Q4 2022 Apartment Income REIT Corp Earnings Call
Okay.
Okay.
Okay.
Okay.
Welcome and thank you for attending today's air communities fourth quarter and full year 2022 earnings conference call. My name is Alexis and I will be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if he would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to Lisa Cohn, President and General Counsel of Air communities. You May proceed.
Thank you Alexis and good day.
My name is Lisa Cohn and its Alexa said I'm, the president and General counsel of Air community.
During this conference call forward looking statements, we make are based on management's judgment.
Among other things current market conditions macroeconomic trends socio economic driver, including projections related to 2023 performance 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 our full earnings release published on <unk> website.
Prepared remarks today come from Terry Considine, our CEO .
Keith Kimmel President of property operations.
John Mcgrath co CIO and chairman of our investment Committee.
Eldon, 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 welcome to all of you on this call.
Air was designed to be the most efficient way to invest in public ownership of multifamily properties.
Last year provides this confirmation.
At 74% are operating margins are the highest among our peers.
At 67% Air has by far the highest rate of conversion of revenue into free cash flow.
Highest among our peers and 10% higher than the peer average and for your information is posted on our webpage and you might be interested redo the calculation.
One foundation is the prowess of Keith and his ops team.
Like other apartment owners Red Rose last year was good.
Same store revenue was up more than 10%.
But unlike all other owners that I know are Coa controllable operating expenses actually declined.
10 basis points in the most inflationary economy of the past 40 years.
I'll just keep doing it.
And second foundation is the portfolio management John Mcgrath.
Roughly three times as active in the past two years as the average apartment REIT.
John and his jeans sold 21% of our starting assets and purchased about $2 billion of acquisition assets.
The acquisition of class of 2021.
Increases the overall same store NOI growth rate by about 100 basis points.
The classroom 2022 about it.
The same size is outside the same store portfolio.
Net operating income growing faster than 40% Approx.
Approximately two and a half times the growth rate at the same store properties.
A good example of the consistency of air ops can be seen in the fourth quarter in January and now February leasing activity.
And without the seasonal slowdown others faced.
A good example, how pure paired trades improved portfolio quality and revenue growth can be seen in Johns fourth quarter trade, a 50 year old garden apartments, and the outer suburbs of Boston for an almost new mid rise and dynamic Miami Beach.
It also shows how we like to invest islands, where zoning or neighborhoods or mother nature, making location attractive to high quality residents.
It is protected in some part from competitive new supply.
Good ups and dynamic portfolio management, combined with Paul's balance sheet little floating rate debt and leases disciplined oversight of offsite activities and costs makes for growth and the greatest efficiency of any public apartment REIT you converting revenue to free cash flow.
Looking to 2023 this year, we plan for more of the same.
Keith and his team will select the best residents and then worked hard to satisfy and retain them.
And Josh on John's team well.
Look for acquisitions, whose returns are magnified by the air edge are accretive to <unk> cost of capital.
Paul will keep score and our balance sheet safe with low leverage long maturities limited interest rate exposure and abundant liquidity.
And Lisa will develop our precious human capital manage risk upgrade corporate systems, most important Gardner priced culture.
There are conflicting views.
About what to expect from the economy this year.
I note that the stock market and the bond markets are pointing in different directions.
Erez prepared for both.
If inflation continues fire and longer air customers can afford higher rents and chiefs has proven you can control costs.
If the fed raises interest rates every bottomline is little affected because Paul is only 4% of borrowings and floating rate debt.
If the economy turns down.
<unk> resilient with residents with high credit scores incomes, averaging $225000 in the latest quarter.
And then greater than 60% propensity to renew.
If the transaction markets proved difficult John and Josh have demonstrated their ability to source capital from property sales and to invest in properties with big upsides when added to the air platform.
I know that Paul's guidance assumes no increase in market rents.
And yet result in same store net operating income.
9%.
And that's about 10.
10% over last year's run rate <unk>.
It's not guidance and only my opinion, but.
But I expect inflation to linger and that rents in our portfolio may grow faster than we expect.
I'm optimistic about <unk> future.
Efficiency and effectiveness provide comparative advantage in operations and acquisitions.
We are a veteran team committed to continuous improvement.
And to each other.
Our intentional culture.
There are a great place to work.
I take pride in its regular recognitions and National Top Workplaces Award is the most recent.
I look forward to the opportunities of this year and appreciate my teammates for their exceptional work last year.
I think Tom Keltner, Chairman of the airport and my fellow directors for their engagement and good counsel.
I'm grateful to shareholders.
Work hard to be good stewards of your precious capital.
With Nomura I'll turn the call over to Keith Kimmel head of Iraq steep.
Thanks Jerry.
I'm pleased to report we wrapped up a good 2022 with a solid fourth quarter.
On today's call I will cover errors.
Air's operations, which have had a more positive trajectory over the past four months the multifamily in general.
Eras acquisitions, the second portfolio that drives elevated growth as we apply the ear ache.
In Ers revenue outlook, which is highest amongst our peer group and based solely on facts and evidence today.
Now to the details.
First the core business continues to do well.
Revenue was up nine 9% from last year.
And the sequential growth of one 8% made it the fastest growing fourth quarter in our history.
We saw great growth in double digits.
Assign blended lease rates up 10, 2% during the quarter.
Occupancy increased each month.
From 96, 7% in October to 97, 4% in December .
January further improved with occupancy of 97, 5% and rates strengthening sequentially.
Second.
Your edge is a unique predictable advantage.
Well your edge is comprised of a multitude of innovations I boil it down to a single concept.
Insistency.
This consistency of resident selection, ensuring we have the highest income requirements credit standards and resident quality.
This consistency of customer service, our teams deliver day in and day out relishing the opportunity to provide a world class experience.
Our resident scored as over four to five on satisfaction surveys in the fourth quarter.
Leading to our trailing 12 month turnover of only 38, 9%.
It is consistency of execution and innovation delivered by a talented and seasoned onsite team bolstered.
Bolstered by a platform of technology process and centralized support.
As a result.
Fourth quarter expenses were down 10 basis points year over year.
Controllable operating expenses were down 30 basis points.
And then just consistency that is the key to air's operating margin.
<unk> established a new high watermark, achieving 76, 1% in the quarter.
Third.
<unk> has a proven track record of above trend growth and acquired properties, what we call the air edge portfolio, which will generate long term outperformance.
<unk> work of John and his team has positioned us and superior submarkets with higher rents higher quality customers and higher upside for growth.
For our air edge class of 2021, both revenue and NOI have grown about 50% faster than our same store communities in the fourth quarter.
We project these communities to grow at twice the same store pace in 2023 as the air edge continues to lead to both additional revenue and expense decreases.
The contribution of the air edge at these communities is worth about an additional 100 basis points did the same store growth rate.
Our acquisition class of 2022 is on a similar trajectory.
These communities are ahead of our underwriting and are expected to grow significantly faster than our stable portfolio of communities.
Fourth.
2023 is the markings of another good year.
Our revenue growth of 8% as a direct result of three facts and evidence today.
Air has 5% earned in from leasing activity in 2022.
Our 5% loss to lease today will contribute 2% growth in 'twenty three.
And our program of upgrading apartment homes will drive another 1%.
Those three factors, none of which rely on market rent growth will result in an 8% increase in ers revenue.
Occupancy is anticipated to be 96, 9% flat from last year.
The January occupancy of 97, 5% continued strength in February and robust demand, which is 10% ahead of 2022.
Bad debt is expected to improve.
Excluding the noise of repayments and delays the run rate of bad debt is around 50 basis points.
Residents are increasingly paying rent on time.
And then the cases that they don't our options for collections of returning to pre COVID-19 norms.
At the beginning of 2022, we had 1000 residents more than two months delinquent and today that is down to 250 of.
Those residents a vast majority are now in the collections process.
The final input to 'twenty three revenue as market rate growth.
And while we don't have a crystal ball, here's what I do know.
<unk> strengthened this year.
As we've increased asking rents by $40 or 1.5%, thus far in 'twenty three.
In total we are projecting 8% revenue growth based on 8% rate growth that we can directly see today.
<unk> occupancy and no additional market rate growth.
But looking at it another way, we can view 2023 revenue growth reached second lines.
In most markets our outlook is in the mid single digit revenue growth.
We add to that the benefit of our market allocation ers portfolio was over 20% allocated to South Florida, We're earning alone is in the double digits and we anticipate growth in the high teens.
Finally, we have the benefit of John's refresh of our portfolio.
Our 2021 average portfolio now entering our same store population is expected to see revenue growth in the mid teens.
And the way, we look at it as a clear path to strong revenue growth in 2023.
My Thanks to all the air team members for a fantastic year Youre consistent attention to our residents and communities as set us up for a great shared success in 2023 and beyond.
And with that I'll now turn the call over to John Graff, The chairman of our investment Committee.
Thank you Keith.
We are focused on repositioning the air portfolio through disciplined portfolio management and accretive capital allocation.
Since separation from aimed Coe $4 1 billion of transactions were approximately 41% turnover of G. A V about three times the turnover of our peers has transformed our ports portfolio in terms of value growth risk and quality.
We have recycled capital into higher quality properties in higher growth submarkets materially reduce exposure to markets with greater regulatory and political risk and an uncertain rule of law.
Continue to improve our capital allocation, including diversification by market and price point and improve the quality of our portfolio as measured by expected rent growth average rents H and physical condition and.
And we increased the allocation of JV to our high growth air edge portfolio from zero to over 17% today.
As shown in the supplemental schedules in the earnings release during 2022, we furthered our goal of continuously improving portfolio quality by selling 18 of our lower rated properties, which were located in slower growing markets with high regulatory exposure.
Average rents, 20% below our portfolio average and whose average effective age was about two thirds older than that of the portfolio.
We also allocated $840 million of capital in 2022, and another $298 million in January 2023 to neighborhoods that exhibit high growth due to durable demand factors and have constraints on competitive supply.
These accretive acquisitions were match funded and are earning an attractive spread over the unlevered equity cost of capital.
Turning to 2023 market uncertainty and volatility have changed the calculus. However, therein lies the opportunity.
During the recent boom times cheap money and over speculation attracted investments from every corner as.
As the market downturn set in investor sentiment soured competitors were forced to pull back and buyer pools became shallow.
An elevated cost of capital made it harder for buyers to make deals pencil.
<unk> mined levered investors enforced others to take a cautious view of the future.
As a result transaction volumes are well off peak levels driving uncertainty of pricing and in widening bid ask spreads as many sellers hesitate at the change pricing and choose to wait for greater clarity or better days.
To be sure uncertainty makes it tough, but our experience economic downturns.
Downturns present, a tremendous opportunity for profitable growth.
Era is well positioned to invest through the downturn and capitalize on the opportunities being presented in these exciting, albeit uncertain times.
We have comparative advantage in transactions market due to our ability to generate enhanced returns through non market advantages such as Paul's balance sheet, it's a safe secure and flexible with ample liquidity and access to all sources of capital.
The ability to use non market currencies, such as O P units to provide significant tax advantages and greater after tax cash proceeds.
Incidentally, we use O P units and 50% of our acquisitions, which Paul neutralizes by repurchase of our shares.
And most importantly, the air edge <unk>.
Simply put properties are worth more than <unk>.
As I have stated on past calls errors in the spread business and we will continue to execute our capital allocation strategy that utilizes our pair trade philosophy.
Our trades improve both portfolio quality and rental growth rates and allow us to be relatively agnostic to market volatility, while also establishing the cost and availability of our equity capital.
Consistent with our strategy in November we locked in at an attractive cost of capital by closing the sale of 650 year old garden apartment properties in outer suburbs of Boston.
The proceeds from the sale were used to fund the $298 million acquisition of Southgate towers in January <unk>.
Southgate, which was got Rehabs in 2016 is located a few blocks away from our Flamingo assets and the South Beach neighborhood of Miami Beach.
The acquisition improves the quality of our portfolio by recycling capital into a high quality asset located in a high growth supply constrained and regulatory friendly sub market.
Like our class a 'twenty, one and 'twenty two acquisitions, which are performing well ahead of underwriting the investment in Southgate is expected to be accretive and earn a spread over the cost of capital of 200 basis points or more.
Looking ahead, we are confident in our ability to continue to source and execute similar trades, whose returns magnified by the air edge will be highly accretive to our cost of capital.
However, given market uncertainty, we have no fixed goal for additional acquisitions in 2023.
While Keith is rightfully optimistic when buying I take a more cautious view.
Growth for the sake of growth is not a strategy I advocate, we will look to continue investing in neighborhoods and addresses that are attractive to high quality residents and have some protection from competitive new supply.
Despite having a cautious disposition I remain bullish on our 2023 growth prospects errors future investments irrespective of the economic climate in which they are made are expected to be highly accretive and an attractive spread over the equity cost of capital within the company's leverage policies and be built upon the companys solid operational foundation.
<unk> with that.
That I will turn the call over to Paul Beldin, Our Chief Financial Officer, Paul Thank.
Thank you John .
I will discuss our strong and flexible balance sheet.
Year 2022 results our expectations for 2023 and conclude with a brief comment on our dividend <unk>.
<unk> balance sheet is well positioned for a period of economic uncertainty, including today's unsettled interest rate environment.
First leverage is low leverage to EBITDA of $6 five to one variance to our target range of five to six times, but some $26 million as a result of the timing of share repurchases, which I'll discuss further in a moment.
In 2023, we anticipate the leverage to EBITDA levels will vary from quarter to quarter, but our year end target range remains unchanged.
Second liquidity is ample with well over $800 million now available under our revolving credit facility.
Third we have limited repricing risk and limited exposure to floating interest rates.
Subsequent to year end and on a leverage neutral basis, we borrowed $320 million for 10 years at a fixed rate of four 9%.
Proceeds were used to refinance our sole debt maturity before may 2025, and to reduce borrowings by $230 million on our revolving credit facility.
This transaction reduced floating rate debt to $150 million or 4% of total leverage and increased our weighted average maturities by nine months.
The quality of the balance sheet is that just my opinion timber Moody's issued a <unk> to issuer credit rating supplementing our triple B flat rating from S&P with two investment grade ratings, we have access to the full suite of dead capital markets, we have access to the public and private bond markets Bank.
That market and nonrecourse property level debt.
Now turning to full year 2022 results full.
Full year <unk> was $2 41 per share inclusive of a 22% contribution from the now repaid M. Coe note.
Last spring, we decided to allow prepayment on the note to delever and extend debt maturities all while lowering our engagement with the aim coe to advance the separation began the year before.
When we announced the prepayment provided guidance for run rate <unk> that is F. O exclusive of the contribution from the Aimco now expected to be $2 19 per share.
Full year 2022 run rate results delivered that to 19 run rates.
And same store operations, we outperformed our expectations with full year same store NOI growth up 14% 200 basis points ahead of our beginning of your expectations revenue was up 10, 2% and operating expenses were up only 40 basis points.
Furthermore, controllable operating expenses were down 10 bps, a remarkable achievement in a year when the CPI increased six 5%.
Outside of same store 21 acquisitions did even better with fourth quarter growth rate in NOI, almost 50% higher than in the same store pool.
We used our strong balance sheet and abundant liquidity take advantage of the stock market. It all drops to repurchase a total of 8 million shares 5% of our shares outstanding at the start of the year.
At an average price of $39 49, and an expected IRR of approximately 10%.
These repurchases are inclusive of 654000 shares repurchased in November and December to neutralize the op units issued in connection with the January acquisition of Southgate.
As we look forward to 2023.
We expect <unk> per share at the midpoint will be $2 41.
Up 10% from 2020 twos run rate <unk> to <unk> 19.
We expect this growth to be the result of a 20. <unk> addition from eight 8% NOI growth in our same store pool inclusive of an approximate 100 basis point benefit due to the inclusion of the faster growing class of 2021 properties, partially offset by a <unk> subtraction due primarily.
To the combination of <unk>.
Oh, I lost due to property sales and higher interest expense from a combination of earn in of higher interest rates from 2022 finance activities.
And higher average outstanding balances, partially offset by benefits from incremental contribution from our 2022 acquisitions. The January acquisition of Southgate and a net <unk> <unk> benefit from share repurchases.
Finally, a few quick comments on our dividend.
Refresh tax basis continues to result in a tax payer friendly and dividend in 2022 areas dividend of $1 80 per share was <unk>, 86% taxable capital gains rates and 14% at ordinary income rates.
Those investors who are tax sensitive each dollar of the air dividends was worth 39% more after tax then was the peer average.
2023, we anticipate our dividend will continue to be the most tax efficient of the multifamily peer groups.
That we will now open up the call for questions. Please limit your questions to two per time in the queue.
I will turn it over to you for the first question.
Absolutely.
First question comes from the line of Hendel, St Tuesday with Mizuho.
You May proceed.
Good morning out there to you guys.
So first I guess congratulations on another strong quarter.
First question is on the blended rents here, which are holding up much better than your peers, especially on the new lease rate side. So I was hoping you could provide some color on the <unk>.
Trend of the blended rates throughout the quarter and into early this year and I'm curious if your expectations over the next few months into the spring what sort of comp.
The blended rates follow up quick.
Yeah.
And Dallas key things thanks for the question.
Well you can see it in our work as we've been looking at a blended rates that.
<unk> been in you know around the 10% plus range.
As we look into into January we're in the nines essentially is what we're coming in at and what we when we look forward. We can see our signed leases that are looking forward to maintaining a very similar type of trajectory now of course, it's early days in and just January a week into February so there's a lot still in front of us.
What I would tell you is as we have an expectation that we'll continue to see something similar like that Oh.
Over the next call at 30 days or 45 days, but the important part is that in January we saw an acceleration and so you know seasonally we're starting to see a pickup we had raised our rates by about $40 or a one 5% and we'll see how that plays out but of course, we will get together and Ah and another.
90 days, and we'll be able to give you a better update.
Got it I appreciate that Keith.
Of course in del Webb you know.
I I would point to three different three different things our resident quality our team members and our portfolio and you know just if you start with our which starts with our residents and we were really highly focused on high quality residence with high incomes high credit scores are our average FICO score of 725.
These are individuals that have the ability to sustain and be able to pay increases.
And then there are just a different customer who wants to stay longer with us.
That's backed up by team members, where our community managers and service managers have.
They've worked for us for eight plus years on average. So these are individuals who give exceptional customer satisfaction knowing that it's all these things work together, where residents will stay with us longer team members work for us longer.
And then of course not to be missed is the portfolio and I talked about this in my prepared remarks, but when I think about the work John and his team are doing we have we have multiple things that are really contributing to this one let's talk about Miami, our position in South, Florida, 20%, where we're getting really high rents and of course that helps bolster but not to be missed.
The class of 2021, that's coming into play and where we can apply the air edge and where we can actually see upside when we take over a building we can raise the rents more than others.
And between the combination of those things I believe that's really what you're seeing that's coming through in those numbers.
That's helpful. I appreciate that one more if I could just on the expense side, maybe some color on the building blocks for the pressure you're seeing and then I guess just looking ahead are you expecting to return to a more normal low single digit level beyond this year.
Obviously, that's been a hallmark of the platform level. Several years. So I'm. Just wondering this year is more of an anomaly or if there's something structurally out perhaps to prevent you from going back to those lower levels.
Yeah. Thanks, Ann this is Paul.
I appreciate the question and Youre very right to point out that our guidance for expense growth next year is very abnormal and atypical for us in our portfolio.
There are really two factors that are driving the increase in our expected expense expectations. The first is in real estate taxes, and so before talking about 'twenty three I just want to focus on the past for a second on real estate taxes.
Not only did we have negative growth in real estate tax expense in 2022, but if you look at our compounded growth rate for the past three years. It has only increased on average by one 7% and so what we're seeing in 2023 is a catch up in valuations in many markets and the impact of two large tax.
Fuels that occurred in 2022 that we don't have as part of our guidance in 2023, and when you combine those two factors you get an expectation of a real estate tax growth next year in the 7% to 8% range, which if you look at our long term trends should should moderate in future years, especially when you consider that 40% of our portfolio roughly.
Located in California, and protected by prop 13 so.
The second factor in increasing expenses is on the insurance side of the equation as I'm sure you.
And from talking with other multifamily companies and it just through your industry contacts you know that the property.
Market right now is very difficult as hard and premiums are increasing so we think we have a potential for a sizable increase in insurance costs in that line of business and.
And that's really what's driving our expectations for this year.
Very helpful. Thank you guys.
Celia.
Thank you for your question.
The next question comes from the line of John Kim with BMO Capital markets. You May proceed.
Thank you.
I wanted to follow up on the lease growth question, because it is a bit of an outlier in the sector.
I was wondering if you could breakdown what markets are driving that high lease growth rate is it just miami or are there other markets that are giving you above.
Your peers at 9%.
And also how much capital enhancements or wherever they had some capex how much that's been additive to these countries.
John I'll start with it and then maybe I'll turn it to Paul.
But when we when we go through the lease to lease rates, we see a strong across the board quite frankly.
Miami would be the.
The highest would be you know in the mid twenties, but we have lots of other places that are coming in in the <unk>.
<unk> D C. Our Los Angeles portfolio. That's also in the 10.
10% to 13 range. So we have a variety of places that we're getting high rents.
And in those new leases not just any one particular spot.
John and to address the capital enhancement spending in 2022, we invested about $90 million in capital enhancements. The vast majority of that was in K N b programs across the portfolio and so as we underwrite those those projects, we anticipate not only a high yield on the initial investment.
We underwrite an expected internal rate of return or an investment of 10% on our money and the way that the majority of that has manifested as through higher revenue growth and so you are seeing a benefit of that investment in our blended lease rates.
Okay now that you've closed southgate.
And you have I guess, a better idea of where rents are coming in at least the beginning of the year can you disclose what the year one cap rate is on the asset.
Hey, John This is John Mcgrath.
We're looking at a year, one cap rate right around 5%.
So when you say 200 basis points above the cost of capital is that just over.
Five year period, or what can you that's over.
Sure.
That's over the Irr's, so our deals will be accretive on.
From the beginning if you will all over.
Fair trade and over the <unk>.
There are periods, a 10 year.
Period, we expect to have a spread of 200 basis points or more over that cost of capital.
Great and then one final question for me is just you.
You made a lot of this.
Gotcha.
Today, our discussion points about getting into lower regulatory environment. So I was wondering if you were going to continue to pursue that path.
Reducing the exposure to California, and some other highly regulated markets.
Allocating more towards towards the Sun belt.
Well I'll start and then maybe Terry.
Jump in.
As part of our capital allocation, we are very focused on looking at concentration and concentration risk.
And one of those areas is of course, a regulatory and political environments. So we will continue to balance our portfolio.
Both on where we see high growth, but also where we can reduce risk within the portfolio.
John I don't have a lot to add to that.
<unk>.
That theres, even discussions of national.
Intervention in housing policy. So it's just a fact of.
Business in America today.
We look at.
Expected outcomes in different markets and we look at the risk factor.
Military.
Access is part of that.
Thank you and sorry for going after going over two questions sorry about that.
Yeah.
Thank you Mr. Kim.
The next question comes from the line of Nick Joseph with Citi. You May proceed.
Thanks, I appreciate the comments on kind of the air edge and the benefits from the incoming same store assets as well as I guess the acquisitions from 2022.
When you look at those deals that you've done over the past two years with any of those pre stabilization or is all the outperformance just put it onto your platform.
Hey, Nick this is John Mcgrath.
The air Edge is what's created the opportunity we buy stabilized product we put it onto our platform. The greatest advantage that I have is a deal guy plain and simply as Keith and his team I can drop the product onto the platform and they take it from there and the magic has worked.
But all the all the acquisitions were stabilized when you acquired them.
Yes.
Thanks, Nick.
And that is that that also continues so it's not a onetime event.
We believe will happen over those 10 years is that in the first five youll have this rate of increase as.
The customer selection processes. It takes a couple of turns of the rent roll.
Capital investment pace planning and then an investment and then rolls through the rent roll so that.
<unk>.
When we take a stabilized asset and add to its value that will be so much in the first year, but it will also be another increment in the second another increment in the third and so forth.
So the first five years are likely to be elevated and then some reversion to trend.
January .
Maybe the divergence of trends that you guys are putting up versus versus peers and recognize its a competitive acquisition market.
Lot of peers are very good at operations as well, so just trying to understand where that where that difference is coming from but maybe the second question just on kind of capital allocation going forward you've been doing some buybacks what is the appetite.
Going forward, just given where the stock trades relative to at least consensus NAV.
What we've now paired trade.
If we sold real estate buybacks and reinvested it where we have higher growth rates.
We look at the where the stock trades, we see that as an opportunity and it's been about a 20% element of our investment policy over the last year or so.
Sorry, Yes. The question was on more buybacks not on issuing equity here.
Well as I say, we bought back 5% of our capital in the last year and <unk>.
Pricing continues.
We'll continue to buy more and when we look at the.
This is part of a balanced program, we see that the real estate returns are that.
Equal to or greater than those of share buybacks.
Thank you.
Yeah.
Thank you Mr. Joseph.
The next question comes from the line of Sanjay <unk> with Goldman Sachs. You May proceed.
Thank you for taking my question and congratulations on a very strong quarter.
I'd like to go back to market rent growth a little bit look I understand the guidance assumes no increase in market trends, but then Gary you did say that your view of inflation is that it will continue to linger.
In light of that RV to deaden basically.
<unk> that guidance is conservative.
Hum.
Oh are you know the other end of that could be that things might fall off the cliff as the progressive and progressive and therefore market rent growth is not there seal because you know we all understand that you've obviously started with such a strong January so why not give a view of market rent growth.
Right.
Xiaomi is because we're giving guidance for the year and at a time when men.
The chairman of the fed is trying to figure out what to think about the future.
It would be foolish.
A little harder for me.
Our air as a team to.
Give specifics about what's going to happen going forward. So there isn't a conservative bias in what we do it's based on what we know today.
That's likely to change.
In our remarks, we talked about what would happen if it changed in a positive way and what would happen if it changed in a negative way and we know that on this call are people that are far more expert about the macro economy then.
A group of the <unk>.
<unk> operators and so you can overlay your macro objectives and see what they would show I offered my own unworthy opinion that that I think it's going to be harder to get inflation under control and if that's the case the likely outcomes are going to be higher rent growth.
But also higher interest rates now, we're not too exposed on an operating basis to higher interest rates, thanks to Paul but.
Going back to Nick's question that May show up in.
This is Paul I'll start and Keith if you have anything to add please please jump.
In.
Your question was framed in a manner of our supply risk in and some of our new acquisition markets and that has predominantly been in South, Florida, and then in the Washington D. C area. So just starting with South Florida. There is a lot of construction when you look at Miami Dade in that area in aggregate in total, but if you drill down and look at supply.
In close proximity to our properties, particularly the properties in Miami Beach, there's very very little competitive new supply in those particular areas and so while there might be some ancillary effects from new buildings delivered in other parts of town, we don't expect that to meaningfully impact our business in 2023. Similarly.
In Washington, D C and our assets and our locations of our price points, we don't have a concern.
More broadly where we do see supply, though is that many of the submarkets. So we've talked about on past calls we see the center city Philadelphia area continue to have a high deliveries as a percentage of existing stock Theres about six to 800 units that are being delivered within a mile of our center city properties and.
<unk> 2023.
And then.
The only other location of appreciable supply is here and then in the Denver area, where we see competitive new supply being delivered in the area of our 21 fitzsimons in astra's properties. So we have a very critical advantage in that our properties are the only multifamily properties that are actually on campus. So when.
They are choosing a place to live.
Our location is far superior.
That's very helpful. Thank you so much.
Thank you Ms Lucia.
The next question comes from the line of Rich Anderson with Smbs you May proceed.
Thanks, Hello, everybody. So I want to go back to this January nine 4% blended number.
And you said.
The 2021 acquisitions added 100 basis points to your same store growth profile I think you said that.
Is it a similar level of additive impact when it comes to this.
New renewal and blended mass or is it substantially more impactful for some reason because.
The multifamily Reits tend to move in a pack in terms of operations and the numbers there, but this is quite quite different and I'm. Just wondering if thats driving the differentiator if you're if there's maybe a difference in the calculation methodology is there anything you could say that kind of explains this.
A little bit more than just saying you have the best residents.
Properties.
Hey, rich it's Keith.
When when you look at the numbers that came in in January . They are they are impacted very little frankly by the 2021.
Number that came in or is it 2021 population as far as it goes as the new lease rates, where the blended rates.
While there while they are impactful.
They werent the thing that drove it but we really saw was strength in places like Miami, Los Angeles D C.
And frankly in our San Diego would be another one that I would point out and which we were able to continue to press rates.
And we had residents who were just continued to stay with us.
And put us in that position now of course 2021, we will earn in even further as we are the <unk> class of 2021 more earn and further as we get into the balance of this year and we think it will just as you pointed out that 1% will be for the full year, but not not to particular around January results.
Okay.
The other outlier for you guys is that running at 50 basis points, that's also substantially better.
Could you can you give some color behind that why you're doing so much better on that number and maybe.
<unk> comment.
On how San Francisco is moving along these days in your in your eyes.
Hey, rich it's good to hear from you. This is Paul on the bad debt question, while we have seen as we looked at our bad debt experience through the quarter is that our bad debt expense has trended down, but I think a very important distinction to make it as what is the net bad debt expense and what is the gross bad debt and the difference between the two.
Relates to government assistance payments or collections from former residence and so what we have seen is that our gross bad debt has trended down quarter by quarter for about 240 basis points in the first quarter down to roughly 150 basis points in the fourth and then if you look into that detail a little bit further our fourth quarter of 100.
50 basis points of bad debt is made up of 100 bps of bad debt related to residents that Keith mentioned that are more than two months delinquent in our confidence to lower bad debt experience next year is driven by the fact that whereas we had 1000 of these residents at the beginning of the year. We only have 250 today and most of those are and then vixen.
Assess and we're optimistic that we'll be able to release those units to rent paying customers in the relatively near future and so that's really what is driving our opportunity and our expectations going forward for next year.
Okay and then.
Rich I would just add to that pulse too modest to say, so, but our accounting has been quite conservative and we basically reserved uncollected bad rent so the noise about collections.
Almost always going to be a good guide to us in terms of reported bad debt.
The metric we focus on is what Paul mentioned, which is run rate bad debt and that debt to <unk> today and as the economy is heal R. R.
The restraints on normal collection have ended.
Getting back to sort of an error standard.
50 bps or lower.
Okay, and then any quick comment on San Francisco, how it's trending.
It's really not particularly material to us a particularly different.
If youre talking about the city of San Francisco.
Can you just clarify your question on San Francisco.
Bay area by area excuse me okay. Okay.
But is it just how is that how's the bay area doing in general.
So what we've seen in the Bay area is that we've seen some strengthening as it comes to demand with leasing apartments. So one of the things that had been for as you might recall over the past 18 months or so there was this outgoing of folks that we'd go work remote and different things and what we've seen on the ground is people coming back.
And so it's not clear to me if that's a reflection of some of these tech lay offs that are occurring that essentially people are coming back, saying I'm going to get back to the hubs and the home basis of these these companies.
The point I would give you is as are our occupancy in the Bay area is in the high 90 Sevens and we had struggled previously being in it being at 95% as an example, so we are seeing a shift that's there now the rents havent fully recovered the bay area was one of the slowest and most impacted.
And so there's still more work to be done, but we're feeling good about where the bay areas as we start the year.
Okay.
Thanks, guys.
Thank you.
Thank you Mr. Anderson.
The next question comes from the line of John Pawlowski with Green Street, You May proceed.
Thanks for the time, please bear with me one more question on new lease changes Paul can you just give us a sense without revenue enhancing capex.
How much lower new lease changes in recent months would have been versus the roughly 10% reported.
Yeah, Jonathan that's a question that we're going to dive into it and get back to you on that when we talk about the contribution from revenue enhancing capex that revenue enhancing a little bit of a misnomer because it's not all revenue enhancing but it's also expense reducing and so there's a mix issue there and I don't want to give you a number off the top of my head.
That isn't precise so let us follow up with you on that.
Okay, no problem than just a few quick market level questions Keith.
Amy portfolio, obviously, the composition of the assets is change in rents are up massively in the market can you just give us a sense for rent to income ratios and your current Miami portfolio.
How that compares to the total portfolio.
So the rent let me see if I have that right right at my fingertips here.
Well, so I've got Matt Holmes Who's has given me the detail.
We've been running at 20% rent to income ratio.
Miami, which is actually quite similar.
The reason that is is because we don't actually have a different requirement from city to city. So regardless of the product type of what we do is whether the rents are $8000 a month or $4000. A month, we have a very high standard of having the income's being substantially high enough to cover and to grow into it. So it's about 20% in Miami.
Okay last one from me, 1% sequential decline in revenues in Washington D. C. Keith could you provide a little bit more color about what's going on in terms of demand trends in the D. C Metro.
Sure. So yes, so really what we have there was some some transitions of somebody.
Our accounting that we had that happened in the third quarter and fourth quarter. The transition between the two so it was really a matter of that happening between those two months the broader points on D. C is the DC is one of our strongest markets and it's a 90, 898% occupied and really as we look forward. It would be one of our stronger so it was really.
Just some noise between those two months if you look at for the total overall number.
It's in great shape.
Okay.
Most of the time.
Thanks, John .
Thank you Mr Pilevsky.
There are currently no further questions registered so as a reminder, it is star one on your telephone keypad to ask a question.
Well, while we wait for questions I just want to thank everyone for their interest in air. Please call. If you have any questions any of the management team.
The.
<unk> season as the soon to be upon us, we look forward to being together and.
Or if you're in Colorado, we welcome you to visit us in our offices, but thank you very much.
Yeah.
There are no additional questions at this time.
I will now turn the line back to the management team for any additional remarks.
Thank you. Thank you.
Absolutely that concludes the air communities fourth quarter and full year 2022 earnings conference call. Thank you for your participation you may now disconnect your lines.