Q3 2023 Independence Realty Trust Inc Earnings Call
Good morning, My name is Andre and I will be your conference operator today.
At this time I would like to welcome everyone to the Independence Realty Trust Q3, 2023 conference call Today's conference is being recorded.
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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over to Lauren Torres. Please go ahead.
Thank you and good morning, everyone. Thank you for joining us to review independence Realty Trust's third quarter 2023 financial results on the call with me today are Scott Shafer, Chief Executive Officer, Mike Daly EVP of operations and people.
Both Jim Zebra, Chief Financial Officer, and John It's Richard SVP of operations.
Today's call is being webcast on our website at IR T living dotcom, there will be a replay of the call available via webcast on our Investor Relations website, and Telefonica <unk> beginning at approximately 12 P M Eastern time today.
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 and financial performance 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.
Please refer to Irt's press release supplemental information and filings with the FCC 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.
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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 current report on the form 8-K.
Payable at Irt's website under Investor relation 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 with that it is.
My pleasure to turn the call over to Scott Schaeffer.
Thank you Lauren and thank you all for joining us this morning.
On our last earnings call. We specifically noted four areas of focus at IRET drive occupancy deliver planned value add improvements further manage our cost structure and reduce our.
Since then we have made progress in each of these fronts and have recognized ways to further optimize our portfolio, which will accelerate our deleveraging and better position <unk> for the future let me take them one by one.
First our same store occupancy in the third quarter improved 40 basis points to 94, 6% on both a year over year and sequential basis, reflecting our team's ability to continue to implement operational enhancements.
Second we continue to invest in our communities, particularly through our value add renovation program, where we renovated 709 units in the third quarter and 1969 units in the first nine months of 2023, achieving an unlevered return on investment of 16%.
Third we continue to better manage our cost structure by reducing overhead costs by $2 million. This year as compared to our original guidance issued in February. This is in addition to the $2 $5 million in annual savings associated with the centralization of resident services and sales performance management teams.
Looking into 2024, we are rolling out several new technology initiatives that will create further efficiencies and fourth we are now announcing a program to accelerate the sale of noncore properties and immediately de lever more on this strategy in a minute.
While we remain encouraged by our strategic initiatives to support continued growth at IRT.
Other multifamily operators are facing an increasingly challenging environment, specifically, we have seen a slower rate of occupancy gains and expected due to the softening economic environment, along with pricing pressure as new supply is offering an aggressive concessions. These factors are affecting some of our markets such as Atlanta, Dallas and Nashville.
So as a result of these recent trends we are adjusting our 2023 guidance, Jim will provide greater detail behind our guidance update later on this call.
We firmly believe that our core markets are well positioned to continue to see strong absorption of multifamily units. Further we will continue to benefit from our market diversification and affordable defensive middle market communities that are more resilient, but not immune to current elevated supply pressure.
We work to navigate the current environment. We must also think strategically to ensure that we are well positioned for the future.
Accordingly, we are initiating our portfolio optimization and deleveraging strategy, which is focused over the near term on reducing our presence in noncore markets. While also significantly deleveraging our balance sheet. We are accelerating this plan due to the broad view that interest rates will remain higher for longer which will continue to impact property values. Our plan is to sell 10 noncore.
Our properties with the proceeds used to immediately reduce debt and the plan reduces near term maturities and better positioned to IRT for an investment grade rating.
Before handing the call over to Mike I'd like to stress our continued confidence in our core markets, where demand fundamentals remained favorable and supply pressures should begin to abate over the next six to 12 months, we expect to continue to benefit from positive migration demographic and employment trends. This is a core strength to the Iot portfolio and will position us favorably going forward I would now like to turn the call over to Mike.
Thanks, Scott as Scott mentioned and it has been noted by other companies and multifamily economists we are operating in a challenging environment with the impact of new supply and the impact of inflation on consumers. These factors have led to more options for renters in the near term and higher sensitivity to price than we've seen in recent years. This has created headwinds for.
US and for the industry. Despite these challenges in the third quarter. We delivered a same store average occupancy rate of 94, 6%, a 40 basis point increase on a quarter over quarter and year over year basis, and a 150 basis point increase from Q1 of this year as of today, our same store occupancy is 94.
6% and our same store non value add occupancy is 95% our portfolio average rental rate increased four 4% in Q3 contributing to five 4% year over year property revenue growth for the quarter.
Audra: Good morning, my name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Independence Realty Trust Q3 2023 conference call. Today's conference is being recorded. 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Lauren Torres: At this time, I would like to turn the conference over to Lauren Torres, please go ahead. Thank you and good morning everyone. Thank you for joining us through a view, Independence Realty Trust Q3 2023 financial results.
New lease rent growth in Q3 reflected changing market conditions with new lease rates 80 basis points higher this.
This includes the impact of concession activity to counter those conditions in the third quarter, we increased the use of concessions, especially markets, such as Atlanta, and Dallas to remain competitive and to prioritize occupancy lease.
Lease over lease effective rent growth for renewals in Q3, 2023 was four 8% and in Q4 2023 to date is 5%, which reflects approximately 82% of our total expected Q4 lease renewals.
Our Q4 2023 to date blended lease over lease effective rental rate growth is two 3%.
Lauren Torres: On the call with me today are Scott Schaeffer, Chief Executive Officer, Mike Daley, EBP of Operations and People, Jim Sebra, Chief Financial Officer, and Janice Richards SVP of Operations. Today's call is being webcast on our website at irtliving.com. There will be a replay of the call available via webcast on our investor relations website and telephonically beginning at approximately 12 p.m. Eastern time today.
We continue to achieve double digit NOI growth in the third quarter in a number of markets, including Houston, Tampa, Louisville and Lexington. These.
These markets have displayed increases in average monthly rent benefiting from strong job markets. We continue.
To focus on driving operational performance through process improvement role specialization and ongoing technology enhancements.
These initiatives include a pilot program to build on organizational improvements that have increased the speed of our response to local market changes.
Lauren Torres: 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. The forward looking statements reflect irt's current views with respect to future events and financial performance. 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. Please refer to irt's press release supplemental information and filings with the SCC 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-gap financial measures during this call.
Another example is in the screening and qualification process for new residents.
Across the industry efforts to ensure screening effectiveness and to fight fraud are a high priority. We are deploying new technology solutions to improve the accuracy and confidence of prospect I'd verification and are preparing to deploy a new robust income verification solution. In early 2024, we expect these technology enhancement.
We will improve the speed and effectiveness of resident screening.
In addition, our specialized teams focused on sales and residents account management have had a positive impact on staffing efficiency resident experience and reputation streamlining the collections process and greater efficiency and focus for our community teams.
As we look ahead, our focus is on prioritizing occupancy throughout our portfolio, while optimizing rent growth where possible. Our results in Q3 show the success of our initiatives and we will continue to explore opportunities to increase efficiencies and drive results.
Lauren Torres: A copy of irt's earnings press release and supplemental information containing financial information, other statistical information and a reconciliation of non-gap financial measures to the most direct comparable gap financial measure is attached to irt's current report on the form 8k 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.
I will now turn the call over to Jim.
Thanks, Mike and good morning, everyone, beginning with our third quarter 2023 performance net income available to common shareholders was $3 9 million as compared to a $16 2 million.
In the third quarter of 2022. This decrease as a result of an asset impairment. We recorded this quarter associated with the portfolio optimization and deleveraging strategy as Scott mentioned.
Scott Schaeffer: With that, it's my pleasure to turn the call over to Scott shaper. Thank you, and thank you all for joining us this morning on our last earnings call. We specifically noted for areas of focus at irt drive occupancy deliver planned value at improvements further manage our cost structure and reduce our. Since then we have made progress on each of these fronts and have recognized ways to further optimize our portfolio, which will accelerate our deleverging and better position irt for the future.
During the third quarter core <unk> per share increased seven 1% to <unk> 30 per share from 28 per share a year ago. This growth reflects the organic rent and NOI growth that we experienced in the quarter on a year over year basis.
<unk> same store NOI growth in the third quarter was four 8% driven by revenue growth of five 4%. This growth was led by a $4 four an increase in average monthly rental rate to one $549 per month.
Scott Schaeffer: Let me take them one by one. First, our same-store occupancy in the third quarter improved 40 basis points to 94.6% on both a year-over-year and sequential basis, reflecting our team's ability to continue to implement operational enhancements. Third, we continue to better manage our cost structure by reducing overhead costs by $2 million this year as compared to our original guidance issued in February. This is in addition to the 2.5 million in annual savings associated with the centralization of resident services and sales performance management teams.
On the operating expense side Iot same store operating expenses increased six 3% during the third quarter led by higher property insurance and contract services due to inflation as well as higher advertising expenses as a result of our increased efforts to drive occupancy amid a slowing macroeconomic environment.
Turning to our balance sheet as of September 30, our liquidity position was $276 million, we had approximately $17 million of unrestricted cash and $259 million of additional capacity through our unsecured credit facility.
Before turning to 2023 guidance I'd like to provide more details behind our newly initiated portfolio optimization and deleveraging strategy as Scott mentioned, we are focused on reducing our presence in noncore markets. While also delevering our balance sheet in particular, we plan to sell 10 properties in seven markets.
Scott Schaeffer: Looking into 2024, we are rolling out several new technology initiatives that will create further efficiencies. And fourth, we are now announcing a program to accelerate the sale of non-core properties and immediately deliver more on the strategy in a minute. While we remain encouraged by our strategic initiatives to support continued growth at IRT, we and other multifamily operators are facing an increasingly challenging environment. Specifically, we have seen a slower rate of occupancy gains than expected due to the softening economic environment along with pricing pressure as new supply is offering aggressive concessions. These factors are affecting some of our markets such as Atlanta, Dallas and Nashville.
For estimated gross proceeds between 521 and $533 million.
Scott Schaeffer: So, as a result of these recent trends, we are adjusting our 2023 guidance.
Which equates to a weighted average economic cap rate of approximately five 9% at the midpoint.
After repaying debt at the property level associated with the sold properties. We estimate that we will have between 232 and $244 million of remaining proceeds and we'll use the remaining proceeds to repay unhedged floating rate borrowing and various other high cost property mortgages that mature in 2020 for 2025.
Scott Schaeffer: Jim will provide greater detail behind our guidance update later on this call. We firmly believe that our core markets are well positioned to continue to see strong absorption of multifamily units. Further, we will continue to benefit from our market diversification and affordable defensive middle market communities that are more resilient but not immune to current elevated supply pressure.
In 2026.
The weighted average coupon of the debt we plan to repay at approximately six 1%.
As we saw these properties nine of which were acquired from our merger with Star in late 2021, we are expecting to record a net loss on sale of between 39 and $51 million, which.
Scott Schaeffer: While we work to navigate the current environment, we must also think strategically to ensure that we are well positioned for the future. Accordingly, we are initiating our portfolio optimization and de-leveraging strategy, which is focused over the near term on reducing our presence in non-core markets while also significantly de-leveraging our balance sheet. We are accelerating this plan due to the broad view that interest rates will remain higher for longer, which will continue impact property values. Our plan is to sell 10 non-core properties with the proceeds used to immediately reduce debt. The plan reduces near term maturities and better positions to IRT for investment grade rating.
Which includes a 20% to $24 million gain on a single legacy IRT asset.
That is expected to be sold.
We expect this strategy will result in two to three <unk> of annual dilution to core <unk> per share.
And after the effective annual Capex, we expect it to be breakeven on a free cash flow basis.
In addition, the related deleveraging is expected to reduce our net debt to adjusted EBITDA by almost one full turn and further improve our unencumbered asset ratios as we work towards achieving an investment grade rating.
Scott Schaeffer: Before handing the call over to Mike, I'd like to stress our continued confidence in our core markets where demand fundamentals remain favorable and supply pressure should begin to abate over the next six to 12 months. We expect to continue to benefit from positive migration, demographic and employment trends. This is a core strength to the IRT portfolio and will position us favorably going forward.
We would also expect that this strategy will remove all floating rate risk from our balance sheet, and we will significantly reduce our debt maturities in 2024 and 2025 as we've disclosed in our earnings supplement.
With respect to our full year 2023 outlook, we are lowering our EPS guidance range from 25 to 27.
Mike Daley: I now look to turn the call over to Mike. Thanks, Scott. As Scott mentioned and has been noted by other companies and multifamily economists, we are operating in a challenging environment with the impact of new supply and impact of inflation on consumers. Each factors have led to more options for renters in the near term and higher sensitivity to price than we've seen in recent years. This has created headwinds for us and for the industry.
To a loss of seven <unk>.
Which now reflects estimated impairment losses of real estate assets, just as discussed as a result of our strategy.
Our 2023 core <unk> per share guidance midpoint changes by roughly half a penny.
We are reducing our same store portfolio from 115 to 106 properties as a result of this portfolio optimization and deleveraging strategy as we just discussed.
Mike Daley: Despite these challenges in the third quarter, we delivered a same store average occupancy rate of 94.6%. A 40 basis point increase on a quarter over quarter and year over year basis and a 150 basis point increase from Q1 of this year. As of today, our same store occupancy is 94.6% and our same store non-value rad occupancy is 95%. Our portfolio average rental rate increased 4.4% in Q3, contributing to 5.4% year-over-year property revenue growth for the quarter.
The midpoint of our new same store revenue guidance is five 6% down from 635% previously.
This reflects the following assumptions for the fourth quarter of 2023 average occupancy of 94, 4% a blended net effective rental rate increase of 90 basis points.
And bad debt approximately 2% of revenue.
On the expense side, our guidance for full year 2023 total operating expense growth is now more favorable at five 7% down from six 1% at the midpoint of our ranges.
Controllable operating expenses are now expected to be up six 5% at the midpoint versus previous guidance of five 1% driven by higher inflationary pressure on services as well as higher cost to turn units associated with evictions.
Mike Daley: The lease-over-release effective rent growth for renewals in Q3, 2023 was 4.8%, and in Q4, 2023 to date is 5%, which reflects approximately 82% of our total expected Q4 lease renewals. Our Q4, 2023 to date, blended lease-over-release effective rental rate growth is 2.3%. We continue to achieve double-digit NOI growth in the third quarter in the number of markets, including Houston, Tampa, Louisville, and Lexington. These markets have displayed increases in average monthly rent, benefiting from strong job markets.
Non controllable operating expenses for real estate taxes, and insurance are now expected to be up four 5% at the midpoint. This is down from our previous guidance of seven 8% driven by lower assessed values than expected and early successes with 2023 real estate tax appeals.
As a result of these changes our revised midpoint for property NOI growth is now five 5% down from six 5%.
We are reducing our G&A and property management expense guidance to a midpoint of $55 million down from 51 million previously and we're also reducing the range midpoint for full year interest expense to $101 5 million down from $103 million.
Mike Daley: We continue to focus on driving operational performance through process improvement, role specialization, and ongoing technology enhancements. These initiatives include a pilot program to build on organizational improvements that have increased the speed of our response to local market changes. Another example is in the screening and qualification process for new residents. Across the industry, efforts to ensure screening effectiveness and de-fight fraud are a high priority. We are deploying new technology solutions to improve the accuracy and confidence of prospect ID verification and are preparing to deploy a new robust income verification solution in early 2024. We expect these technology enhancements will improve the speed and effectiveness of resident screening.
While we are still not assuming any acquisition volumes for this year, we are maintaining our disposition guidance of $124 5 million at the midpoint as we are not expecting the additional sales from our portfolio optimization strategy will occur this year, but rather in early 2024.
Now I'll turn the call back to Scott Scott.
Thanks, Jim in closing, we feel very good about our position despite the near term environment.
We have the right assets in the right markets that will continue to benefit from favorable demographic trends.
Mike Daley: In addition, our specialized teams focused on sales and residents account management have had a positive impact on staffing efficiency, resident experience, and reputation, streamlining the collections process, and greater efficiency and focus for our community teams. As we look ahead, our focus is on prioritizing occupancy throughout our portfolio while optimizing rent growth where possible. Our results in Q3 show the success of our initiatives, and we will continue to explore opportunities to increase efficiencies and drive results.
Second value add is core to who we are and will remain a consistent source of organic growth with portfolio throughout the cycle and lastly, we are now taken decisive action to optimize the portfolio and fundamentally reset our leverage profile. We are committed to this strategy as we believe it will deliver sustainable earnings growth. We thank you for joining us today, and we look forward to speaking.
With many of you at NAREIT REIT World Conference in the coming weeks operator, you can open the call for questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Jim Sebra: I will now turn the call over to Jim. Thanks, Mike.
Jim Sebra: Good morning, everyone. Beginning with our third quarter 2023 performance, net income available to comment shareholders was $3.9 million, as compared to a $16.2 million in the third quarter of 2022. This decreases the results of an asset impairment recorded this quarter associated with the portfolio optimization and delivery strategy Scott mentioned. During the third quarter, quarter of the vote per share increased 7.1% to 30 cents per share from 28 cents per share a year ago.
We will take our first question from Austin, where schmitz at Keybanc capital markets.
Hi, good morning, and thank you.
Are the 10 assets being marketed as one off sales or are you attempting to sell as a portfolio and can you give us a sense how far along you are in the marketing process and just how deep the pool of buyers has been so far.
Sure Austin. Thanks for the question they are being marketed as one off transactions because they are in <unk>.
<unk> markets.
And we we started this process a little bit ago and are well along we have a couple under agreement. There is a third agreement ready to be signed there is there is a couple more loi's.
Jim Sebra: This growth reflects the organic rent and NOI growth that we experience in the quarter on a year-over-year basis. IRT SAMHSA and NOI growth in the third quarter was 4.8%, given by revenue growth of 5.4%. This growth was led by a 4.4 increase in average monthly rental rates to $1,549 per month. On the operating expense side, IRT saves the operating expenses increased 6.3 percent during the third quarter, led by higher property insurance and contract services due to inflation, as well as higher advertising expenses as a result of our increased efforts to drive occupancy amid a slowing macro economic environment.
So we're well into the process and that's what gives us confidence that we'll get this done.
And then I guess, just what gives you the confidence that you can execute a sale of the pricing you've alluded to in your prepared remarks, I mean other than it does sound like you've made some progress here to four.
But then upon executing a sale I'm also curious what the ultimate target is now.
For net debt to EBITDA over call. It the next 24 months or so.
Well I'm going to let Jim answer the last part of that question, but there was good demand.
Jim Sebra: Turning to our balance sheet, as of September 30, it will look clearly positioned with $276 million. We had approximately 17 million of unrestricted cash and $259 million of additional capacity through our unsecured credit facility.
For these properties as we took them out to market multiple bids.
Very qualified and well heeled buyers.
And that we know is because we when we took them through buyer interviews.
So it gives us confidence that we'll get it done and we intend to sell these assets.
Jim Sebra: Before turning to 2023 guidance, I'd like to provide more details behind our newly initiated portfolio optimization and delivery strategy. As Scott mentioned, we are focused on reducing our presence in non-code markets while also delivering our balance sheet. In particular, we plan to sell 10 properties in seven markets for estimated growth proceeds between $521 and $533 million, which equates to a weighted average economic cap rate of approximately 5.9 percent at the midpoint.
And Austin on the question on the net debt to EBITDA, we've given out perspective that we expect it to be kind of mid fives at the end of 2025, we fully expect that we'll be pulling that up into certainly 2024, if not maybe mid 2024. So we expect our net debt to EBITDA to ratchet down by that almost that entire full turn.
And continue to make additional progress as EBITDA grows.
That's helpful I'll leave it there thanks for the time thanks.
Jim Sebra: After repaying debt at the property level associated with the sole properties, we estimate that we will have between $232 and $244 million of remaining proceeds, and we'll use those remaining proceeds to repay unhaged floating rate borrowing and various other high cost property mortgages that mature in 2024, 2025 and 2026. The weighted average coupon of a debt we plan to repay is approximately 6.1 percent. As we saw all these properties, nine of which were acquired from our merger with STAR in late 2021, we are expecting to record a net loss on sale of $39 and $51 million, which includes a 20 to 24 million hour gain on the single legacy IRT asset that is expected to be sold.
Thanks Allison.
We will go next to John Kim at BMO capital markets.
Yeah.
Thank you.
Can you discuss where bad debt was during the third quarter.
And how do you see that improving progressing over the next 12 months.
Yes, it's a bad debt in the third quarter was about one 9% we expect right now.
In our initial guidance for the year, we expect it to be about one 5%, we think that it'll be kind of hovering for the full year at around 2%.
And then as Mike alluded to in his prepared remarks, as we make additional progress on the.
The I'd verification as well as us.
An improved income verification tool.
That will continue to see that bad debt Ratchet down next year.
And that one 9% and was that gross or net of resident relief fund.
Jim Sebra: We expect this strategy will result in two to three cents of annual delusion to core fulfill per share, and after the effect of annual cat bets, we expect it to be breakeven on a free cash low basis. In addition, the related deleverging is expected to reduce our net debt to a density, but by almost one full term, and further improve our unencumbered asset ratios as we work towards achieving an investment grade rating. We also expect the strategy will remove all floating rate risk from a balance sheet, and will significantly reduce our debt maturities in 2024 and 2025 as we've disclosed in our earning supplements.
There really wasn't very much resident relief fund so I would say it's both.
Okay.
On your value add the 23 properties.
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The new lease growth rate.
Decelerating was down one 6% in the fourth quarter can you explain this dynamic I thought the renovated units themselves were generating.
Enough rents I guess, 20% uplift in rents.
To bring up the overall average of the buildings.
Sure.
It's really a seasonality and timing issue as we work to push occupancy the value add was part of that effort.
Jim Sebra: With respect to our full year 2020 free outlook, we are lowering our EPS guidance range from 25 cents to 27 cents to a loss of seven cents to two cents, which now reflects estimated impairment losses of real estate assets just as discussed as a result of our strategy. Our 2023 core fulfill per share guidance midpoint changes by roughly half a penny. We are reducing our same store portfolio from 115 to 106 properties as a result of this portfolio optimization and delivery strategy as we just discussed.
There is good demand we're not carrying.
A lot of value add units that have been completed there getting leased and we expect that to normalize back to more historical levels next year.
Now that occupancy is stable.
Sure.
Gives us the view that it will again normalize next year.
Do you expect to return.
<unk> to continue to.
To moderate.
Jim Sebra: The midpoint of our new same store revenue guidance is 5.6 percent down from 6.35 percent previous. This reflects the following assumptions for the fourth quarter of 2023. Average occupancy of 94.4%, a blended, net effective rental rate increase of 90 basis points, and bed debt had approximately 2% of revenue. On the expense side, our guidance for four years 2023 total operating expense growth is now more favorable at 5.7% down from 6.1% at the midpoint of our ranges.
To moderate no no I expect it to be back towards that 18% in 2024.
Okay.
Great. Thank you.
Thanks, Jeff.
We'll go next to Brad Heffern at RBC capital markets.
Can you talk about why you're pursuing the deleveraging program now obviously you bought star a couple years ago. So I guess why not sell these kind of one off cats and dogs immediately and what made now the right time to do it.
So good question.
Yeah.
We've looked at the current interest rate environment and with the broad view is now rates will stay higher for longer.
Jim Sebra: Controllable operating expenses are now expected to be up 6.5% of the midpoint versus previous guidance of 5.1% driven by higher inflationary pressure on services as well as higher cost to turn units associated with evictions. Non-controllable operating expenses for real estate taxes and insurance are now expected to be up 4.5% at the midpoint. This is down from our previous guidance of 7.8% driven by lower assessed values than expected and early successes with 2023 real estate tax appeals.
We felt that cap rates, probably we're not going to go down in the near term.
What what kept us from doing it previously was that there was significant yield.
Yield maintenance or defeasance costs associated with the property level mortgages on these properties now.
Now those because of the increase in rates and the passage of time.
That prepayment penalty if you will is gone.
So with a view that rates going to be higher for longer and with no pre.
Jim Sebra: As a result of these changes, our revised midpoint for property and a livery is now 5.5% down from 6.5%. We are reducing our GNA and property management expense guidance, so a midpoint of 50.5 million down from 51 million previously. And we are also reducing the range and midpoint for full year entry expense to 101.5 million down from 103 million.
Prepayment costs.
<unk>.
Now we decided it was time to just exit these markets. So we had always planned on exiting.
And to use the proceeds to delever.
Okay got it.
And then probably for you Jim I guess some of the building blocks for 2024 I was wondering if you could give them like.
Your current expectation for earn in.
Jim Sebra: While we're still not assuming any acquisition volume for this year, we are maintaining our dissolution guidance of 124.5 million at the midpoint as we are not expecting the additional sales from our portfolio optimization strategy will per this year, but rather in early 2024.
The.
Foster lease and any initial thoughts on where the royalty market rent growth.
So.
Good question.
Obviously 2024 is still very much unknown, but the tenant building blocks to current loss to lease is one 8% across the portfolio.
Scott Schaeffer: Now I'll turn the call back to Scott Scott. Thanks Jim.
Current expectations for earn in for next year are about one 3% and obviously, that's assuming kind of that.
Scott Schaeffer: In closing, we feel very good about our position despite the near term environment. First, we have the right assets and the right markets that will continue to benefit from favorable demographic trends. Second value add is core to who we are and will remain a consistent source of organic growth with portfolio throughout the cycle. And lastly, we are now taking decisive action to optimize the portfolio and fundamentally reset our leverage profile. We are committed to this strategy as we believe it will deliver sustainable earnings growth.
Kind of continual we've seen rent growth so far enough in the fourth quarter that continues for November December.
And then right now Costar is reporting that our submarkets should experience two 4% market rent growth.
Okay. Thank you.
Well move to our next question from Anthony Powell with Barclays.
Scott Schaeffer: We thank you for joining us today and we look forward to speaking with many of you at NA READS Rebrow Conference in the coming weeks.
Hi, good morning, you've talked in the past about how class B apartments should benefit from trade down in a slower economic environment are you seeing any of that or the supply environment, maybe making that more difficult. This time around.
Audra: Operator, you can open the call for questions. Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.
Austin Wurschmidt: We'll take our first question from Austin Worshmit at Keybank Capital Markets. Hi, good morning and thank you.
Thanks for the question. This is Mike I think I think we are continuing to see that.
Scott Schaeffer: Are the ten assets being marketed as one off sales or are you attempting to sell as a portfolio? And can you give us a sense how far along you are in the marketing process and just how deep the pool of buyers has been so far? Sure, Austin. Thanks for the question. There have been marketed as one off transactions because they are in varied markets. And we started this process a little bit ago and are well along.
Properties are being hit harder than <unk> I think those are the ones, where we see the developers getting more aggressive with concessions, obviously that directly impacts the the AG market more so than the beam market and I think that our properties are definitely shown more occupancy and rents rent growth.
Growth strength on our on our B assets.
As far as markets being impacted I think.
2024, we expect that to be better from an impression from a concession.
Scott Schaeffer: We have a couple under agreement. There is a third agreement ready to be signed. There is a couple more LOIs. So we are well into the process and that is what gives us confidence that we will get this done.
Perspective, I think Atlanta.
Less pressure with the new supply, which is good for US obviously, that's a big market.
Dallas Nashville, the other ones aforementioned earlier.
Scott Schaeffer: I guess just what gives you the confidence that you can execute a sale at the pricing you've alluded to in your prepare remarks, I mean, other than, you know, it does sound like you've made some progress here to four. But then upon executing a sale, I'm also curious what the ultimate target is now for, you know, not that debita over called the next 24 months or so. Well, I'm going to let Jim answer the last part of that question.
Either very slightly up in terms of new supplier or even with this year.
Alright. Thanks.
Generally I mean are you seeing any signs of stress in the consumer base and the outside of things like fraud or you're saying.
And is coming to you, saying the campaign right.
Just.
Just any kind of science that casinos or being more stressed on a broader level than that.
Scott Schaeffer: But there was a good demand for these properties as we took them out to market multiple bids very qualified and well healed buyers. That we know is because we went we took them through a buyer interviews. So it gives us confidence that we'll get it done and we intend to sell these assets. And awesome, you know, the question on the net that the EBITDA, you know, we've given out perspective that we expected to be, you know, kind of mid fives at the end of 2025.
Then just more specific situations.
Specific to our business no.
Our rent to income ratio has remained very consistent at 22%.
We've not seen any upward trend and an inability to pay.
We have in the.
Prior periods.
We do actually have better credit in our applicants than we did say a year ago. So we're seeing an upward trend in terms of credit worthiness of our applicants and I don't I don't think it's any surprise that any pressure on consumers generally impacts the residents and all multifamily, but nothing specific to our business.
Scott Schaeffer: We fully expect that we'll be pulling that up into certainly 2024 if not maybe mid 2024. So we expect our net that the EBITDA can ratchet down by that almost that entire full term in continuing to make additional progress as this EBITDA grows. It's helpful.
Beyond that beyond that normal consumer pressure.
Okay. Thank you.
Next we'll move to Eric Wolfe with Citigroup.
Austin Wurschmidt: I'll leave it there. Thanks for the time. Thanks.
Hey, Thanks can you talk about where you expect new and renewal rate growth to go through the rest of the year and if you think we'll sort of see peak pressure could supply on your rate growth in the first half of next year, if theres going to be a bit of a lag there just given the time it takes to lease up all the new supply.
John Kim: We'll go next to John Kim at BMO capital markets. Thank you.
Scott Schaeffer: Can you discuss where bad that was during third quarter and how you see that improving or progressing over the next 12 months? Yeah, so bad that in the third quarter was about 1.9%. We expect right now, you know, in our initial guidance for the year we expected to be about 1.5%. We think that will kind of hovering for the four year rate around 2%. And then as Michael alluded to in his prepared remarks, you know, as we make additional progress on, you know, the ID verification as well as an improved income verification tool that will continue to see that bet that ratchet down.
Yes, I mean, I think again I think we'll continue to see a little bit of that.
Scott Schaeffer: Next year. And that 1.9% was that gross or net as president relief fund? There really wasn't very much resident relief fund. So I would say it's both.
Rent growth that we've seen so far that we've reported in the fourth quarter, we think that will continue.
John Kim: Okay.
For November December I think the blend in our guidance that we have for the entire fourth quarters about 90 basis points of blended rent growth.
As far as the new supply.
Sure.
We are looking at our sub market new supply I think that the as I mentioned earlier.
Dallas Nashville Atlanta.
See that moderating, especially in Atlanta.
And I think that in terms of the delivery, we do see that in the first half of next year, obviously there'll be some absorption.
On that delivery, but.
Definitely to your 0.1st half.
Scott Schaeffer: On your value add the 23 properties, the, the new least growth rate. The salary rate was down 1.6% in the fourth quarter. Can you explain this dynamic? I thought the renovated units themselves were generating enough rent, I guess for 20% up left and runs to bring up the average of the building. Sure. It's really a seasonality and timing issue as we worked to push occupancy. The value add was part of that effort.
And I'd like to add that for the fourth quarter as we sit here today, if you use a 50% renewal rate for lease expirations, 85% of that 50% has already renewed and they renewed at.
An average 5% rent increase.
So that gives you a good idea of how we see the fourth quarter, finishing out.
Got it and I think you mentioned that one of your data providers is predicting.
4% market rent growth next year, I mean, do you think thats.
Scott Schaeffer: There is good demand. We're not carrying a lot of value add units that have been completed. They're getting leased. And we expect that to normalize back to more historical levels next year. Now that now that occupancy is stable. It gives us, you know, the view that it'll it'll again normalize next year.
I guess, a reasonable given everything that's going on I would say that the market would probably be.
We are excited about that growth just given us around what sunbelt supply is going to do.
In Florida, the compounding effect of it keeps increasing so I mean, just from your perspective, I mean do you think that two 4% is reasonable and when Youre looking to set your guidance early next year. I mean are you mainly looking at some of the third party data providers or is it more of a sort of ground up.
Scott Schaeffer: Do you expect to return expectations to continue to to moderate? To moderate? No. No, I expect it to be back towards that 18% in 2024.
John Kim: Great, thank you. Thanks, Sean.
Each of your property to put out a forecast and you build that into your guidance.
So long question nationally with ESI to fair break into pieces. So in terms of our budgeting and forecasting process. It's very much a ground up process with each one of our communities kind of having input into kind of what they think rents could grow by in terms of renewal and new leases.
Brad Heffern: We'll go next to Brad Heffern at RBC Capital Markets. Hey, everybody, can you talk about why you're pursuing this deal-everaging program now? Obviously you bought Star a couple of years ago, so I guess why not sell these kind of one-off caps and dogs immediately and what baited now the right time to do it?
As we can always say that our data providers certainly provide data and we use multiple ones and what I quoted was costar is kind of that two 4%.
I think it's probably certainly reasonable given what the data and the other economists have predicted but.
Scott Schaeffer: So good question, you know, we looked at the current interest rate environment and with the broad view that now rates will stay higher for longer, we felt that cap rates probably were not going to go down in the near term. What kept us from doing it previously was that there was significant yield maintenance or defecence costs associated with the property level mortgages on these properties. Now, because of the increase in rates in the passage of time, that pre-payment penalty, if you will, is gone.
But obviously 2024 is still very much unknown in raw evaluating kind of what the effects of new supply will continue to have across the us as well as our markets.
Okay alright, thank you.
We will go next to Wes Golladay at Baird.
Hey, Good morning, guys as you look to next year for the value add program. I think you mentioned, you're still going to get those high teen returns do you expect the same amount of projects next year.
Scott Schaeffer: So, you know, with the view that rates are going to be higher for longer and with no pre-payment costs, now we've decided it was time to just exit these markets, that we had always planned to exit, and to use the proceeds to the level.
Yes.
Our target next year will be about 2500 to 3000 units.
For next year.
Okay Fantastic and then you mentioned the operational efficiencies Rolling out next year, how should we think about expense growth compared to this year is there any one time items that will be hard to comp mixture or easy comps and how will these efficiencies benefit you next year.
Jim Sebra: Okay, got it, and then probably for you, Jim, I guess some of the building blocks for 2024, I was wondering if you could give them like your current expectation for earn-in, the Boston lease and any initial thoughts on whether we'll see market-ring growth? So, good question, you know, obviously 2024 is still very much unknown, but the current building blocks, the current loss of lease is 1.8 percent across the portfolio. Our current expectations for earn-in for next year are about 1.3 percent, and obviously that's assuming kind of that kind of continue. What we've seen rent growth so far in the fourth quarter that continues from November to December, and then right now, co-star is reporting that our submarkets should experience 2.4 percent market rent growth. Okay, thank you.
Yes. So good question, we're obviously not giving any color yet on 2024 expenses, we're still through the budgeting process I would think that one of the big areas that will we expect to see some further progress on is bad debt I realize that's not necessarily an expense of <unk>.
Negative to the revenue line.
But that's a key area that Mike and Janice and team expect to see some really good progress on as we roll out these new technology tools.
So I think we're very much still open on 2024, and we'll be prepared to kind of talk about it more in February when we gave our guidance for 2024.
Got it.
One more and I mean, there is commentary on other calls where the concessions were so so.
Whoa are so high that some people are moving from Bofa assets or are you seeing that in any of your markets, where maybe a year from now when they can't afford the rent they come back to kind of get a feel for the dynamics of some of these markets.
I think.
This is Jonathan you can have three markets that we mentioned, where we've seen that increased supply during a low seasonality, which is Atlanta, and Dallas and Nashville, we've seen some of that but we still see that our b assets are outperforming our assets holistically.
Anthony Powell: We'll move to our next question for Anthony Powell at Barclays.
Mike Daley: Good morning. We've talked in the past about how class B apartments should benefit from tree down in a slower economic environment. Are you seeing any of that or is the supply environment maybe making that more difficult this time around? Thanks for the question. This is Mike. I think we are continuing to see that A properties are being hit harder than B. I think those are the ones where we see the developers getting more aggressive with concessions.
Great. Thank you for the time.
Thank you.
Mike Daley: Obviously, that directly impacts the A market more so than the B market, and I think that our properties have definitely shown more occupancy and rent growth strength on our B assets. As far as market being impacted, I think, in 2024, we expect that to be better from an impression, from a concession perspective, I think Atlanta, less pressure with the new supply, which is good for us. Obviously, that's a big market. Dallas, Nashville, the other ones I've mentioned earlier, either very slightly up in terms of the new supplier or even with this.
Next we'll go to Merrill Ross with Compass point.
Good morning, Thank you.
Questions.
I wanted to just.
Thanks, Sharon properly and ramp concessions do you expect to alleviate early next year or continued to be high.
And how does that change your focus.
Client retention.
I think in terms of retention. This is Mike I think in terms of retention, we've seen as Scott referenced earlier very strong numbers in terms of.
Renewals.
As well as the rate of those renewals are being accepted at concessions are going to go down they're going down as we speak relatively speaking as.
As we see that supply pressure continued to alleviate obviously the concession as a strategy would go down as well.
Mike Daley: Thanks, and more generally, I mean, are you seeing any signs of stress in the consumer base? I mean, outside of things like, you know, fraught, are you seeing, and it's coming to you saying they can't pay rent, just any kind of signs that consumers are being more stressed on a broader level than just more specific situations? Specific to our business, no. You know, our rent to income ratio has remained very consistent at 22%.
We think the approach that we've taken is.
Good from a renewal perspective in the future because our residents will not have that kind of sticker shock when they when they have moved those folks that have moved to a.
We're going to have to pay that additional amount.
<unk> received a rent reduction, whereas with our concessions ill update 11 months at a higher rate.
And we'll be not surprised when renewable time comes around.
Mike Daley: We've not seen any upward trend and any inability to pay, you know, than we have in the prior periods. We do actually have better credit in our applicants than we did, you know, say a year ago. So we see an upward trend in terms of credit worthiness of our applicants. And I don't, you know, I don't think it's any surprise that, you know, any pressure on consumers generally impacts the residents in, in all multi-family, but nothing specific to our business beyond that, beyond that normal consumer pressure.
Alright, alright totally makes sense until.
Great question.
Essentially the reception.
Mike Daley: Okay, thank you.
Do they still onto the asset sales and the dividend coverage remains D is it possible that you'd go for another round.
95, more assay ancillary alright got it.
We're always looking to.
No concentrate and and better manage the portfolio as a whole right now we've only identified these 10.
But depending on on demographic changes there.
There may be more in the future, but there's no plans at this point.
Eric Wolfe: Next we'll move to Eric Wolf as city group. Hey, thanks. Can you talk about where you expect new and renewal rate growth to go through the rest of the year? And if you think we'll sort of see peak pressure to supply on your rate growth in the first half of next year, if there's going to be a bit of a lag there, just given the time to take the lease up all the new supply.
Great. Thank you.
Sure.
Thank you Mark.
We will take our next question from John Kim of BMO capital markets.
Thank you on on the dispositions can you.
To provide some more commentary on how many of the 10 assets have mortgage debt in place and with an average interest rate is.
Eric Wolfe: Yeah, I mean, I think, again, I think we'll we'll continue to see a little bit of that. The record that we've seen so far that we've reported in the fourth quarter, we think that'll continue for November, December. I think the blend, you know, in our guidance that we have for the entire fourth quarter is about 90 basis points of blended record. As far as the new supply, I think, you know, we are looking at our sub market new supply, I think that the mentioned earlier Dallas, Nashville, Atlanta, we see that moderating, especially in Atlanta.
Yes, so nine of the nine of the 10 assets have mortgage debt in place one asset is.
Free and clear and.
And the average interest rate of the debt that we will pay off because we're going to have about $240 million of.
Excess cash after the sales to pay off kind of line of credit et cetera is about six 1%.
I was more questioning the average interest rate on.
Those assets and if that played a major factor in identifying those assets for sale, yes. The average rate on the mortgages theres nine mortgage themselves or I don't have exact numbers low 5%, 551% I can come back give the specifics.
Eric Wolfe: And I think that in terms of the delivery, we do see that in the first half of next year, obviously, there'll be some absorption tail on that delivery, but definitely to your point first half. And I'd like to add that for the fourth quarter, as we sit here today, if you use a 50% renewal rate for lease aspirations, 85% of that 50% has already renewed and they renewed at an average 5% rent increase.
Okay, great. Thank you.
And next we'll move to Alan at Jefferies.
Hi.
Potential buyers for the assets from your deleveraging program and would you expect multiple bidders.
We've had multiple bidders and we can identify who the buyers are.
Mike Daley: So that gives you a good idea how we see the fourth quarter finishing out. Got it. And I think you mentioned that one of your data providers is predicting, I mean, like 2.4% market rent growth next year. I mean, do you think that's. I guess the reason we're given everything that's going on here, I would say that the market would probably be, you know, pretty excited about that growth is given use around what some belt supplies going to do.
But each each property was marketed independent of the others as one off sales.
Mike Daley: As part of the compounding effect of it keeps increasing. So I mean, from your perspective, I mean, you think that 2.4% is reasonable and when you're looking to set your guidance early next year, I mean, are you mainly looking at some of the third party data providers or is it more of a sort of ground up, you know, looking at each of your properties, put that a forecast and you build that into your guidance.
And there were multiple.
Bidders on each one.
And apologies if I missed this.
With the 10 assets for sale are there other assets no longer subject to prepayment penalty that you would consider for sale.
There are lots of other assets that are not subject to prepayment penalties, but that was really not the driving force. The driving force was that we wanted to.
Exit certain markets.
And.
We couldnt do it or we decided not to do it earlier because of the prepayment penalties.
But.
The driving forces exiting the markets and then generating.
Mike Daley: So long question, actually, I've tried breaking pieces. So in terms of our budgeting and forecasting process, it's very much a ground up process with each one of our communities kind of having input into kind of what they think rents could grow by in terms of renewal and new leases. You know, as we can always say that, you know, our data providers certainly provide data and we use multiple ones. The one I quote it was co star is kind of that 2.4%.
The capital to retire the debt.
With the sale are you exiting all the markets you would like to exit.
All of the markets all of the eggs.
Let me, let me start with all of the sales are in markets that we want to exit we will continue to.
View the portfolio going forward for additional markets, but at this time, we're exiting the ones we want to.
Mike Daley: I think it's, it's probably certainly reasonable given what they, you know, they data and how their economists have predicted. But obviously 2024 is still very much unknown and we're all evaluating kind of what the effects of new supply will continue to have across certainly us as well. Okay, thank you.
Thank you.
And that does conclude our question and answer session. At this time I would like to turn the conference back to Scott Schaeffer for closing remarks.
Thank you all for joining us today, and we look forward to speaking with you next quarter.
Wesley Golladay: We'll go next to OS Golladay at Baird. Hey, good morning guys. As you look to the next year for the value app program, I think you mentioned you're still going to get those high teen returns. Do you expect the same amount of projects next year? Yes, our target next year will be for that $2,500 to $3,000 units for next year. Okay, fantastic. And then you mentioned about operational efficiencies, you know, rolling out next year.
And that does conclude today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Wesley Golladay: How should we think about, you know, expense growth compared to this year? Is there any one-time items that will be hard to comp next year or easy comps? And how will these efficiencies, you know, benefit you next year? Yeah, so make a good question. We're obviously not giving any color yet on 2024 expenses. You know, we're still through the budgeting process. I would think that, you know, one of the big areas that will be expected to see some further progress on its debt, realize that's not necessarily an expense.
Wesley Golladay: It's a negative to the revenue line. But that's a key area that Mike and Janice and team expect to see some really, you know, progress on as we roll out these new technology tools. So I think, you know, we're very much still open on 2024 and we'll be prepared to kind of talk about more in February. Let me give our guidance for 2024. Got it. And it kind of gets squeezed one more in.
Wesley Golladay: I mean, there's commentary and other calls where, you know, the concessions were so, so low or so high that, you know, some people are moving from B to A assets, or are you seeing that in any of your markets where, you know, maybe a year from now when they can't afford the A rent, they come back trying to get a feel for, you know, the dynamics of some of these markets.
Janice Richards: I think in this, this is Janice. I think in the three markets that we mentioned where we've seen that increased supply during a low seasonality, which is Atlanta and Dallas and Nashville. We've seen a sum of that, but we still see that our B assets are outperforming our A assets holistically. Great. Thank you for the time. Thank you.
Merrill Ross: Next, we'll go to Merrill Ross at Compass Point.
Merrill Ross: Good morning. Thank you. That's good. My question. I wanted to just make sure I heard properly in a discussion. Do you expect them to alleviate early this year or continue to be high? And how does that change your focus in terms of current retention? I think in terms of retention, this is my, I think in terms of retention, you know, we've seen as Scott referenced earlier, very strong numbers in terms of both renewals as well as the rate that those renewals are being accepted at.
Merrill Ross: Concessions are going to go down. They're going down, you know, as we speak relatively speaking, as we see that supply pressure continue to alleviate, obviously, the concession as a strategy would go down as well. We think the approach that we've taken is very good from a renewal perspective in the future because our residents will not have that kind of sticker shock when they, you know, when they have moved, those folks that have moved to A are going to have to pay that, you know, additional amount if they've received a rent reduction.
Merrill Ross: Whereas with our concessions, they'll pay 11 months at the higher rate and will be, you know, not surprised when renewal time comes. I told you the separate question since the reception was relatively strong to the asset sales and the dividend coverage remains deep. Is it possible that you'd go for another round of maybe five more assets, or are you done? We're always looking to concentrate and better manage the portfolio as a whole. Right now, we're looking at the question. We've only identified these 10, but depending on demographic changes, there may be more in the future, but there's no plans at this point.
John Kim: Thank you. Thank you, Merrill.
Jim Sebra: We'll take our next question from John Kim at BMO Capital Markets. Thank you. On the dispositions, can you provide some more commentary on how many of the ten assets have mortgage debt in place and what the average interest rate is? Yeah, so nine of the ten assets have mortgage debt in place, one asset is free and clear, and the average interest rate of the debt that we will pay off because we're going to have about $240 million of excess cash after the sales to pay off, you know, kind of line of credit, et cetera, is about 6.1%.
Jim Sebra: I was more questioning the average interest rate on those assets, and that played a major factor in identifying those assets for sale. Yeah, the average interest rate on the mortgage is nine mortgage themselves, or I don't have exact numbers, low five, like five point one percent. I can come back to this bit of. Okay, great. Thank you.
Wesley Golladay: And next, we'll move going to the side at Jeffries.
Scott Schaeffer: Hi, who are the potential buyers for the assets from your leveraging program, and would you expect multiple bitters? We've had multiple bitters, and we can't identify where the buyers are, but each property was marketed independent of the others as one off sales. And there were multiple bitters on each one.
Scott Schaeffer: Apologies if I missed this with the ten assets for sale. Are there other assets no longer subject to prepayment penalty that you would consider for sale? There are lots of other assets that are not subject to prepayment penalties, but that was really not the driving force. The driving force was that we wanted to exit certain markets, and we couldn't do it or we decided not to do it earlier because of the prepayment penalties. But the driving force is exiting the markets and then generating the capital to retire the debt.
Scott Schaeffer: With the sale, are you exiting all the markets you would like to exit? All of the markets, all of the exit, let me start over, all of the sales are in markets that we want to exit. We will continue to view the portfolio going forward for additional markets, but at this time we're exiting the ones we want to.
Scott Schaeffer: Thank you.
Scott Schaeffer: And that does conclude our question and answer session at this time I'll turn the conference back to Scott Schaeffer for closing remarks.
Scott Schaeffer: Thank you all for joining us today and we look forward to speaking with you next floor. And that does conclude today's conference call. Thank you for your participation.
Scott Schaeffer: You may now disconnect. [inaudible] and we look forward to speaking with you today and we look forward to speaking with you today and we look forward to speaking with you today and we look forward to speaking with you today and we look forward to speaking