Q4 2022 Albemarle Corp Earnings Call
Speaker 1: Demodulated for the day is called. If you would like to ask a question during your presentation, you may do so by pressing star one or half on keypad.
[music].
Speaker 1: I will now hand over to your host, Meredith Fendi, Vice President of Investor Relations and Sustainability. Meredith, please go ahead.
Speaker 2: All right, thank you Glenn and welcome everyone to Albumrol's fourth quarter and full year 2022 earnings conference call. Our earnings were released after the closing market yesterday and you will find the press release and earnings presentation posted to our website under the investors section at albumrol.com. Joining me on the call today are Kent Masters Chief Executive Officer.
Speaker 2: and Scott Tozier, chief financial officer, Rafael Crawford, President of Kitchen, Netha Johnson, President of Specialties, and Eric Norris, President of Energy Storage, are also available for Q&A. I'll note that today's call will be limited to 30 minutes, shorter than our usual quarterly updates.
Thank you for standing by and welcome to the Independence Realty Trust, Inc. Q4 earnings Conference call. My name is Sam 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 you'd like to ask a question. Please press <unk>.
Speaker 2: since we just held an in-depth update three weeks ago. The replay of that webcast is available on our website.
Star followed by one on your telephone keypad.
I'll now turn the call over to Lauren Torres Martin. Please go ahead.
Speaker 2: As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance, and timing of the expansion projects, may constitute forward looking statements. Please note the cautionary language about forward looking statements contained in our press release and earnings presentation that same language applies to this call.
Thank you and good morning, everyone. Thank you for joining us to review Independence Realty Trust fourth quarter and full year 2022 financial results on.
On the call with me today are Scott Shafer, Chief Executive Officer, Mike Daly EVP of operations and people sterile Ender, President of IRT, and Jim <unk> Chief Financial Officer.
Speaker 2: I'll also note that some of our comments today refer to non- GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release and the appendix of our earnings presentation. With that, I'll turn the call over to Kent.
Today's call is being webcast on our website at IR T living dotcom.
Will be a replay of the call available via webcast on our Investor Relations website.
Speaker 3: Thanks, Meredith.
Speaker 3: Good morning and thank you for joining us today. I'll start by highlighting that our fourth quarter results were exceptional.
Telefonica <unk> beginning at approximately 12 P M eastern time today.
Speaker 3: with close to triple the net sales from the same period in 2021.
Before I turn the call over to Scott I'd like to remind everyone that there may be forward looking statements made on this call. These forward looking statements reflect irt's current views with respect to future events financial performance and the merger with steadfast apartment, REIT, which will be referenced here in at star.
Speaker 3: and adjusted EBITDA up more than 400% year-over-year.
Speaker 3: And while rising lithium pricing contributed to these results, we also saw significant increased volume growth.
Speaker 3: Scott will go into the financial details for the quarter and the year. We are confident in our assessment of the market opportunity for our essential elements.
Actual results could differ substantially and materially from what IRT has projected such statements are made in good faith pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Speaker 3: and equally confident of our ability to seize that opportunity.
Speaker 3: We anticipate net sales growth of 55 to 75% for 2023.
Please refer to Irt's press release supplemental information and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations participants may discuss non-GAAP financial measures during this call.
Speaker 3: Our strategy is not just to maintain, but to build on our global leadership in both energy storage and specialties, and we continue to invest in both capacity and innovation to make that happen. And now I'll turn over to Scott for the details. Great, thanks Ken and good morning everyone. Let's start on the slide 5 to quickly review the 4th quarter 2022 performance. Net sales for the 4th quarter close at approximately $2.6 billion.
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A copy of Irt's earnings press release, and supplemental information containing financial information other statistical information and a reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measure is attached to Irt's. Her report on the form 8-K.
Speaker 3: up 193% from last year driven primarily by our lithium segment but we saw increases in bromine as well. Income a trip available to Albumo was $1.1 billion for the fourth quarter. Deluted EPS for the fourth quarter was $9.60 which was a record for Albumo.
Available at Irt's website under Investor Relations.
Irt's other SEC filings are also available through this link.
IRT does not undertake to update forward looking statements on this call or with respect to matters described herein, except as may be required by law.
Speaker 3: In fact, it easily beat our previous full year EPS record of $6.34 back in 2018. Praying to slide 6, fourth quarter adjusted EBITDA was over $1.2 billion, up almost 5.5 times year-to-year. This $1 billion increase was primarily driven by higher lifting prices and increased volumes.
With that it's my pleasure to turn the call over to Scott Shafer.
Thank you Lauren and thank you all for joining us this morning.
<unk> 22 was a strong year for Iot as we integrated the store portfolio and exceeded our initial synergies in full year operating guidance during a challenging macroeconomic environment, our ability to deliver nearly 30% core <unk> per share growth. In 2022 was the result of the strategic positioning of our extended portfolio concentrated in March.
Speaker 3: As you can see on the slide, these high quarterly results also contributed heavily to our full-year increase in adjusted EBITDA of nearly 300%. Our bromine segment was up slightly, and as expected, our cattle segment came in lower in the quarter as higher sales volumes and favorable pricing were offset by a plant shutdown due to the winter freeze in Texas in December .
Gateway markets within the Sunbelt region, where we continue to benefit from positive supply and demand dynamics. Our team delivered another year of robust performance, which was reflected in our fourth quarter and full year results specifically, our average rental rate increased 12% in 2022 supporting a double digit increase in revenue.
Speaker 3: Full year 2023 guidance is unchanged from our strategic update in January . We continue to expect strong sequential sales growth in 2023.
Our same store NOI increased 13% in the fourth quarter and 13, 7% for the full year compared to last year.
And we continue to effectively reduce our leverage from seven seven times EBITDA a year ago to six nine times at year end 2022 ahead of our low <unk> target.
Speaker 3: And remember, we have assumed flat year in 2022 lithium pricing throughout 2023. We expect our adjusted EBITDA to be approximately 20 to 45 percent higher than 2022 with positive trends in all three businesses. Additionally, we expect net cash from operations to rise between 10 and 25 percent over 2022. And this means we expect to remain free cash flow positive this year, even after increasing our growth investments. On slide 8.
We also made meaningful progress on our value add program as we renovated 656 units in the fourth quarter and 1451 units for the full year, while achieving an annual return on investment of more than 24%. This positions us well to deliver the 2500 to 3000 units that we've previously guided for in 2023.
We remain confident about the potential of our value add program and continue to assess the economic landscape as we determine the pace and scope of renovations are properties in selected markets.
Speaker 3: We expect to see net sales increase sequentially quarter to quarter as our vines ramp up. We project that our adjusted EBITDA will be evenly split between the first and second halves of the year. And as a result, we anticipate that margin rates will moderate as we progress through the year. And I'll come back to that in a moment.
We're coming off a strong year, we recognize there is more work to be done to drive sustainable occupancy gains across the entire portfolio and can assure you that this is a top priority for us in 2023.
We are focused on working with our regional leaders and frontline leasing teams to improve all aspects of our leasing and sales process. As we mentioned previously our target occupancy is 95% for non value add communities and we will continue to drive rent growth where appropriate.
Speaker 3: All three of our business segments are looking at healthy growth rates during the year, reiterating what we detailed in our January event. This is our webcast in January . A lot of the questions we've gotten are around margins and capital expenditures. So I'll provide some additional color and time on those two items and then Kent will provide a market update.
Speaker 3: All three of our business segments are looking at healthy growth rates during the year, reiterating what we detailed in our January event. This is our webcast in January . A lot of the questions we've gotten are around margins and capital expenditures. So I'll provide some additional color and time on those two items, and then Kent will provide a market update. So let's turn to slide 9.
Looking ahead, we are factoring in a mild recession, which we expect to be more pronounced in the second half of this year. Despite these uncertain conditions being well positioned we're in all points of market cycle due to our portfolio footprint across key sunbelt markets that continue to see significant migration and job growth.
And we expect to build upon our solid foundation and continue to deliver outsized growth rates as shown in our 2023 guidance, which includes a $6, 5% NOI growth at the midpoint of our guided range. This is on top of NOI growth of 11, 4% in 2021, and 13, 7% in 2022 or.
Speaker 3: Energy storage, EBITDA margins were 65% in 2022. And then in 2023, a lower impact of spodgaming inventory and increased impact of our JVs is expected to normalize our 2023 margins for around 46% to 47%. Most of that roughly 20% is point decline, due to spodgaming inventory lags. It takes about six months for spodgaming to go from our minds through conversion to our customers.
Our 2023 guidance.
Also includes five 6% core <unk> per share growth at the midpoint.
We are off to a good start this year I remain very excited about the growth opportunities for Iot and optimistic about our future as real estate fundamentals remain strong and our resilient growth markets.
I'd now like to introduce you to Mike Daley, our EVP of operations and people like as a core member of the IR team overseeing all aspects of our day to day operations, Mike has been with IHG since 2019 and successfully guided us through the pandemic with consistently strong operational performance. He is a seasoned executive and returned to lead the operations in December 2022.
Speaker 3: Last year, we saw a dramatic increase in pricing for lithium and spodgeming. Due to that timeline on spodgeming inventory, we realized higher lithium pricing from our customers faster than higher spodgeming costs. As a result, we had unusually strong margins in 2022, particularly in the second half. The next item affecting margins is the accounting treatment of the marble joint venture. The next item affecting margins is the second half. The next item affecting margins is the third half. The next item affecting margins is the third half.
With that introduction I'd like to hand, the call over to Mike.
Thanks, Scott I'm happy to join today's call for the first time in the share in greater detail why we are excited about our portfolio and its ability to provide stable growth through different economic cycles, our strong fourth quarter and year end results were driven by double digit rent growth with markets like Tampa Myrtle Beach.
Speaker 3: We expect to report 100% of net sales, but only our share of EBITDA, resulting in a lower recorded margin on that portion of the business. As this joint venture continues to ramp up, this accounting impact will increase. We expect to report 100% of net sales, but only our share of EBITDA, resulting in a lower record margin on that portion of the business.
Emphasis Atlanta, and Raleigh, Durham, achieving mid to high teen average rent increases for the full year.
Speaker 3: We are in active discussions with our partner about restructuring the marble joint venture and expect to have news on this soon. Finally our EBITDA margins are impacted by tax expense at our talisman joint venture. We are in active discussions with our partner about restructuring the marble joint venture and expect to have news on this soon.
We continue to see strong migration trends into our southern markets. This was recently confirmed by the U S Census Bureau, which reported a Florida, Texas, North and South Carolina, Tennessee, and Georgia, where the states with highest net domestic migration gains in 2022.
Speaker 3: Towson income is included in our EBITDA on an after-tax basis. If you adjust Towson results to exclude this, margins would be about 8-10% higher in 2023. Let's turn to our capital expenditures outlook on slide 10. We are investing with three goals in mind.
These six states represent over 60% of Irt's NOI and are not only well situated in the attractive Sunbelt region, but also have experienced a robust job market recovery after the pandemic, averaging 5% job growth since March 2020.
Scott mentioned, we are laser focused on driving improved occupancy in the fourth quarter average occupancy at our total same store portfolio was 93, 8% down 40 basis points from Q3 2022, driven in part by seasonality as we've previously indicated the startup renovations at our value add communities.
Speaker 3: First, to add conversion capacity and remain vertically integrated. Second, to invest in new product technology to support battery advances. And third, to build and maintain our world-class resource base.
Speaker 3: To meet these goals, we expect capital investment to increase from about 1.7 to 1.9 billion dollars in 2023 to about 4 to 4.4 billion dollars in 2027. About half the increase in capital expense relates to geographic diversification to support customer demand for regional lithium conversion and supply.
Within our same store portfolio also impacts occupancy as every unit comes offline for approximately 30 days. We've started renovations on 10, new communities during the second half of 2022 through today.
We also recognize that the average occupancy of our same store non value add communities. During the fourth quarter was 94, 6% below our previously stated target of 95% improving our leasing and sales process is a priority for the entire operations team and we are confident that our occupancy will increase to our targeted levels.
Speaker 3: In 2023, we're investing in our conversion capacity in Meshon, Inch and Jaun. And as the easy market develops in other parts of the world, we will continue to invest. For example, we're planning investments in North America and Europe where we estimate capital intensity to be more than double. Thank you.
During the leasing season.
We are pleased to note that we are seeing positive momentum as we begin 2023 on.
On a blended basis, we have achieved four 8% lease over lease rental rate growth through February 13th with a four 6% increase and new leases and a four 9% increase in renewals for our combined same store portfolio.
Speaker 3: Second, by mid-decade, we expect to invest more in technology to produce advanced energy storage materials for next-generation batteries. And lastly, we expect to invest in additional resource development. Across our capital spending, about 5% is linked to sustainability.
We have a four 9% earn and that will contribute to 'twenty two 'twenty three revenue growth and our loss to lease across the portfolio is 6%.
Speaker 3: including improvements to new and existing facilities. These investments are expected to generate strong returns, allowing us to continue to invest to support our customers while generating significant free cash flow.
I'd now like to turn the call too far off to provide you with an update on our investment opportunities.
Thanks, Mike starting with our value add program, we completed renovations on 656 units in the fourth quarter and as a result of these four properties from our ongoing renovation was completed under the program.
Speaker 3: With that, I'll turn it over to Kent for a brief market update and closing remarks. Okay, thanks Scott. As China reopens, we expect moderation in EV demand to be short-lived with medium and long-term demand remaining robust.
For the full year, we completed renovations on 1451 units achieving a return on investment of 24, 1%.
Speaker 3: We continue to expect ED sales in China to grow 40% year over year and increase of nearly 3 million vehicles. As you can see in the chart on the right, sales in China are seasonally weak around the Lunar New Year.
This was done with an average cost per renovated unit of $13659.
At an average rent increase of $270 over on renovated comps as Scott mentioned, we expect to renovate between 2500 3000 units in 2023.
Speaker 3: We believe the latest facing out of subsidies will have limited impact on demand. EV subsidies have rolled off unscheduled since 2013 with only brief declines and sales.
Currently we have 18 properties in 10 markets included in our ongoing value add program.
Over the course of 2023, we plan to add another nine properties, comprising 2654 units and expect to achieve an average.
Speaker 3: continued municipal incentives and consumer preferences support a strong demand outlook for EVs. Our contract customers are not flowing down their ordering patterns and early indications of both that cap-out inventory and battery inventory in China are decreasing, which is a good sign for lithium cells. We're listening to our customers and we'll be watching the data.
On material costs of 22% at these new projects.
In connection with our ongoing capital recycling program. We sold two previously held for sale properties in the fourth quarter.
Meadows apartments in Louisville, Kentucky, and Sycamore tariffs in Terre Haute, Indiana.
The aggregate sale price was $99 million and we recognized 17 million net gain on sales in these two communities.
Speaker 3: So we'll continue to adjust our expectations as the year progresses. Our biggest challenge is managing the tremendous growth opportunity as in front of us. We are leveraging our durable competitive advantages like our world-class resources, our global asset portfolio, and technical know-how to continue to grow. And we are being absolutely disciplined about how we build our leadership position.
The blended economic cap rate on these dispositions was four 5%.
We also moved one property to held for sale status of 277 unit community in Indianapolis.
Property was built in 1976 and requires a high level of annual Capex spend relative to our other communities located in the same market.
We expect the sale of this property to close at the end of this month with proceeds from the disposition to be used to reduce debt.
Speaker 3: particularly when it comes to scaling lithium production and conversion. We intend to accelerate growth profitably and in ways that align with customer needs. We are confident that electrification will continue to be a primary pathway toward a clean energy future.
The deal is complete the buyer's deposit is hard and they rate locked on that they're using to finance the purchase.
The economic cap rate on this disposition is four 8%.
Speaker 3: But we also recognize that the future for AlbumRal is built on more than electric vehicles and on more than just our production capacity. As we said in our strategic update, our strength in transforming resources into essential elements give us outstanding leadership opportunities in four key areas.
Regarding new supply deliveries are expected to increase in 2023 the decline in the years following.
Costar has projected new deliveries in our Submarkets based on a weighted average exposure at two 8% and the existing inventory dropping to two 4% in 2024 and potentially declining further as many projects not shovel ready have been put on hold due to several factors, including elevated cost of construction and increased <unk>.
Speaker 3: mobility, energy, connectivity, and health. We know that customer-focused innovations and sustainability are as essential to our future as our resource capacity as we work to fulfill our purpose of enabling a more resilient world. So now we'll move to Q&A and Glam, you're going to moderate that. Thank you.
Interest rates.
While select Submarkets in Atlanta, Dallas, Tampa, and Nashville will have elevated new deliveries in 2023, we expect that this will have limited impact on our primarily class b communities with monthly rents substantially lower than comparable new construction.
Speaker 1: Thank you ladies and gentlemen if you'd like to ask a question please press star 4.1 mod type on keypad now. When we print the answer question please ensure you're familiar with the locally. With our first question comes from PJ Tube Car from City PJ your life is now open.
Longer term supply demand imbalance is expected to continue in our markets, where construction will not meet the overall housing needs.
Lastly, I would like to share with you one of our larger capital projects for 2023.
In anticipation of the continued growth of electric vehicles over the course next decade, we're committing $2 million on our first phase of our EV charging station program.
Speaker 4: Yes, I good morning everyone. Just a long-term question. As you get ready for King's mountain site to potentially restart in let's say four or five years, I know you're doing a lot of community outreach and engagement today, but can you lay out for us the milestones in terms of permitting process?
The first step of installing 192 charging stations at 32 communities will be used to better understand resident demand and usage of this amenity.
We believe that these charging stations will be well received and expect a continued rollout in the following years throughout the portfolio.
I would now like to turn the call over to Jim.
Speaker 3: And after the IRA, do you think the process has gotten any easier? Thank you. Okay, so, all right, interesting. So we are doing a lot of community outreach. It's not so much about the permitting process. It's just kind of how we're doing business when we go about a project like this. So, and we expect to continue to do that throughout the life of the mine as we do that at other mines and other sites as well. So we're just, we're changing a little bit how we do that, learning from some of the success that we've had. And lithium business, and we apply that to our other sites as well whether we're mining there or not. But we'll continue to see that outreach.
Thanks, Carolyn and good morning, everyone, beginning with our 2022 performance update for the fourth quarter of 2022 net income available to common shareholders was $33 6 million.
Up from $28 6 million in the fourth quarter of 2021.
Full year 2022, net income available to common shareholders was $117 2 million up from $44 6 million in the full year 2021 <unk>.
During the fourth quarter core <unk> more than doubled to $66 8 million from 31 point here a million a year ago and core <unk> per share grew 28% to 29 cents per share.
Speaker 3: on the has the permitting process guy in the easier sense of IRA. I think there's a tension on it. We are hopeful that it may be a little bit easier and streamlined, but I can't say that it's gotten that way yet. That's my view. And then some of the milestones in permitting Eric, do you want to comment on that? Yeah, I guess PJ good morning. I think that the first step would be permitting towards the latter half. And beginning to apply for permitting towards the latter half of this year.
For the full year of course without grew to $247 4 million from $92 million in core <unk> per share grew 26% to $1 <unk> per share on a year over year basis. This growth reflects the earnings accretion associated with our merger with star as well as the sizeable organic rent and NOI growth.
We experienced throughout the combined portfolio during 2022.
Speaker 3: We've been in feasibility work on environmental side and sustainability sides prepare for that permit.
Speaker 3: And we have a permitting strategy that can get all the details on here, but I say leverages the fact that this is a brownfield site. So we're optimistic that even though there's, as Ken said, there's tension and attention on the permitting process that this particular mine...
For the full year Iot same store NOI growth increased 13, 7% supported by revenue growth of 10, 7% with rental rates increasing by 12%.
On the property operating expense side Iot same store operating expenses increased four 6% in the fourth quarter led by higher real estate taxes, and utility expenses, while repairs and maintenance costs and advertising expenses declined compared to a year ago.
Speaker 3: given its brown pill history, we'll have hopefully a rapid review. So we'll continue to monitor that closely and update you accordingly. Yeah, but even though we're not with filing for permits this year, when we've been doing work on gathering data for that process for almost two years, I think, I'm not exactly sure how long, but for quite some time, the data that's necessary for those permits, the history around.
For the full year Iot same store operating expenses grew five 9%, mostly reflecting increases in property insurance real estate taxes and contract services, while inflation continues to drive higher costs for products and services, we are continuing to roll out efficiencies using technology and procurement effort to help reduce the inflation.
Speaker 3: everything that you have to report on to get the permit. So it's a process that takes a little time. And even though we haven't formally filed yet, we've been working on that for a couple of years. Thank you, I'm faster than long. Thank you, PJ. Your final next question comes from David Bellita, from Deutsche Bank. David, your line is now open. Thank you, good morning. Eric, just on a listing spot price in China, it's not a major focus of yours. We have seen continued softening of the last few weeks. What do you make of that? More than David, I would say it has a lot to do with what Ken described in his remarks. We've come off out of a period of time in 2022 of remarkable growth.
This is burton.
Turning to our balance sheet as of December 31, our liquidity position was $350 million, we had approximately $16 million of unrestricted cash and $334 million of additional capacity through our unsecured credit facility.
Regarding the ongoing topic of leverage we are excited to announce that <unk> continued to make significant progress since last year. We ended 2022 is six nine times net debt to EBITDA down from seven seven times, a year ago and came in ahead of our year end target of low Sevens as Sal mentioned earlier, the proceeds from our upcoming property sale.
Indianapolis will be used to repay outstanding indebtedness and puts us in good footing to achieve our leverage target of mid sixes by year end 2023.
While we do anticipate some macroeconomic uncertainty in the coming months I wanted to reiterate that we have no debt maturities in 2023, and only $70 million of maturities in 2024, we have and will continue to maintain sufficient liquidity to address these maturities using our unsecured credit facility.
Speaker 3: that exceeded expectations in terms of EV production and was going at a pretty heavy pace when when a decision was taken to reopen the economy and then and of course you know what happened thereafter. I mean the virus fed quite rapidly in it. It did staff consumer demand at a time when seasonally it was as weak anyway because of the lunar year. I think there's much been made about the subsidies as well rolling off but those have been rolling off for several years. Some of them in extended at the provincial level and some of the more meaningful subsidies are at the state and local level anyway. So we we we don't think that that's as big a big issue and we've certainly seen that in prior years have initially a spike in demand. Maybe before the subsidy comes off a drop in the man right after comes off and then rebound and demand.
We also have adequate hedges that has effectively converted floating rate debt to fixed rate debt such that our floating rate debt exposure as of year end is only 10% of our outstanding debt.
With respect to our outlook for 2023.
Our EPS guidance is a range of 23 to 27 per diluted share and for <unk> in the range of $1 12 to $1 16 per share.
For 2023 at the midpoint of our guidance, we expect NOI at our same store portfolio to increase six 5%. This guidance reflects same store revenue growth of six 4%, which is comprised of an average occupancy of 94, 5%.
Speaker 3: Our projection and our customers view is that this year, particularly in the second half, we'll see that growth that's projected of close to 40%. In the meantime, people are buying under contracts, but not venturing into the spot market and bringing their in China and bringing their employees down quite low because we're in this post-holiday period with still some uncertainty in the very near term. We expect that to be short lived with a demand rebound later this year. I'm very helpful. Scott, just on the full-your guidance, thank you for the first half of second half. Would any further thoughts on the Q1 versus Q2 split in the beta? Yeah, I would expect that Q1 would be stronger than the second quarter. Again, it's...
An earn in of four 9% a blended rental rate increase of 3% for all leases signed in 2023, and a bad debt expense of one 5% of revenue.
Moving on to expenses, our projected growth in same store operating expenses of six 1% at the midpoint as a result of our expectation that non controllable expenses for real estate taxes and insurance will increased eight 6%.
And our controllable operating expenses increased four 4%. This is primarily the result of inflationary increases and we will continue to implement various strategies, including automation and centralization to improve our efficiencies.
Speaker 3: It's really driven by that inventory lag that we're seeing ultimately, as well as, you know, you know, the strong prices in the fourth quarter that carry into the first quarter ultimately. So ultimately, I think the first quarter is a bit stronger than the second quarter. Excellent. Thank you very much.
Speaker 3: inventory lag that we're seeing ultimately, as well as the strong prices in the fourth quarter that carry into the first quarter ultimately. So ultimately I think the first quarter is a bit stronger than the second quarter. Excellent. Thank you very much.
Throughout 2023.
As it relates to our general and administrative and property management expenses Youre guiding to $52 5 million at the midpoint or an increase of four 3%.
Speaker 3: Thank you David. We have our next question comes from Jeff from Jeff Morgan. Jeff Levi's now open. Thanks very much. If lithium prices remain flat in 2023, is it the case that your equity income from talisman would remain at that 332 level all the way through 2023 and is talisman making as much?
For interest expense, we're guiding to a midpoint of $105 5 million, excluding the effects of amortization of the debt premium adjustment related to our star merger that we add back for core <unk> purposes. This is an increase of 7% over 2022 and is entirely driven by the expected increase in floating rates during 2023.
For example, the current 2023 yield curve for so far is an average of four 9% as compared to one 5% for 2022 remember 90% of our debt is either fixed or hedged, thereby mitigating the effect of this increase.
Speaker 3: spot-me-in-esset can make or is there room for it to move up in 2020, 24? Now I'll take the equity income question and maybe Eric you can take the production question.
Regarding our transaction and investment expectations. We are currently not assuming any acquisition volume, but are providing guidance for disposition volume of $35 million to $40 million, reflecting the asset held for sale in Indianapolis, which we expect to close later this month.
Speaker 3: So we'd expect if lithium prices stay flat, we'd actually expect the equity income out of talisman to increase. If you remember the transfer price out of talisman is on a, at least historically been on a six month lag. It's now shifted to a three month lag and so that that.
And lastly regarding Capex, we expect $20 million in recurring maintenance, capex $80 million and value add and nonrecurring spend and $85 million and development Capex in 2023, each at the midpoint of our guided ranges these incremental development and value add capex will be funded primarily through our excess cash flow.
Speaker 3: the increases that have happened last year will start to flow through in the first half of 2023. So I'd expect it to be higher. Eric, do you want to talk about production? Yeah, and Jeff, with regard to production, you may know that CGP1, their first line has been running for years now, is at max rate. CGP2 came on in the recent past and is ramping, a ramp last year. There is possible possibility for that to run. I mean, the upside would be it can run at slightly better rates. It's not there's some productivity and the bottlenecking activities to make that that they could result in that. Although it is running close to capacity. And then there's additional from the tailings through process, lifting that's being added. So it's higher year on year. And this potential for be slightly higher if those productivity issues are successful. Okay, great. And you spoke of your first half and second half.
$133 million generated during 2023, which is after paying our current dividend of <unk> 14 per quarter.
Now I'll turn the call back to Scott Scott. Thank you Jim.
As we move ahead in 2023, we remain well positioned for continued growth as we execute our strategy and invest in our portfolio our confidence stems from irt's ability to build a leading presence in attractive markets with solid renter demand fundamentals, which has been able to withstand the backdrop of macroeconomic uncertainty we are fully committed to enhancing shareholder value and Greg.
Returning capital to our shareholders, we look forward to another year of achieving our targets and strengthening our presence in the multifamily sector.
Thank you for joining us today and look forward to speaking with you again, operator, you can now open the call for questions.
Okay.
Absolutely we will now begin the Q&A session, if you'd like to ask a question you May press star followed by one on your telephone keypad if for any reason that you'd like to remove your question. You May Press star followed by two as a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question.
Speaker 3: Lithium EBTA is being comparable Given that there's so much more production coming out of Chile Why would that be the case shouldn't your volumes be stronger in the second half of 2023?
Our first question today comes from the line of Austin, where Schmidt with Keybanc Austin. Your line is now open.
Speaker 3: Yes, they'll definitely be stronger. It'll be on the basis of the production out of Chile, but also the ramping up of Lodgen and the conversion there. Then the additional volume that Eric just talked about with Towson. Of course, prices are up, but we're assuming prices flat throughout the year based off of how we exited 2022. Then you've got a layer on the cost impacts that I talked about on the call. You've got the...
Thanks, and good morning, everybody.
Scott and Mike I appreciate all your comments around the focus on ramping and stabilizing occupancy, but I'm curious do you feel like you have the right personnel in place on the operations team.
Have there been any other recent changes to the team that are worth highlighting and do you feel that the team really has kind of a handle on.
Reacting to changing market conditions in order to keep occupancy within a tighter band.
Speaker 3: Spodgamine inventory lag that corrects itself this year. You've got, as Wajana ramps up, you just have a margin rate impact there that just due to the fact that we report 100% of the revenue in only half of the EBITDA. Okay, great. Thank you so much. Thank you, Jess. Thank you, Jess. With our next question comes from Stephen Richardson from Epochol Eye Sci. Stephen, your line is now open.
Moving forward, particularly within that non value add pool.
Thanks Austin good good question this.
This is Scott as you know.
I think the best way to answer your question as to start with a little bit of how we got to where we are so you know as I as I've said in the past I wasn't happy with our occupancy trends in the fourth quarter.
We pushed rents a little too hard which had a negative effect on our resident retention and our ability to sign new leases.
The market was changing and frankly, we were our team was slow to adapt.
Speaker 5: You know, clearly in China you've acquired and built conversion capacity in the US. It looks like things are really centered at King's Mountain. Can you talk a little bit about Europe in terms of how you're thinking about how this evolves? I know it's early, but is this an area where we would see you bring material from either Chile or West Australia? And then do you envision yourself partnering or doing more of a greenfield as it comes to supplying on the continent?
On the good side of this is we had one of the highest increases in lease rates of all the multifamily Reits.
But I've always stressed the importance of balancing rent increases with occupancy so that we can deliver the highest possible revenue.
And frankly, we got away from that Formula and this happened at the same time that we were increasing the number of properties going through the value add program.
Speaker 3: So I'll start with that. Eric can fill in a little bit. So I think you're, I mean, you answered part of the question. So we're moving from China to North America. We have resource strategy and a program for North America. We invest in, we're investing there and will be a similar program in Europe . We just, we don't have the resource space in Europe that we have in North America. So that will,
Which we said in the in the corn previously.
Is that adding properties to the value add program has a significant negative impact on our occupancy.
The 656 units that we completed in the fourth quarter reduced overall occupancy from 50 to 60 basis points. So it really does have an effect.
So we decided to make some changes in our operations team in the fourth quarter, including adding additional senior leaders with approved with proven track records in multifamily operations.
Speaker 3: We'd like it to be a combination of some local resource which we don't have at the moment and then bringing some resource Bringing the resource in in some form and that's most likely going to be from Chile and and Western Australia Because we're the big resource spaces are are at the moment and we just got to work out the strategy of Of how we bring that in the most the economically and most sustainable way that we can and that's going to be about the Strategy with the assets that we put on the ground in Australia Eric and talk about partnering Yeah, so it would be a
We just brought on Janus Richards, who heads our.
Operating platform.
16 years of experience with with Camden and.
We really look forward to her.
And having her voice.
In charge of operations.
We made these changes I wanted to make these changes during the slowest period in leasing.
The fourth quarter, leading into the first quarter of 2023.
Speaker 3: a Greenfield site as there really are no brownfield sites for such capacity in Europe today. And we've gone through site selection process and looked at numerous countries and haven't drawn that down close enough yet to make an announcement or to say anything publicly further about it. But that being said, it would be a plant that would be modeled very intentionally after what we've done here in North America or we want to do in North America, I should say. We're on a plant that is able to process a variety of different feedstocks. Can't mention chili, that would be a carbonate feed or spodgaming or derivative of spodgaming coming from Australia into Europe .
And also so that we were prepared as we headed into an uncertain 2023.
And as you can see from our 2023 guidance, we're confident that we've made.
We are confidence in these changes I mean, our guidance is as you know I think pretty strong.
To list out some of the changes that we've made we've improved the flow of information from the communities.
On our pricing to our pricing team relative to market rents. So that we will not be behind the curve going forward as the market changes.
We've opened a 24 seven call center to make sure we're capturing all the phone leasing leads.
That's new to US we had started that process.
Before the store merger and that it was put on hold because we were focused on the integration.
We've expanded our sales training we've brought on special sales coaches.
The leasing professionals at the properties, where we have the highest turnover I think that's the same for all multifamily REIT.
So you constantly have to continue to train them and now we're making sure. We thought we were making for before but now we are making sure that.
They are coached and they are appropriately ready.
Speaker 5: comments off the top in terms of the CAPEX Outlook. One of the questions that we feel that on this is, it's clear that this CAPEX Outlook is a function of looking at the current environment or I think you used your N22 environment for pricing going forward. So important to realize that you're not obligated to spend this $4.4 billion in $27. I guess the one point of clarification is...
To do the leasing and we are improving our technology to streamline how our teams.
Our leads.
So that we can maximize that lead to lease convert conversion ratio.
This is a focus for us we will have occupancy back.
So that 95% level and non value add communities.
And we want to get we wanted to make sure I wanted to make sure that we had all of these changes done.
Speaker 5: Is that a peak for CAPEX based on the project Q that you're looking at? Like this CAPEX come down in 28-29 based on that cadence of project spend? Thank you. Yeah, so, yeah, I would say, I mean, you're right. We're not committed to it. So we will look at things evolve and go, that's our best view. We put a five-year plan out there that's our best view, the best view of what we'll be doing over five years. So, but any capital that will be investing in 27 will be for 31-32 market. And it's a pretty long way to be able to predict that from here. So, we don't want to go past that five-year forecast that we put out there.
Again during the slowest leasing time period, and then again as we head into leasing season here in 2023.
So I hope that answers your question.
Yeah, No I appreciate all the detail that you are.
Provided there I guess can you share how you were interacting or overriding sort of the revenue management system previously and.
How much I guess the impact of the frictional vacancy redevelopment you highlighted but maybe how thats impacting pricing to some extent.
Well I don't I'm not sure that overriding was the right is the right description.
Speaker 5: It could level off. I mean, it just depends on what the market looks like. We'll know a lot more in five years time than we do today. But any capital we're spending in 27 is, that's for 32 or 31, whatever the timeframe is around that. And then it's important to note that our CAPTAX program becomes more resource oriented. I mean, it's been conversion in the near term that we've had the resource. It'll be more balanced between conversion and resource as we get out into that timeframe. Thank you. Thank you, Stephen. We'll see you next question comes from Christopher Parkinson from Mischzouro. Christopher, hello.
The pricing team I believe was not getting real time market information in the market changed dramatically last year I mean, if you think about it.
All of our all of the Reits, where we're getting 12 15, even up to 20% or more rent increases and it changed in the third quarter going into the fourth quarter and our team was a little bit slow to react and we send out our renewal letters 90 days in advance to our tenants as leases are expiring.
So that's slow to react had a has a forward effect as well because here in January we're renewing leases.
Or January explorations.
Received letters back in October November on lease renewals were.
We frankly were pricing above the market. So people left and that had a negative impact on occupancy we saw it.
I made the changes and.
Going forward, we're in a much better position.
Just last one for me I'm, just curious if you alluded to getting back to that 90 595 plus percent level, maybe Jim can you provide a little bit of additional detail on on your occupancy assumption and kind of the.
Myles stones or cadence through the year, how we should expect that to ramp.
Speaker 5: Even we're operating today, we'll have to take it down to do those make rights to get additional volume. There's a potential to expand at Genzo as well, but that's not a project that we're executing at the moment. We want to get up the speed and operating, but if operating today, and we'll probably, it will ramp up over the next year, I think, to kind of the full capacity acquisition capacity, which is around, we target it, 25,000 times. Kimmerton is making product today.
Uh huh.
Yes.
Occupancy the average occupancy assumption in guidance at the midpoint is 94, 5%.
That's expected to kind of ramp up similar to like some of the seasonal kind of gains that we saw last year through the summer months, and then kind of tail off in the back half of the year back to that seasonal kind of norm I think we saw pre COVID-19.
October November December , but the average for the year was 94 five.
Speaker 5: But we're not selling any product because we need to get qualification from our customers. So we're in that's where we are. And then that will ramp over time. And we've the strategy, originally the strategy at Kimerton was to execute the both trained simultaneously. We've bifurcated that because we'd struggled with labor during the pandemic and still frankly struggled with labor at Kimerton. So we're sequencing the commissioning and implementation. So train one is operating and making product. Train 2 is not and is probably six months behind train one, I would say.
Great. Thanks, everybody.
Thanks, Ross Thank you.
Next question comes from the line of Brad Heffern with RBC Brad.
Yes. Thank you so on the the new 6% loss to lease quote I think that's down a decent amount from the last quarter can you talk about what contributed to that change and what gives you confidence in the new number against the backdrop of declining occupancy.
Yeah, Great question, Brad This is Jim.
The our loss to lease is based off of a comparison of our of our asking rents at all of our communities versus.
Speaker 5: And then that will ramp over time. We've always said we ramped those projects. We planned those projects to ramp from startup to full capacity over two year period. And I think that's probably the still the rule of thumb that we're following. And so another part of the question. Any updated thought process on your additional projects that you can assess specifically in the US over the next few years? Any updated thoughts? That's all. Thank you.
Our average in place rents basically, suggesting if we were to release based on our asking rents how much redwood kind of robot.
There's a little bit of seasonality to rental rates in the fourth quarter that causes a slight decline, but at the same time as Scott mentioned.
We began to try to drive that occupancy in the fourth quarter and certainly the early part of this year.
Such that the asking rents came down a little bit to try to do so.
Speaker 5: Yeah, yeah, so probably nothing new since the Call a few weeks ago, so we we're still looking at the site selection for conversion facility to convert the Kings Mountain or Silver Peak we've expanded and it's operating at that expansion rate Maybe a little bit more ramp up to do at Silver Peak, but it's operating at that higher rate and And then the other would be Magnolia for and that is a little bit further out, but we're making progress there and planning that project but we've not kicked it off from an FID standpoint yet
Okay got it and then on the revenue growth guide is there an underlying assumption for market rent growth in that I think the 3% blend just seems like it's half of the current loss to lease I am not sure. If there is anything thats being added on top of that.
There is a little bit of assumption on market rent growth you know, we talk about market rent growth.
And that kind of the low single digits, 123% and the temperature of the guide.
So our loss to lease typically we've always said it takes us to kind of 12 to 18 months to capture it.
Speaker 3: Very helpful. Thank you so much. Thank you, Christopher. With our last question comes from John Roberts. From Chris. John , you're nice now. Thank you. I think your guidance is based on the December 31st realized price, but I just want to clarify the equity income within that guidance is based on price rising through the first quarter because of the lag and then for the remaining quarters of 2023 the equity income has a flat price.
But there is a little bit of a market rent growth assumption, but again, we're being we're looking at 2023, 8% with a relatively conservative.
Okay. Thank you.
Yeah.
Thank you.
Next question comes from the line of John Kim with BMO John .
Yeah.
Hey, Thank you I just wanted to follow up on that question I didn't really.
Quite get that so your blended lease growth assumption for the year, 3% loss to lease of six youre at.
Expecting market rental growth this.
Speaker 3: half of that lag is recovered. It actually, on the equity income, it actually goes up in the first half through the first half.
This year and on top of that value add program stepping up.
So I'm wondering how you get to that 3% lease growth rate assumption.
Yeah, I mean, I think the 3% these growth. It's just again the conservative estimate around kind of what the leasing cadence would be to continue to drive that occupancy the value add is certainly supporting a lot of the value add picks up in the summer months when the leasing lease explorations are the highest.
Speaker 3: So, and then we'll see volumetric increases out of that as well. So, it actually increases through the year sequentially. Okay. And then any update on the negotiations with mineral resources on the marble JV? So, not a real update. Scott said in his comments that we can...
But I think ultimately it just comes down to a level of conservatism around what will happen in the middle mid December with respect to any kind of macroeconomic uncertainty.
Okay.
The the loss of occupancy we had this quarter.
Just that your customers that maybe a little bit more price sensitive.
But you are getting the 20% uplift plus on rents on the value add.
And I'm, just wondering with this occupancy loss and the uplift you're getting how do we how do we interpret that is it just that you're getting a different demographic on the value add customers or is it taking longer to.
Speaker 5: Okay, thank you. As you heard today and during our January webcast, we feel we have the right strategy, the operating model, and the people to meet this opportunity and manage our business successfully to grow today and well into the future. Thank you for joining your call and your interest in Album Mall.
Complete the renovations I'm just wondering.
How do we marry these two.
Characteristics of your company.
Speaker 1: Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may not discuss your lines.
It's a different demographic and new <unk>.
Our value add program.
Improves our properties so that we compete directly with newer class a construction.
But at a price that is still below that class a new rent so.
The premiums that we're receiving it's because we're basically changing.
The resident profile and it's a resident who is willing to pay a higher rent for a better product.
And they are choosing the value add communities are value add community over a newer construction because our rent even with these premiums and with these returns is 3% to $400 below what a comparable new property strength would be so so that's what's driving that.
Value add premium.
And Scott I think you said last quarter that you were going to moderate the value add this year and it looks like.
Youre doubling it.
I just wanted to understand that.
The moderation is because we had originally targeted 4000 units for 2023 and now we're now we're targeting 2000 503000.
Yeah.
Okay. Thank you.
Okay.
Thank you.
The next question comes from the line of Nick Joseph with Citi.
Nick.
Thanks, maybe just on that market rent growth understand the macroeconomic uncertainty, but how much of a range of variances there between markets.
Expected and if you can talk I know you touched on supply of beds.
Top and bottom performing expectations for markets.
Yeah, but I think there are some markets that are expected to have good rent growth from a market standpoint.
I think the probably the top end of the range is three 4% in the bottom end is.
One ish percent I mean, I think it's.
It's fairly tight when you look at some of the perspective that our real page. There's just put out in terms of some some data sources.
Yeah.
Thanks, so much.
Which are those are three and four versus one.
So I think the general view is if you look at some of the markets like Tampa will continue to see strong market rent growth, but again I think theres a lot of the data sources suggest are still continuing to kind of be relatively conservative when it comes to.
Macroeconomic uncertainties.
Thanks, and then just on the India asset where is it in the sales process. If you can.
Talk about anything from a pricing or demand side, what you've experienced with that on the market.
So.
Property, we have under contract will close in the next couple of weeks.
Through contingency they have a hard deposit and their financing lined up so we're very confident that up close and.
In regards to.
Overall transaction volume is down considerably I think there is still a significant disconnect between the bid ask we are seeing.
Some transactions occur for specific reasons, whether it would be $10 31 to debt maturities.
Neither pricing in the high fours low fives cap range, but theres still a lot of people, including ourselves waiting to see where the market settles in a lot of this is.
Due to travel.
Treasuries and debt cost and people don't know where they are so we need some stability in interest rates before that becomes more transactions.
Thank you very much.
Thanks, Nick.
Next question is from Anthony Powell with Barclays Anthony.
Hi, good morning.
Question on I guess occupancy.
Occupancy and turnover of move outs.
When people are moving out of your of your building that and hadn't due to high rent where are they going to other class B apartments biopsy.
How is the kind of the competitive landscape.
Changing.
Well obviously this is this is Mike we're dependent on the feedback from the exiting resident to tell us why they're leaving and where they're going so.
I think we are seeing people going to a different class of community because of the affordability of those relative to what they are currently paying we have kind of a normal excuse me a normal level of.
Relocations Theres.
Some moderation and people buying a new house.
Which obviously is reflecting mortgage rates.
But by and large it is an affordability issue, we see some folks moving in.
With a roommate situations some folks a younger demographic moving back home.
So it's a mix of reasons that people are leaving but the common theme is affordability and looking for somebody with some place to live with a lower total cost we have about a 22% or so kind of.
Rent to income ratio, which is affordable relative to most of the options that people have.
But we do see that pressure, so I think that that is.
Probably not.
The only reason, but definitely influences the reasons that people are leaving.
I would add however, though that that ratio has or those those reasons have not changed dramatically from prior years, So moving out to buy a home is still the number one reason.
Moving to as the job locate job relocation is still the number two reason and the third reason.
<unk> is.
To move to a single family.
Rental.
Pricing has always been an issue in class B apartments, and we'll always continue to be.
Okay, and I guess on the other side I mean, you talked a lot about kind of the <unk>.
Class a class b kind of migration and kind of tougher economic times over the years is that something that we expect to start being a.
Tailwind this year and in a macro environment or are those class a.
Apartment is starting to be more price.
Accommodating so that may not be as big of a tailwind as it may have been in the past.
No I think it is it is going to be a tailwind it is going to be a benefit for us I think you will see that if.
If you look at that.
The multifamily peers with a.
A larger.
Our portfolio of class a assets, you'll see that there is still continuing to increase the rents.
So I don't think that the class a assets are in a rent reduction mode. So we do expect to see.
Further demand from people moving from class a.
Down specifically into our value add communities.
Because they're getting they're getting.
Again, I believe theyre getting a class a product.
At eight.
B plus a minus rent.
Got it and maybe a quick one the guidance out and then I think you've talked about a mild recession being kind of the base case.
Is that for both the high and low end of guidance and let's say, we have a soft landing whats the potential upsides to rent and occupancy.
Okay.
Yeah, I would tell you that as a base case in both scenarios I think.
If there isn't like a soft landing I think the ultimate kind of question will be you know just how to kind of how much the market rents begin to reaccelerate.
And the effect that hasn't been I think that will also continue to drive occupancy up a little bit I don't think there's a soft landing necessary drive changes the expenses too too much unless maybe like insurance expenses come down a little bit but that's more.
<unk> macroeconomic type drivers in the insurance category.
Alright, thank you.
Okay.
Thank you.
Next question is from missing deal with Baird.
<unk>.
Yeah.
Hey, good morning, everyone. Thanks for taking my question just one for me.
We noticed that the fourth quarter dispositions came in at $99 million, but you mentioned expecting a $103 million for these dispositions. After the third quarter. Just wondering if this 99 was a net number or at the buyer they traded at a lower price for these assets.
The yes, the market changed interest rates went up and they came back at a price reduction we actually went through a couple of iterations with different buyers and we determined that it was still a good.
Time to sell the asset.
That was the sycamore tariffs asset in Terre Haute and we made the decision since it was a one off asset for us in a market, where we had no interest in growing.
We would continue and dispose of the asset even though we did get re traded I would tell you I don't like being re traded.
But I didn't like this asset either so it was a.
A decision to move forward and just be done with it.
Thanks for that that's all for me.
Thank you. Thank you.
Thank you. Our next question is from the line Linda Tsai with Jefferies Linda.
Good morning, Linda.
Linda please ensure you're not on mute.
Okay.
Sorry about that thanks for taking my question just one quick one for me.
What would your expectation be for retention ratio by year end.
Yes, we've always talked targeted a retention ratio to be in that $50 to $5, 50% to 55% range. So I think.
Target of call. It 53 ish would be kind of our expectation for the year.
Toby baked into guidance.
Got it thank you.
Yeah.
Thank you.
I have no further questions waiting at this time, so as a final reminder to ask a question. It is star one more policy you very briefly.
Seeing none I'd like to hand, the call back over to the management team for any closing remarks.
Thanks, everyone and we look forward to speaking with you again next quarter.
That concludes the Independence Realty Trust, Inc. Q4 earnings Conference call. Thank you all for your participation you may now disconnect your lines.
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Yes.
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