Q3 2023 Apartment Income REIT Corp Earnings Call
Welcome and thank you for attending today's Eric communities third quarter 2000, <unk> earnings Conference call. My name is John and I'll be your moderator for today's call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
I would like to withdraw your question. Please press star two.
Yes.
I would now like to pass the conference over to Lisa Cohen, President and General Counsel Peter communities. You May proceed.
Thank you John and good day, everyone. My name is Lisa Cohn, and I am President and General counsel of Air communities.
During this conference call forward looking statements, we make are based on management's judgment, including projections related to 2023 expectation.
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 <unk>. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on <unk> website.
Prepared remarks today come from Terry Considine, our CEO, Keith Kimmel, President of property operations, Josh Josh <unk>, our Chief investment Officer, and Paul Beldin, our CFO.
Other members of management are also present and all of us will be available during the question and answer session.
Following our prepared remarks, I will now turn the call to Terry Considine Terry.
Thank you Lisa.
Thanks to everyone on this call for your interest in air.
We had a solid third quarter and business is good.
I'll start with three observations.
First operations matter.
Keith and his talented team continued to outperform.
Second portfolio composition matters.
At a national level, there is a tremendous amount of competitive new supply.
There is no national market for apartment renters, only local markets Submarkets and neighborhoods.
Erez diversified by markets and price points.
And as we look to 2020 for a regular review of new supply property by property shows that range Thats been typical over the past several years.
Interest rates matter.
The increase in the 10 year rate.
Disrupted property pricing and created opportunities for profitable acquisitions.
In the third quarter are made successful pair trades that upgraded our portfolio and increase the expected growth rate in recurring cash flow.
In the quarter, Keith and his team again confirmed our decision to organize ear around comparative advantage and operations.
In the third quarter are enjoyed the highest customer retention.
Lease rate growth.
AME store net operating income growth free cash flow growth and operating margins.
<unk> emphasis on customer selection resulted in more stable communities with residents were more financially capable.
Staying with us longer.
Air operations.
The deep pockets of our venture partners make possible accretive acquisitions.
Over the past three years, we've invested more than $2 billion of capital.
These properties, whose financial results are improving at rates.
Well above peers peer leading same store portfolio.
Speaking of transactions I want to introduce Joshua <unk>, our chief investment officer to the call.
Many of you will have met Josh had been co CIO at air for more than two decades.
He has transitioned to CIO the seamless.
And I also want to tip my hat to John Mcgrath, a dear friend for his many contributions there.
Well in his entrepreneurial pursuits.
Through joint ventures, and a property sale are raised more than $600 million of new capital.
And as Josh will report reinvested the proceeds in property purchases share buybacks and debt reduction, both accretive to <unk>, and <unk> and improving the quality and growth rate of the portfolio.
Paul kept the balance sheet bulletproof.
We will end the year with leverage below six times, EBITDA abundant liquidity and limited exposure to higher interest rates.
We priced the air culture.
The foundation for all we do.
And it's well described in the corporate responsibility report.
Published last month by our colleague Patty Schrader and posted on our website.
Now I will turn the call to Keith Kimmel President of property operations Keith.
Thanks Terry.
The third quarter was good.
As expected with strong demand and leasing pays 25% ahead of 2022.
High retention with only 38% turnover in the past year.
Accelerating occupancy as we put peak season frictional vacancy behind us.
Slower rent growth as inflation apps impactful supply pockets muted overall by aerospace diversified portfolio.
And significant gains from acquisitions <unk>.
Growth rate outpaces, our same store communities.
The third quarter solid leasing translated into good financial results.
Are transacted, new lease rates up three 6%.
Renewals up 6%.
Blended lease to lease rates up four 7%.
Occupancy increased throughout the quarter.
From 94, 6% in July to <unk>.
96% in September.
Revenue was up six 8% year over year.
<unk> were up 8% largely due to timing and for the full year expenses are on plan with controllable expenses up less than 1%.
Net operating income increased six 3% and errors operating margin was 73, 4%.
Growth was even stronger in our acquisition portfolio now 20% of our business, thanks to Josh and his team.
Our five acquisitions from 2021 now owned for approximately two years and included in our same store portfolio and revenue up 10, 3% net.
Net operating income up 15, 2% and added 40 basis points to same store revenue growth and 80 basis points to same store net operating income growth.
Our class of 2022 acquisitions not yet included in same store had revenue up nine 9% expenses down 6% and net operating income up 21%.
Our rate of increase in profitability is more than triple our same store result.
Southgate bought earlier this year had sequential revenue growth in the third quarter that also outpaced our same store communities.
We see a steady close to the year and setting us up for a solid start to 2024.
October average daily occupancy was 96, 9% up one 6% from the third quarter.
Physical occupancy is in the mid 97% range today, which we expect to hold throughout the rest of the year.
Lease rates are easing seasonally with October transacted do lease rates up one 3% renewals up three 8% and blended lease rates up two 1%.
We are well positioned for further revenue growth in 2024 with earn in in the low 2% range occupancy that will start the year in a strong position bad debt that continues to show improvement and a diversified portfolio and with strong markets are expected to offset those pressured by new supply.
We talk regularly about the rich the distinct approach that delivers consistent results.
<unk> edge begins with quality residents with an average 725, FICO score and rent to income below 20%.
Our residents stay longer thanks to World class customer service delivered by our experienced and stable onsite teams to build communities and relationships differentiating air in a commoditized marketplace.
We add technology selectively where it improves team productivity or the resident experience.
These factors combined to reduce errors controllable operating expenses to nearly flat for the past 13 years.
We approach our business differently.
We use analytics to fundamentally rethink operations delivering results and lease to lease metrics turnover occupancy bad debt income growth and margin.
My Thanks to all our team members for your ongoing passion to provide world class customer service and create communities. Our residents value you are the foundation of the ear ache.
I'll now turn the call over to Josh <unk>, our Chief investment Officer, Josh.
Thank you Keith we are open for business and closed five transactions this quarter.
<unk> increased our allocation to faster growing acquisition properties.
Either improve the portfolio record JV announced on the Q2 call. You provided are with $505 billion of capital grew by over $100 million with the acquisition of the <unk> as opposed to Maryland.
The sale of tempo provided $21 million.
Finishing our planned exit from New York City.
<unk>, our share of the <unk> and our entry to the North Carolina market, where we bought brazeau and the research triangle and old town in Raleigh.
The balance was used to delever and buyback stock.
Taken together these paired trades are expected to be neutral to 'twenty for NOI and accretive to free cash flow by <unk> <unk> per share or.
Our investment philosophy remains the same we focus on generating a positive spread to our cost of capital and on improving portfolio quality.
The properties acquired this quarter compared to the properties sold half hour.
Average ages of less than two years versus effective ages of over 26 years, resulting in a reduction of capital replacement spending of $4 million per year.
Expected stabilized free cash flow that is cash flow after capital replacement is 20% higher rents, 11% higher better locations and expected 10 year IRR is 230 basis points higher driven by the combination of the air edge and higher growth markets.
We also used retained cash flow to fund property upgrades of $24 million in Q3, and $64 million year to date with double digit yields at Irr's. The result, a portfolio with a 20% allocation to acquisitions, where the implementation of the air edge is driving NOI growth.
Rates of around 17% lifting the total portfolio NOI growth by 170 basis points to seven 2%.
Higher recurring cash flow from fees and economies of scale generated by our JV with <unk> of over $2 2 billion.
Organic growth from property upgrades.
Exceptional high credit quality customers and broad diversification with roughly equal weighting across the following three categories Eastern West Coast class, a and class B apartments at urban and suburban locations.
This portfolio has proven resilient even during periods of elevated national supply the.
The impact of supply depends upon price point and micro location, we track the percent of NOI from properties facing new supply pressure, which historically has ranged from 20% to 30% we estimated at 26% for 2004.
More details can be found in the appendix to our release.
At the moment the transactions market has jelled with national volume down our reported 72% due to the high cost of debt limited available equity and supply concerns. However are benefits from access to capital via our partnerships with some of the largest and most sophisticated global investors and sovereign wealth funds.
Superior operations from the <unk> and the ability to source acquisitions accretive to both financial results and portfolio quality.
It is a great advantage as an investor we only count on key and his talented team to improve our returns with that I'll turn the call over to Paul Beldin, Our Chief Financial Officer, Paul Thank you Josh.
I will discuss <unk> balance sheet report third quarter results and our expectations for the full year.
Highlight three enhancements made to our earnings supplement and conclude with a brief comment on our dividend.
<unk> balance sheet is well positioned.
During the quarter are refinanced $154 million of borrowings on our revolving credit facility and $325 million 2023, and 2020 for term loans with new fixed rate property debt with a weighted average life of five three years and a weighted average interest rate of five two <unk>.
<unk>.
30 basis points above the short term debt repaid, but happily about 100 basis points below borrowing costs today.
As a result are has near term exposure to rising interest rates that is limited to $79 million and our share of the Virginia joint venture debt plus $26 million on our revolving credit facility.
We have no debt maturities until the second quarter of 2025, and abundant liquidity with $2 $1 billion available sufficient to refinance all maturing debt through 2027.
Leveraged EBITDA is anticipated to be below $6 <unk> to one at year end.
Temporarily elevated today due to the timing of $365 million of NOI and free cash flow accretive acquisitions and share repurchases.
Turning to third quarter results.
<unk> 64 per share was a penny above the midpoint of guidance.
Obviously discussed 2022 and 2023 <unk> include income not expected to recur in future periods.
The third quarter, we had <unk> of such nonrecurring income compared to <unk> <unk> in the third quarter 2022.
Run rate <unk>, which excludes this non recurring income was <unk> 59 per share in the third quarter up seven 3% year over year and up eight 2% year to date.
<unk> was <unk> 52 per share up 4% year over year and up six 3% year to date.
<unk> has been calculable from our disclosures we have.
Publish it now to provide greater visibility of the capital spending required to maintain our properties are proxy for depreciation, which we call capital replacements.
<unk> in excess of dividends about $56 million year to date and expected to be about $80 million for the full year is retained to fund organic growth such as investment in property upgrades, which we call capital enhancements.
Looking forward to the fourth quarter, we have narrowed our guidance for full year pro forma <unk> to be between $2 39, and $2 43 per share.
For the quarter, we anticipate pro forma <unk> doing 63, and <unk> 67 per share was <unk>.
Higher property NOI offsetting the sequential decline in nonrecurring income.
Fourth quarter is usually era's most profitable due to the earn out of peak leasing season ramps and seasonally lower expenses.
Next I'd like to discuss three enhancements made to our earnings release.
The close of the core joint venture increased the percentage of <unk> and <unk> derived from unconsolidated properties and from services provided to third parties.
To allow for more efficient and effective modeling, we enhanced supplemental schedule II.
Separately disclose third party services subject to long term contract and those generally in support of transaction activities.
To walk the consolidated drivers of <unk> to Arris proportionate share and Additionally, we added to our glossary a walk of our GAAP income statement to the schedule.
These changes will be beneficial please reach out with any questions.
Last the airborne of directors declared a quarterly cash dividend <unk> 45 per share.
Annualized basis, the dividend reflects the yield approximately five 8% based on the current share price.
We will now open the call for questions. Please limit your questions to two per time in the queue, John I'll turn it over to you for the first question.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one and your telephone keypad.
We will pause for just a moment to compile the Q&A roster. Thank you.
Okay.
Your first question comes from the line of Eric Wolfe from Citigroup. Your line is now open.
Hey, good afternoon.
On page six you can give a breakdown of your NOI growth by property is based on when you acquired them.
Just curious can I take from that disclosure that 89% of your JV will be.
Same store pool next year basically just excluding the other real estate classes 23, and so that our remaining 11% any early sense for the growth potential for us.
Properties.
Hey, Eric This is Paul Thank you for the question I hope you're well.
Thank you for pointing out the additional disclosure we provided in our supplement.
To answer your particular question next year on same store, we will be adding.
That will be adding the class of 2022 same store, but also what's included in other real estate. Those four properties are the properties that we acquired from Amcole little less than a year ago now and then so that'll be part of our same store pool in 2024, as well and so the only items that will be outside of the same store will be ours.
Acquisitions made in 2023.
Got it and then this quarter.
120 bps contribution to your same store revenue from other residential income which has been growing over the last couple of quarters, presumably since you received more late fees.
Can we see that would be a little bit of a headwind to growth next year, just given that your bad debt has come down substantially.
Substantially so I think you'd see less late fees or are there other sort of initiatives to offset that.
Eric It's Keith.
There are some other initiatives offset that we have lots of focus on parking and storage and other resident type of very particular amenity.
<unk>, so while I acknowledge your point about whether late fees or other things that could come with previous delinquencies. We have other ideas and things that are in play that actually we've been working on a lots of the year and we will start earning into next year.
Thank you.
Your next question comes from the line of fleets understand from Wedbush. Your line is now open.
Thanks, Good morning out there I think.
Yes.
So.
On the deployment of joint venture.
Funds and sort of bringing in partners and so on I understand the line of thinking behind it what concerns me is.
Sort of a return to more complicated.
Structures.
The very thing that you sold are on is simplified strategy and all that sort of stuff. So.
Do you expect to expand joint venture activities from here formation of new ones or do you feel like what you've got is enough to feed your growth needs for the coming few years. Thanks.
Rich, it's Terry and good afternoon wherever you may be.
Thanks.
And.
It's good to hear your voice.
Youre absolutely correct.
Correct that the addition of joint.
<unk> ventures.
Bedroom and element of complexity to the air plan.
I would note that it was included in the air separation at that point, we had a single joint venture.
But there's been a change in facts since then a dramatic change in the capital markets.
And when facts change, we need to incorporate that in our thinking.
And.
We want very much for air to be transparent.
And that's why by Paul.
And his team spent so much time on same store scheduled to.
Provide a walk so that.
Analysts and the market would be able to track.
A portion of that contribution.
Not be.
<unk> done by the increased complexity.
Okay, great and as far as the opportunity set that May lie ahead.
You and your peers are kind of tune yourself up for <unk>.
Some dislocation related to debt maturities and all of that.
Do you have an idea of how this could look into do you have a sort of a pipeline number in mind today and would it be mostly.
One off deals in your pair trade scenario could you could you see yourself doing something larger portfolio wise or even some sort of.
Entity level type situations like what's out there.
That you see now and how might it grow as we go thanks rich.
Rich you followed up both the industry and aimed to air for a long time.
And so you know that we will be comfortable doing one off acquisitions and ended the acquisitions.
I think it really depends on what opportunities the market brings I think that.
The impact of higher interest rates and for how long is still reverberating and I don't think the market's founded clearing place.
I'm delighted to see the 10 year back down a little bit, but I don't think its going back to where it was and I think thats not yet fully reflected or are.
<unk> by the market.
Yeah fair enough. Okay. Thanks, everyone. Thanks Terry.
Yes, you bet.
Your next question comes from the line of John Kim from BMO Capital markets. Your line is now open.
Thank you and good morning.
I had a question on your guidance, which you've maintained.
On same store revenue.
At the mid points last quarter.
And in answer to your question.
You guys had mentioned that the assumptions at least mid point would be to get blended right.
Mid fours to 5% in second half of the year, what you achieved in the third quarter, but since then it has decelerated in October.
So can we take from that that mid point of your guidance is.
This is a stretch goal at this point.
John I disagree with that articulation I think the midpoint of guidance is right in line with where we expect to land and so when we talked last quarter about our expectations for blended lease rate growth for the year.
Our expectations are the same today as they were at the end of July and then a deck that we put out in September we talked about our expectations for our full year blended lease rate growth to be between five 5%, 6% I think year to date through September I think were up six one and in that ballpark, so where we're doing well in that regard and.
When you think about the impact of fourth quarter leasing you just have to remember for our business, it's not that impactful because we don't have that many transactions during the quarter.
Another point on guidance that I would just speak to that you didn't explicitly ask but I think it's an area of interest relates to the implied acceleration for fourth quarter revenue relative to the third quarter and if you look at that you can see that in the third quarter. Our revenue growth was affected by a headwind in the form of lower occupancy.
Occupancy during the quarter was 60 basis points lower than a year ago, but Conversely in October our ACO is already 30 basis points ahead of where we were a year ago and growing so we feel very comfortable about our guidance and we still have two months to go to hit it but we view it as a likely outcome.
Okay, that's great color. Thanks, Thanks, Paul.
Youre leasing metrics and same store revenue have been leading it looks like youre on track to repeat that.
That feed next year.
Hasnt translated that slow growth.
So reasons, including the separation from Mako, but next year, you do have that price headwind on nonrecurring items.
Do you foresee any other headwinds to earnings that will.
Impact your ability to match earnings with internal NOI.
John I'll start and if.
Terry you might want to jump in or anybody else, but you are right to call out that we do have <unk>, a nonrecurring income and our expectations for the current year.
And so that's why we have pointed.
You and others to our.
Our run rate <unk> growth, which is up at a rate that is during the quarter.
Up about six 7% should I should do a better job I remember my own script.
Failing me now, but more importantly for next year, we're going to have a benefit of continued strong same store NOI growth the benefit from our portfolio.
Composition, changing and evolving in a higher growth rate of the air edge property is growing quicker one headwind, which is apparent if you look at our earning supplement is that our weighted average interest cost will be higher next year than this year because of the balance sheet restructuring that I spoke about in my prepared remarks, and just other changes and.
If you look at our weighted average interest rate as of the third quarter that should give you a pretty good proxy as to what to expect for next year with one caveat that I'd call out that's the $79 million of debt that's associated with our Virginia joint venture is currently capped at five 4% that cap expires in January.
So we will be subject to higher rates next year on that $80 million of debt.
Just one quick follow up how should we be thinking about run rate up about one time items or.
Is it like earning concept.
Right.
Don a run rate, we think it would be recurring normalized items that would be relatively consistent year over year, there's always some volatility in the year, because the business changes and evolves and so there is some volatility in nonrecurring type items. We just wanted to draw attention to what is recurring and enduring.
John I want to Jerry I want to just do.
Underlying what Paul just said.
The focus of air and the whole team here is on free cash flow and recurring free cash flow.
And Thats, what we think is the most important driver of value.
That said the business gives rise to nonrecurring income and all cash income, even if not recurring its worth having.
And so we're going to keep getting it and reporting it but we're also going to keep directing view towards the recurring free cash flow, which we think is the more fundamental.
Great. Thank you.
Your next question comes from the line of Penn del <unk> Juste from Mizuho. Your line is now open.
Thank you and good morning, guys.
So I.
I guess you guys touched on by the acceleration question. The <unk> work lots of John So maybe Keith can you talk about the the pricing power and expectations.
Next year, if some of your better performing markets here like Miami, Boston in Socal versus some of your.
Weaker market affiliates, San Fran and where are you offering.
Okay. Thanks.
And Joe I missed the last part you said, where my offering what was the last question.
Are you offering.
Okay got it yeah.
So I think in the.
The first the first thing is that.
The talk about the seasonal deceleration.
What I really want to emphasize.
Is is that we're returning back to a normal seasonal pattern and what we're seeing.
Let me point you to 2018 in 2019, which was pre Covid and when we look at the fourth the third quarter to the fourth quarter in those periods, we saw somewhere between 200 and 280 basis points of deceleration in new lease rates.
So when we look at where we're at today, we're inside that window of a very similar deceleration that we would've seen pre COVID-19. So we've had this period of time.
We're going from the third quarter, the fourth quarter. It had this acceleration for a lot of different factors, but what we're seeing is much more akin to what is typical so thats. The first thing I would point to the second thing I'd say is that Paul pointed this out which is in the fourth quarter, we do a lot less business.
Our model.
Georgia Board business happens between May and September which is really our peak leasing season, that's where the majority of that activity happens and we get the best earning from that and so the deceleration is not something that.
I wanted to have a lot of exercise around because it's really about making peak season, and then building into next year as we look into next year I want to get ahead of myself about who is going to do what but one of the markets. You pointed out that has been a tough one is northern California.
Listen I think northern California has the most on the bone to come back.
And what I would what I'd point you to today is in northern California and for US that's the peninsula to be particular San Jose.
And Marine County, we're at 97 seven occupied today.
What that tells me is demand exists and at some point, we're going to get that pricing power back and we're going to earn it back and so we'll see I called it is getting a issue I thought it was going to be the winner can turn out to be true in Dallas, but but that one could be back San Diego continues to be a great market for us.
Of course, Miami continues to be a great market for us Philadelphia will be a tough market I would call. The first half of the year as we work through the balance of supply, but then we're going to be in blue skies clear ceiling. Once we get past that because that supply will be behind us. So we will get into the more particulars when we get to January but that's the way I'd have you think about it.
Great I appreciate that color.
And then some a question on the JV.
How much capital is left to deploy there I guess I assume that'll be the first.
Source of potential acquisitions other than maybe dispositions as you match fund, but clearly I think where your cost of capital and buying back shares or like J D.
And then maybe on Raleigh is a market. That's entered this quarter I'm curious what you saw there what type of exposure you are looking to build there. Thank you.
I would say handouts, Terry, but I'm going to call on Matt Grady.
Our primary.
Person responsible for the joint ventures, and then I'll call it Josh for Raleigh, So met.
Okay.
Just on the our joint venture partners each have.
Committed follow on.
Amounts to invest alongside us and so those amounts are.
In aggregate about 600 $700 million.
But I would say that.
The objective is.
We're doing right by our partners will continue to do those and I don't think Theres a meeting we partnered with folks with deep pockets. So we should be able to continue to draw on that in the future.
Josh. Thank you Terry Thank you end up.
<unk> has been a target market for air and we're excited to be able to execute on multiple deals. There this quarter to give us immediate scale in the market.
We believe in the long term outlook of Raleigh based on the favorable business environment skilled labor force driven by proximity to research universities in science and technology companies. We think these factors will generate durable long term job growth and population growth in the market.
Okay.
And now.
I hate to have to man, what Josh said Buddy.
Various attractive beach there he overlook the college basketball team. So I just think that way.
I assume you mean North Carolina.
Sorry.
Yes.
Two of them that will get worked out over the course of the season.
Alright, Thank you guys I appreciate it.
Your next question comes from the line of Robyn Luu from Green Street. Your line is now open.
Hey, good morning, Thanks for taking my question I, just wanted to get back on the prior question or around the Bay area and that is Mr. <unk> Zhang.
In the 2024 table you did actually mentioned that you expect sluggish releasing.
That is a.
Are you finding it.
Do you expect it to be tougher to track I guess, new demand new tenants.
Quite importantly, thank you broader demand.
Next year in that area.
Hi, Robyn, it's Keith I would just say look it's been a tough four years there.
So.
It's hard to believe but in March of this coming year, we will be four years of sort of navigating the.
Remote work and all the different types of things that happened with the technology environment there.
Mostly what I, what I want to say is that we're cautious about it.
Pointing back to the occupancy that I, just referred to our portfolio being at 97, 7% in our Bay area portfolio rises to the point that gives me confidence.
The demand continues to exist and be there it will be really about when we can really recapture some of the rates that have been on the table for a period of time.
Yes. Thank you that's helpful and then just one for Josh.
And then just touching on the Maryland acquisition.
Given the price to go all in.
500000.
Thereabouts and the rents a little bit higher than what is usual for that market.
How are you underwriting affordability and I guess your ability to push rent growth rather than me.
Need to medium term.
Okay.
Yes. Thank you.
Youre absolutely right. It is a higher end property that particular one has.
Leading finishes and quality and attracts the top end of the renter base their affordability and the building is excellent.
Come to rent ratios of less than 40%.
We think that will be durable demand.
Great. Thanks, that's all for me thanks.
Your next question comes from the line of Michael Goldsmith from UBS. Your line is now open.
Good morning, Thanks, a lot for taking my question. The same store revenue build up for 2020 is really helpful. It seems like some of the.
Some of the components are probably more certain than others. So can you provide a little bit more detail into your visibility and the increase in the average daily occupancy and bad debt improving next year. Thanks.
You bet Mike. Thanks for the question. This is Paul on the first point around our optimism around higher average daily occupancy in 2024 versus 2023.
Friday, a range, where we expect to do maybe 10 to 20 bps better than in 2023.
A portion of that is really just due to the noise that we had during the second quarter in Los Angeles on the eviction process as we evicted those residence that had been living in our communities, but not paying rent and so just the elimination of that reoccurring next year gives us 10 basis points and then on the on the upper end of that range in that 20 basis points.
And that's really being driven by how we have operated this year versus 2022, so far year to date, we are trailing our 2022 occupancy and part of that is due to the law, but part of it is just due to changes in markets and as we're doing our budgets to plan, what we see the upside to do to do better than we did this year and so that gives.
As to the high end of the range.
On bad debt, we have done well this year in bad debt our year to date bad debt on a net basis is 80 basis points of revenue. If you exclude collections from prior periods. Our bad debt is 120 basis points of revenue on a gross basis.
But that's still above where we've been on a pre COVID-19 basis, although we are getting closer in the third quarter, our bad debt on a gross basis was 80 bps and 25 of that of those basis points, just elevated due to eviction related move out costs and fees. So if you pull that out our bad debt expense on.
Our gross basis again is about 55 bps and so if we do no better than what we did in the third quarter you would get that improvement that we are outlining in the and the outlook for 2004.
Got it thanks for that and then.
My second question is.
Yes.
And the ability to sustain.
And control expenses Thats built into your expectations for next year well control together.
In the third quarter here I guess just.
Yes.
Given some of the investments Youre, making.
Is there is there continued ability to keep this cheap.
Keep expenses moderate over the long term or is this.
I'm just trying to understand like how much more how much more cost savings you can kind of drive and keep it controls were yes.
Sure.
Are we kind of getting to the end of that component. Thank you.
Michael It's Terry and lunch.
Bunch of hands go up in the room people are eager to answer that question.
Great already answered.
We don't know how long it will continue 13 years has been a long time, but we see continuing opportunities to do better.
So we're not calling pause we expect to have that kind of discipline next year and we will.
We'll see what happens thereafter.
Thank you very much good luck in the fourth quarter.
Thank you Mike.
Hi, John do we have any additional questions.
Next question is from Rich Anderson at Wedbush. Please go ahead.
The anticipation was killing me.
Yes.
Quick quick follow up on the topic of bad debt because it is it does stand out as an outlier for you guys.
What about.
S. Essex said, something like $120 million of rent that they have not received through the pandemic and subsequent because of delinquencies and people walking in the dark of night, perhaps growing a mustache changing their hair color and moving to Tijuana.
But I'm just wondering if.
If there is any expectation to go after those.
People that are no longer residence of yours, and if if it is just too much work to do and you just have to you have to say put your hands up and say, we're not going to get that back I'm just curious.
If there is an additive component to 2024 from from those sources.
Rich it's Keith Thanks for the question.
First I just wanted to start why I think our results different which is we spend a lot of time on the resident quality.
And when we look at micro scores at 725 with that means is people live up to their obligations.
And they fulfill them and so we haven't had the experience that you just referred to.
With somebody else.
What we have found is that we have the majority of residents. While they may have had a disruption at some point found a way to get back on track.
As it relates to is it worth the time I I will tell you that I am personally involved.
With <unk>.
Seeking out those who have done us wrong.
And to the extent of actually going after them in small claims court and one of the things. That's interesting is in California. They had lifted the actual maximum small claims amount that you could see somebody for if it was actually related to COVID-19 rent and so I'll just give you a one anecdotal example is there was an individual who had.
Left us we're about $85000.
We knew that.
Somebody that actually can pay the rent we had a proof of a guarantor that was a multimillionaire we sued them in small claims court we won.
We then pursued them and they wrote US a check for the balance for the amount of money that they owed us to make it go away. So.
It's one out of a few hundred that exist that are in that kind of a situation, but I will tell you I'll be relentless to go after people didn't have done this wrong, but the more important point is the majority of our residents do this right by creating as because we have such an emphasis on the quality of our resident.
Okay. Thanks, very much good color.
Okay.
Well rich thank you John.
John if we don't have another.
Color pending I would like to thank everyone on the call I can't think of a better note to end on the key emphasis on our customer selection and for many of you I.
I look forward to being together.
Yes Angeles and a couple of weeks. Thank you so much have great weekend.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.