are both less likely to be affected in a recession and also better prepared to deal with it without undertaking the dislocation of movie.
Okay, Great Alright.
The first word you ever said to me in the mid Ninety's, whereas business is good so I was happy to see that.
Resurrect itself in this press release so thanks.
Pretty good it is pretty good.
Thank you very much.
[laughter].
Okay.
Thank you next.
Our next question comes from Nick Joseph of Citi. Nick Your line is now open.
Thanks.
Youre, obviously seeing the normal seasonal sequential slowdown in October maybe a little less pronounced with others are there any markets that you're experiencing some pushback on pricing or you're introducing concessions.
That's kind of the strength youre seeing across the other markets.
Hey, Nick.
Good good to hear you.
We're not seeing anything in particular I first just you know when we hear about whenever I hear concessions.
It's really a marketing tool whether it whether someone lowers the rent by $100 and so thats, the new space rent or whether they put a two weeks free on it it's a marketing tool that really is applied.
Seeing seasonally is.
Really what we saw in 2018 2019, what you would've seen pre pandemic, which is when you get to the colder months places like Philadelphia, and Boston slowdown more of a people move less and then when you get past Halloween you start getting into Thanksgiving and Christmas. There is also less activity nothing to what I would call out that looks anything unusual to us.
In fact, exactly what we would have anticipated.
We're feeling quite good of where our October is and where we will finish the Europe .
Yeah.
Thanks, and then just on the $500 million of asset sales.
Are you expecting those to close how much hard money is down and is there any kind of execution risk that you see still associated with those.
Hi, Nick this is John .
First I expect the sale to close in the next couple of weeks.
And they are they have.
Substantial hard money down about $10 million on the deal and as far as to my saying a lot of risk to the closing.
Anything is possible I would say at this point the risk is very low.
Thanks.
Thanks.
Thank you. Our next question comes from a Handel St Juste from Mizuho.
Your line is now open.
Hey, good morning out there.
Yeah.
Good morning so.
Keith I guess a question for you you just make you feel good about October but that's it.
Continue into year end. So maybe can you add some more color around that where are you sending November renewals today and what are your near term for new and renewals.
Thanks.
Sure.
And when we when we look at look forward here's what we've seen historically, we usually see somewhere around a 200 basis point melt that will happen between October to the end of the year and then of course, what happens is that you worked through January February and then the spring starts to pick back up which is what we would expect in call. It March going into April .
When we look at renewals, we think youre going to see renewal numbers that are comparable to what we've seen they are going out and around the 10% range.
Okay.
Thank you Linda.
Our expected near term rental trends between the A's and B's between your urban and suburban assets.
And I would say no different changes in what we're seeing is is that it really becomes market specific and the example, I gave you. The two examples I gave you is is that.
Maybe two of our more urban would be our Miami South Beach, and then Los Angeles, both of which are to harvest more because we are in the country.
We're seeing the highest rental rate achievement, the highest increases that are being achieved.
And those markets are doing quite well and then of course, when we look in places like D C.
Denver or other places that are more sort of suburban.
There is as solid as well so nothing thats changed and nothing that seems unusual to us at this point.
Great and then maybe my second question on bad debt and near term expectations.
Expectations in the press release, I think you mentioned.
But to have no debt.
Correct.
I assume that means we're fully reserved and not any incremental playback.
Additive to earnings and then.
Secondly, curious how you're thinking about congrats on bad debt.
Go further into a recession here.
Thanks, and I. Appreciate the question. This is Paul and really since the onset of Covid, we've taken a very conservative approach to our past due rent.
Basically been on a cash basis of accounting that whole time.
And so what has ended up happening in the at the end of September is our AR balance our gross our balances continue to come down because our collections are improving for those 99% or so of our residents that are paying rent timely and so our <unk> is primarily comprised of the 1% give or take of folks that are non timely payors.
Brent that balances almost essentially fully reserved $200000 onto reserves. So I feel really good about that and Keith and his team are working hard to collect all of that amount and to the extent that we're successful in doing so that will be additive to a future period results.
On the question of trends around bad debt, what we have seen is gross bad debt, which is our bad debt before consideration of any government assistance payments has trended down through the year. It was 240 basis points in Q1. It came down to 210 bps in the second quarter and was 190 bps in the third quarter.
I think when we believe that trend will likely continue.
So that absent a recessionary type environment in 2023, I would expect things to continue to improve further from there.
And then if there is a recession I would I would go back and look at our previous experience and what we saw during the GSC is that our bad debt expense increased from roughly 60 basis points of revenue at that time to about 110 basis points and so it stayed that way too through the duration of the recession, but came back down.
So it was really a much more muted impact than what has happened during COVID-19.
Got it well thank you guys.
Thank you as a reminder, if you'd like to ask a question you can press star one on your telephone keypad.
Our next question comes from John Kim of BMO Capital markets. John Your line is now open.
Thank you.
Your parents grade model.
Looking first acquisition or disposition I'm, just wondering why you decided to pursue without beach acquisition, but there's a lot of price discovery in the market right now.
Hi, John This is John .
I guess the way I would answer that is the chip.
Chicken and egg a little bit, but the the dispositions what we've been out in the market. We've been looking at ways, where we can lock in our cost of capital. So that we can continue to improve the quality of our portfolio and so when I look back from the separation to know about the transformation work we've done to the portfolio we've done this.
Through a number of different initiatives, including our property sales.
The results have been quite starting our average age has decreased by 25%. Our median incomes have increased by 33% and our average rents increased by 20%. So any new business that we look to do we wanted to continue that trend we want to continue to improve the quality of our portfolio and so by the chicken and egg.
It means that if I can have an opportunity to acquire and improve the quality of the portfolio.
Do a trade if I don't have that same opportunity I'm under no <unk>.
The stress and I won't do a trade.
Have you disclosed the cap rate on the acquisition.
No and I can't at this point, but what I can tell you is that we expected and we do have the pair trade identified we expect it to be an IRR that is going to be greater than 10% and again, we're in a spread business. So it will be about 200 bps or more.
On an IRR and our cost of capital.
Okay and my follow up is.
I am assuming that.
Dispositions are on your assets held for sale on our balance sheet, which is only $129 million.
It had been mark to market on that.
On the split with Aimco.
And also if not at the same store pool. So I was wondering.
How much that impacted.
Or maybe even benefiting your same store results taking them out.
Hey, Jonathan This is Paul on the you are correct that the Boston or the new England area of properties are in our held for sale population met all the criteria under the accounting rules to do so and that $127 million is accurate because with the separation of aimed coe.
From a co the basis in our assets did not reset so it is our historical basis from when aimed coe purchased those assets originally.
And then in regards to the same store pool.
Disposition was in our models and our expectations since about March of this year. So it's been part of our same store expectations since that time.
Alright.
Thank you.
Took it up on a pretax basis, but not on an accounting basis.
Yes, the treatment was different for tax and accounting purposes.
But it's in our numbers.
Yes.
Yeah.
Yeah.
Thank you our final question for today comes from John Pawlowski from Green Street, John Your line is now open.
Thanks, Paul a follow up on property taxes I appreciate the color on.
Just the lag of NOI potential increases, we could see a non California markets I'm curious because the decline in property taxes year to date, two 5% down and the timing of appeals does that blur the math for next year like could we see.
Incremental growth next year, because property taxes are down this year any commentary.
It would be great.
Well, John I think if we did not have the benefit of some appeals in the current year numbers our growth rate next year would be smaller, but what I don't want to get particularly around guidance at this point, but what I think youll see as our property tax growth I will not be abnormally large because of current year Appeals.
Okay.
And then a few transaction market questions for John I apologize if I misheard. This I heard research triangle are you looking at assets in Raleigh, right now and if so what type of exposure are you looking to get in the Carolinas.
Thanks, John for the question.
But the answer is yes, we're looking in the.
Yeah.
Submarkets Central Raleigh Chapel Hill and Carrie.
We don't have an identified.
At this point in time, but we're out there looking at it from a total exposure part of that will come down to what kind of opportunities we find it are attractive.
Okay, but do you have something close to being under contract should we or should we expect a entrance into rallied press release or.
In the coming quarters.
Yeah.
I can't talk to the coming quarters too far out but as of today no I don't have anything under contract.
Okay and last one for me and I'm very sorry of John Kim just asked this I just got distracted, but could you provide the initial cap rate on the south gate and the cap rate on the new England assets in what month those deals priced.
Yeah. So on the Southgate the answer is no I can't provide that to you at this point in time.
I can tell you it once again like I told John that we expect to have our IRR greater than 10% and about 200 basis points or more on a spread on the Boston sales. We're looking at the cap rate on trailing 12 of $4 four.
These deals priced at the <unk>.
Early third quarter.
Okay. Thank you.
Thank you we have no further questions for today, so I'll hand back to the management team for any further remarks.
Well, thank you Alex and thank all of you on the call for your interest in Air Please call any one of us with the question.
We look forward to seeing many of you in about 10 or 12 days Derek. Thanks, So much have a good weekend.
Thank you for joining states cool you may now disconnect.
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