Q4 2023 Apartment Income REIT Corp Earnings Call
Operator: Welcome and thank you for attending today's AIR Communities 3rd Quarter 2023 Earnings Conference Call. My name is Ludi, and I will be your moderator for today's call. All lines have been placed on mute to prevent any background noise.
Welcome and thank you for attending today's air communities third quarter 2023 earnings Conference call. My name is Katie and I will be your moderator for todays 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.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. Thank you. I would now like to pass the conference over to Lisa Cohn, President and General Counsel of AIR Communities. You may proceed. Thank you, and good day.
If you would like to ask a question. During this time simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press. The star followed by then a breakthrough. Thank you I would now like to pass the conference over to Lisa Cohn, President and General Counsel of Air conditioning. You May proceed.
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Lisa R. Cohn: Thank you and good day my name is Lisa Cohn, and I am President and General counsel of air communities during.
Lisa R. Cohn: My name is Lisa Cohn, and I am President and General Counsel of AIR Community. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to our 2024 expectations. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filing. Actual results may differ materially from what may be discussed today.
Lisa R. Cohn: During this conference call. The forward looking statements, we make are based on management's judgment, including projections related to our 2024 expectations.
Lisa R. Cohn: Statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings.
Lisa R. Cohn: Actual results may differ materially from what may be discussed today.
Lisa R. Cohn: We will also discuss certain non-GAAP financial measures, such as FFO and ASFO. These are defined and reconciled to the most comparable GAAP measures in the supplemental information as part of the full earnings release published on AIR's website. Comments today will come from Harry Considine, our CEO; Keith Kimmel, President of Property Operations; Josh Minix, 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 Q&A session, which will follow our prepared remarks. I will now turn the call over to Terry Considine. Terry?
Lisa R. Cohn: We will also discuss certain non-GAAP financial measures such as F. F O N E S F O b.
Lisa R. Cohn: These are defined and are reconciled to the most comparable GAAP measures in the supplemental information as part of the full earnings release published on <unk> website.
Lisa R. Cohn: Our comments today come from Terry Considine, our CEO, He's Campbell president of property operations John.
Speaker Change: <unk>, our chief investment Officer, and Paul Beldin, our CFO.
Speaker Change: Other members of management are also present.
Speaker Change: All of us will be available during the Q&A session, which will follow our prepared remarks, I will now turn the call Terry Considine Terry.
Terry Considine: Good morning, and thank you, Lisa, and all of you on this call. I read the first takes this morning and last night and set aside my prepared remarks to address what I understand to be on your mind. There's considerable consensus on AIR's good operation, but there's confusion about 7 cents of the increase in 2024 expected interest expense. Four cents was the result of the third quarter refinancing, fully disclosed in our third quarter report. It reflects the acceleration by a year or so of the difference between legacy interest rates and then current market. This will occur in every REIT balance sheet as debts are repriced. A penny reflects the impact of fourth-quarter share repurchases, funded by borrowing at a somewhat higher interest rate than in the third quarter, and was considered in her underwriting. $0.02 reflects a $50 million increase in expected 2024 borrowing. Fund a Creative Property Update
Terry Considine: Good morning, and thank you Lisa and all of you on this call.
Terry Considine: I've read the first takes this morning, and last night and set aside my prepared remarks to address what I understand to be on your minds.
Terry Considine: There is considerable consensus on air as good operations.
Terry Considine: There is confusion about seven cents of the increase in 2024 expected interest expense.
Terry Considine: Or what's the result of the third quarter refinancing fully disclosed in our third quarter report.
Terry Considine: It reflects the acceleration by a year or so of the difference between legacy interest rates and then current market rates.
Terry Considine: This will occur in every REIT balance sheets as debt re price.
Terry Considine: A penny reflects the impact of fourth quarter share repurchases funded by borrowing at a somewhat higher interest rate than in the third quarter.
Terry Considine:
Terry Considine: Whats considered in our underwriting.
Terry Considine: <unk> reflects the $50 million increase in expected 2020 for borrowings.
Terry Considine: Accretive property upgrades.
Terry Considine: We have underwritten past and future investments at substantial accretive spreads to our cost of capital. The Higher Interest Expense in 2024. Is the price paid for a higher quality portfolio?
Terry Considine: We have underwritten past and future investments at substantial accretive spread to our cost of capital.
Terry Considine: The higher interest expense in 2024 is the price paid for a higher quality portfolio with faster free cash flow growth in 'twenty, four but more importantly in 2025 and later.
Terry Considine: Faster Free Cash Flow Growth, in 24, but more importantly, in 20, 25, and later. There was some suggestion that leverage increases variability and lower leverage would reduce savings. Financial leverage does introduce exposure to changing interest rates. This was especially pronounced last year, when, for example, the 10-year fluctuated from 3.25% to 5% and back to 4%. But even the highest rates are well below the returns on air investment.
There was some suggestion that leverage increased variability and lower leverage would reduce failure.
Terry Considine: The natural leverage does introduce exposure to changing interest rates.
Terry Considine: This was especially pronounced last year than for example, the 10 year fluctuated from 3.25% to 5% and back to four.
Terry Considine: But even the highest rates are well below the returns on our investment.
Terry Considine: The bigger point is the use of the borrowed proceeds to Upgrade the Air Portfolio and Create Shareholder Value. We are focused on the long-term values of a better portfolio with higher earning power and look past the short-term noise of interest rate changes. Any discussion of leverage needs to consider risk. Air Leverage at 30% Loan-to-Value. Stabilized Properties. It's safe.
Terry Considine: The bigger point is the use of the borrowed proceeds to upgrade the airport folio and create shareholder value.
Terry Considine: We are focused on the long term values of a better portfolio with higher earning power.
Terry Considine: And look past the short term noise of interest rate changes.
Terry Considine: Any discussion of leverage needs to consider risk.
Terry Considine: Air leverage at 30% loan to value the stabilized properties.
Terry Considine: Comparison to others needs to consider the stability of stabilized properties as owned by air, with the risk of other business models, with development risk. The Implicit Financial Leverage of Unfunded Completion Costs and the risk of second mortgage lending, where the much higher leverage from senior debt is off balance sheet, but remains real. There were some concerns about pair trades with minor year one, FFO, and Free Cash Flow Impact. State the concern is to answer it. We're comfortable with the relatively minor year one noise if we see considerable long-term value creation. They're confident that 2023's paired trade will out-earn their cost of capital. There were some similar concerns about the complexity of the joint venture, complexities addressed by transparency, as for example shown in Schedule 2B, which provides a clear path from gap to economics. However, it fails to consider the benefits to shareholders which we saw in 2023 and anticipate in 2024, including the opportunity to upgrade our portfolio by the sale of partial interests in an otherwise The long-term benefits to portfolio construction are real and predictable. For example, the creation of additional service income lowers already low G&A.
Terry Considine: Comparison to others needs to consider the stability of stabilized properties as owned by here with.
Terry Considine: With the risk of other business models with development risk.
Terry Considine: Financial leverage of unfunded completion costs.
Terry Considine: And the risks of second mortgage lending, where the much higher leverage from senior debt is off balance sheet, but remains real.
Terry Considine: Yeah.
Terry Considine: There were some concerns about paired trades with minor year one <unk>.
Terry Considine: <unk> and free cash flow impacts.
Speaker Change: The state the concerns to answer it.
Speaker Change: We're comfortable with the relatively minor year one noise.
Speaker Change: We see considerable long term value creation.
Speaker Change: We are confident that 2020, three's paired trades will outrun their cost of capital.
Speaker Change: There were some similar concerns about the complexity of joint ventures.
Speaker Change: This complexity is addressed by transparency.
Speaker Change: As for example, shown in scheduled to be which provides a clear path path from GAAP to economics.
Speaker Change: It fails to consider the benefits to shareholders, which we saw in 2023 and anticipated 2024, including the opportunity to upgrade our portfolio by the sale of partial interests in an otherwise illiquid market.
Speaker Change: And the opportunity to reinvest the proceeds in other properties often at discounts to their construction costs with higher free cash flow growth rates.
Speaker Change: All while others are sidelined.
Speaker Change: The long term benefits to portfolio construction are real and predictable.
Speaker Change: The creation of additional service income lowers <unk> already low G&A.
Terry Considine: Corollary Benefit to Stock Investors might be the reassurance that the most sophisticated global real estate investor chose and chose to co-invest alongside AIR. There was some discussion of non-recurring... It's just that, non-recurring.
Speaker Change: The corollary benefit to stock investors might.
Speaker Change: It might be the reassurance that the most sophisticated global real estate investors.
Speaker Change: Shows and choose to co invest alongside here.
Speaker Change: There was some discussion of nonrecurring income.
Speaker Change: It's just that nonrecurring.
Terry Considine: That's cash and needs to be reported, was exaggerated in 2022 when we accelerated the termination of continuing agreements between AIR and AIMCO, and coined considerably in 2023. Air's focus on long-term free cash flow will naturally reduce non-recurring income, but when it's available, shareholders will be better off if we take it. Disclosure, as we do, that it's non-recurring, or anyone else.
Speaker Change: Cash and needs to be reported.
Speaker Change: It was exaggerated in 2022, when we accelerated the termination of continuing agreements between <unk> co.
Speaker Change: We declined considerably in 2023.
Speaker Change: <unk> focus on long term free cash flow will naturally reduce nonrecurring income, but when its available shareholders will be better off if we take it.
Speaker Change: Disclosing as we do that is nonrecurring.
Speaker Change: Finally.
Terry Considine: Forecasts for 2024 are just that, forecasts. Air has taken a conservative view to guidance for the 2024 market rental rate. We also provided a range of guidance that shows a possible and substantial upside. Time will tell where results land. I encourage you to keep score at the end of the year, not at its beginning. My bottom line.
Speaker Change: Forecast for 2024 are just that forecast.
Speaker Change: <unk> taken a conservative view to guidance of 2024 market rental rate growth.
Speaker Change: We also provided a range of guidance that shows a possible and substantial upside.
Speaker Change: Time will tell where results slant.
Speaker Change: I encourage you to keep score at the end of the year.
Speaker Change: At its beginning.
Speaker Change: My bottom line.
Terry Considine: Given the consensus on the performance of air operations and the continuing increases in the quality of the air portfolio and its growth rate, it seems likely that air shareholders at year end will own an enterprise whose value will have increased considerably. Given that our diversified portfolio is largely insulated from today's surge in new supply, I expect that our results will compare favorably to ours in 2023 and to peers in 2024. The expected value creation will be the work of a stable and cohesive team, and the advice and oversight of an engaged board of directors. I thank them both for their friendship and help. With that, I'd like to turn the call over to Keith Kimmel. Keith?
Speaker Change: Given the consensus on the performance of air operations and the continuing increases in the quality of the air portfolio and its growth rate it.
Speaker Change: It seems likely that are shareholders at year end, we will own an enterprise whose value will have increased considerably.
Speaker Change: Given that our diversified portfolio is largely insulated from today's surge of new supply.
Speaker Change: I expect that our results will compare favorably to ours in 2023 and to peers in 2024.
Speaker Change: The expected value creation will be the work of a stable and cohesive team.
Speaker Change: The advice and oversight of an engaged board of directors.
Speaker Change: I think both for their friendship and help.
Speaker Change: With that I'd like to turn the call to Keith Kimmel Keith.
Keith M. Kimmel: Thanks, Terry. I'm pleased to report we wrapped up a good 2023 with a solid fourth quarter. More importantly, AIRA is well positioned to begin 2024 in what we see as another good year ahead. Fourth quarter results met our expectations and were reflective of typical seasonality.
Keith M. Kimmel: Thanks Jerry.
Keith M. Kimmel: I'm pleased to report we wrapped up a good 2023 with a solid fourth quarter.
Keith M. Kimmel: More importantly era is well positioned to begin 2024, and what we see as another good year ahead.
Keith M. Kimmel: Fourth quarter results met our expectations and were reflective of typical seasonality.
Keith M. Kimmel: Eric continues to benefit from Josh's good work building a portfolio with broad diversification of markets and limited exposure to new supply. Revenue was up 6.2% with occupancy of 97.3%, up 200 basis points from the third quarter. Signed new leases were down 1.1% from the prior lease as we pushed to build occupancy and pricing power.
Keith M. Kimmel: Air continues to benefit from Josh is good work building a portfolio with broad diversification of markets and limited exposure to new supply.
Keith M. Kimmel: Revenue was up six 2% with occupancy of 97, 3% up 200 basis points from third quarter.
Keith M. Kimmel: Signing new leases were down one 1% from the prior lease as we push to build occupancy and pricing power.
Keith M. Kimmel: Renewals were up 4.7%, expenses increased 30 basis points, and net operating income increased 8.1%. The air edge continues to drive performance.
Keith M. Kimmel: Renewals were up four 7%.
Keith M. Kimmel: Expenses increased 30 basis points and net operating income increased eight 1%.
<unk> continues to drive outperformance.
Keith M. Kimmel: For the full year, controllable operating expenses increased only $20,000, in part due to AIR's best ever retention of 62.3%. AIR's operating margin also reached an all-time high. 76.7%, up 130 basis points from the fourth quarter of 2022. AirEdge also generates above-market performance in our acquisition portfolio. In the fourth quarter, our classes of 2021 and 2022 had net operating income growth of 300 basis points better than our same store portfolio and in particular benefited from the efficiencies of AIR's operating model and technology stack, with expenses down 4.5% from last year. Our class of 2021, now owned for just over two years, has undergone a remarkable transformation.
Keith M. Kimmel: With full year controllable operating expenses up only 20 basis points.
Keith M. Kimmel: In part due to air's best ever retention of 62, 3%.
Keith M. Kimmel: <unk> operating margin also reached an all time high of 76, 7% up 130 basis points from the fourth quarter of 2022.
Keith M. Kimmel: The area, which also generates above market performance in our acquisition portfolio.
Keith M. Kimmel: In the fourth quarter, our classes of 2021, and 2022 and net operating income growth 300 basis points better than our same store portfolio.
Keith M. Kimmel: And in particular benefited from the efficiencies of <unk> operating model and technology stack with expenses down four 5% from last year.
Keith M. Kimmel: Our class of 2021 now one for just over two years and has undergone a remarkable transformation.
Keith M. Kimmel: Compared to the fourth quarter of 2021, revenue is up 25%, and controllable expenses have decreased 21%.
Keith M. Kimmel: Compared to the fourth quarter of 2021.
Keith M. Kimmel: Revenue was up 25%.
Keith M. Kimmel: Controllable expenses have decreased 21%.
Keith M. Kimmel: Net operating income is up 34%, and margins at these communities have expanded over 500 basis points from 68.6% at acquisition to 73.8% today. Our class of 2022 acquisitions, now entering same store, are expected to have net operating income growth this year, approximately twice that of the balance of the portfolio. At Southgate, owned now for one year, the rent roll has increased 14% from day one.
Keith M. Kimmel: Net operating income is up 34%.
Keith M. Kimmel: Margins at these communities have expanded over 500 basis points from 68, 6% at acquisition to 73, 8% today.
Keith M. Kimmel: Our class of 2022 acquisitions now entering same store are expected to have net operating income growth. This year approximately twice that of the balance of the portfolio.
At Southgate owned now for one year the rent roll has increased 14% from day, one and we.
Keith M. Kimmel: We've had net apartment income growth of 23% from the seller's prior year. The combination of above-market revenue growth and predictable expense savings from the AIR platform creates a reliable engine for repeatable growth. January results have strengthened from the fourth quarter, and we are well positioned to start the year. Occupancy continues to be strong, at 97.7%.
Keith M. Kimmel: We've had net income growth of 23% from the sellers prior year.
Keith M. Kimmel: The combination of above market revenue growth and predictable expense savings from the air platform creates a reliable engine for repeatable growth.
January results have strengthened from the fourth quarter, and we are well positioned to start the year.
Keith M. Kimmel: Occupancy continues to be strong at 97, 7%.
Keith M. Kimmel: Our high occupancy brings pricing power with new leases up 1.8%, renewals up 5.6%, and signed blended lease-to-lease of 3.8%. Asking rents have increased 80 basis points year-to-date, and leasing volume has grown sequentially each week as we see the first green shoots of the spring leasing season. We anticipate the balance of 2024 will reflect a typical pre-pandemic, with Strong Demand, Supply Pressures but Only in Pockets, Weaning inflation, and a premium placed on sales and operational activities. Our anticipated 2024 revenue growth of 3.8% is based on 2.4% of earnings from our 2023 leasing activity and current price, plus 40 basis points of growth in occupancy. 10 Basis Points Improvement from Bad Debt, 50 Basis Points Contribution for Community Upgrades, and asking rates that grow another 1% between now and peak season, resulting in a blended lease to lease of three and a half percent in 2024. We anticipate positive growth across all markets. With South Florida, Boston, Washington, D.C., and San Diego expected to be our strongest markets, while the Bay Area continues to lag in revenue growth, though we remain optimistic about a strong recovery. My thanks to all Air Team members for a great year.
Keith M. Kimmel: Our high occupancy brings pricing power with new leases up one 8% renewals up five 6% and signed blended lease to lease of three 8%.
Keith M. Kimmel: Asking rents have increased 80 basis points year to date and leasing volume has grown sequentially. Each week as we see the first green shoots of the spring leasing season.
Keith M. Kimmel: We anticipate the balance of 2024 will reflect the typical pre pandemic year with strong demand supply pressures, but only in pockets.
Keith M. Kimmel: Waning inflation and a premium placed on sales and operational excellence.
Keith M. Kimmel: Our anticipated 2020 for revenue growth of three 8% is based on.
Keith M. Kimmel: Two 4% of earn in from our 2023 leasing activity and current pricing.
Keith M. Kimmel: 40 basis points of growth and occupancy.
Keith M. Kimmel: 10 basis points improvement from bad debt.
Keith M. Kimmel: A few basis points contribution from community upgrades.
Keith M. Kimmel: And asking rates to grow another 1% between now in peak season.
Keith M. Kimmel: Resulting in a blended lease to lease of three 5% in 2024.
Keith M. Kimmel: We anticipate positive growth across all markets with the South, Florida, Boston, Washington, D C and San Diego are expected to be our strongest markets. While the bay area continues to lag in revenue growth, though we remain optimistic for a strong recovery.
Speaker Change: My Thanks to all our team members for a great year.
Joshua Minix: Your dedication to serving our residents, innovative approach to our business, and consistent drive for results made 2023 one of AIR's best years. I look forward to the year ahead. I'll now turn the call over to Joshua Minix, our Chief Investment Officer. Josh
Speaker Change: Your dedication to serving our residents innovative approach to our business and consistent drive for results May 2023, one of Air's best years.
Speaker Change: I look forward to the year ahead.
Speaker Change: I'll now turn the call over to Joshua <unk>, Our Chief investment Officer, Josh. Thank you Keith in 2023, we grew our air etch portfolio with four acquisitions, one located in Miami Beach, Florida, One in Bethesda, Maryland, and two in Raleigh, Durham, North Carolina, where we added a third this year.
Joshua Minix: Thank you, Keith. In 2023, we grew our AirEdge portfolio with four acquisitions, one located in Miami Beach, Florida; one in Bethesda, Maryland; and two in Raleigh-Durham, North Carolina, where we added a third this year. The acquisitions were funded in a leverage-neutral manner by two new joint ventures, the 2023 sale of our last New York City properties, the issuance of operating partnership units, and the assumption of below-market fixed-rate debt. We did not have any transaction closings in the fourth quarter, yet we remain focused on improving the portfolio and expanding our AirEdge allocation. In 2023, the acquisition classes of 21 and 22 were 13% of our portfolio and accounted for 22% of our growth.
Joshua: The acquisitions were funded in a leverage neutral manner by two new joint ventures to 2023 sale ever last New York City properties, the issuance of operating partnership units and the assumption of below market fixed rate debt we.
Joshua: We did not have any transaction closings in the fourth quarter and we remain focused on improving the portfolio and expanding our edge allocation in.
Joshua: In 2023, the acquisition classes of 21, and 'twenty two were 13% of our portfolio and accounted for 22% of our growth.
Joshua Minix: The 23 and 24 acquisitions expand our AirEdge allocation to 20% of the portfolio, which bodes well for future portfolio NOI growth. In 2024, we continue our work to improve the portfolio quality and growth through transaction activity that allocates capital to AirEdge property. The class of 22 joins the same store for 24.
Joshua: The 'twenty three 'twenty four acquisitions expand our air edge allocation to 20% of the portfolio, which bodes well for future portfolio NOI growth.
In 2024, we continue our work to improve the portfolio quality and growth through transaction activity that allocates capital to <unk> properties.
Joshua: The class a 'twenty two joined at the same store for 24, we expect to execute transactions in 'twenty four it to replace and expand that edge allocation, we're off to a great start and closed Sunnybrook and Raleigh, North Carolina this quarter to.
Paul L. Beldin: We expect to execute transactions in 24 to replace and expand fat error edge allocation. We're off to a great start and will close Sunnybrook in Raleigh, North Carolina this quarter. To fund these acquisitions, we expect to sell property either outright or in JVs to maintain a leverage-neutral position. Our investment philosophy remains the same. We focus on generating a positive spread on our cost of capital and on improving portfolio quality, leveraging our great advantage created by Keith and his team to apply the AirEdge to generate outsized returns as newly acquired assets benefit from his expertise. With that, I'll turn the call over to Paul Beldin, our Chief Financial Officer. Paul.
Joshua: To fund these acquisitions, we expect to sell property, either outright or jv's to maintain a leverage neutral position or.
Joshua: Our investment philosophy remains the same we focus on generating a positive spread to our cost of capital and on improving portfolio quality leveraging our great advantage created by Keith and his team to apply the air edge to generate outsized returns as newly acquired assets benefit from his expertise.
Joshua: With that I'll turn the call over to Paul Beldin, Our Chief Financial Officer. Thank you Josh today, I will discuss are strong and flexible balance sheet.
Paul L. Beldin: Thank you, Josh. Today I will discuss AIR's strong and flexible balance sheet, as well as our full year 2023 results and our expectations for 2024. Please conclude with a brief comment on our dividend. The underlying balance sheet is well positioned, is investment grade, long in duration, fixed rate, two-thirds non-recourse, and about 30% loan-to-value. Low leverage, when you consider our business, is focused on stabilized properties and has no exposure to new construction or mezzanine loans or short-term rental.
Paul L. Beldin: Full year 2023 results our expectations for 2024.
Paul L. Beldin: Conclude with a brief comment on our dividend.
Paul L. Beldin: And your balance sheet is well positioned as investment grade long in duration fixed rate two thirds nonrecourse and about 30% loan to value below leverage when you consider our business is focused on stabilized properties and has no exposure to new construction, our mezzanine loans are short term.
Paul L. Beldin: Rentals.
Paul L. Beldin: We have abundant liquidity with just under $2 billion available, sufficient to refinance substantially all maturing debt through 2027. Four-quarter leveraged EBITDA was a tenth of a turn above our expectations, a result of an opportunistic fourth quarter share repurchase. I was comfortable ending the year about $45 million above our leverage expectation due to the strength of the balance sheet. The anticipated 2024 EBITDA growth, which, absent changes in leverage, is anticipated to be sufficient to reduce leverage by one-half a turn and the accretive use of proceeds. The share repurchases are part of a balanced capital allocation program.
Paul L. Beldin: We have abundant liquidity with just under 2 billion available sufficient to refinance substantially all maturing debt through 2027.
Paul L. Beldin: Fourth quarter leveraged EBITDA was a 10th of a turn above our expectations. A result of opportunistic fourth quarter share repurchases.
Paul L. Beldin: Comfortable and in a year or about $45 million above our leverage expectation due to the strength of the balance sheet anticipated 2020 for EBITDA growth that absent changes in leverage is anticipated to be sufficient to reduce leverage by one half a turn and the accretive use of proceeds.
Paul L. Beldin: The share repurchases are part of our balanced capital allocation program.
Paul L. Beldin: For the past two years, we have used approximately 25% of our available capital to repurchase 8% of the company at a discount to NAV. To the extent air shares continue to trade at a significant discount to NAV, we anticipate that we will continue to allocate a portion of any proceeds raised to repurchase additional shares in a leverage-neutral manner. To support us in this activity, our Board of Directors granted a new $500 million authorization. As we look to grow the company, we have excellent access to dry powder to fund future acquisitions through our evergreen joint ventures with two large global investors. Learning to Foil Your Results
Paul L. Beldin: Over the past two years, we have used approximately 25% of our available capital to repurchase 8% of the company at a discount to NAV.
Paul L. Beldin: To the extent air shares continue to trade at a significant discount to NAV. We anticipate that we will continue to allocate a portion of any proceeds raised to repurchase additional shares in a leverage neutral manner.
To support us in this activity our board of directors granted a new $500 million authorization.
Paul L. Beldin: As we look to grow the company, we have excellent access to dry powder to fund future acquisitions through our evergreen joint ventures with two large global investors.
Paul L. Beldin: Turning to full year results pro forma <unk> equaled the midpoint of guidance at $2 41 per share run rate <unk>, which excludes costs or income that are not anticipated to recur in future periods was $2 36 per share equal to the midpoint of our expectations and up sell.
Paul L. Beldin: GoFORMA FFO equaled the midpoint of guidance at $2.41 per share. Run rate FFO, which excludes costs or income that are not anticipated to recur in future periods, was $2.36 per share, equal to the midpoint of our expectations and up 7.8% from 2022 and up 20% cumulatively since 2021. Run rate AFFO was $2.09 per share, up 7.7% from 2022 and up 23% cumulatively since 2021. Looking forward, we anticipate that free cash flow and AFFO will grow at a faster rate than NOI and run rate FFO, respectively. We look forward to 2024.
Paul L. Beldin: <unk>, 8% from 2022 and up 20% cumulatively since 2021.
Paul L. Beldin: Run rate <unk> was $2 <unk> per share of seven 7% from 2022 and up 23% cumulatively since 2021.
Paul L. Beldin: Looking forward, we anticipate that free cash flow and <unk> will grow at a faster rate than NOI and run rate <unk>, respectively.
As we look forward to 2024.
Paul L. Beldin: We expect 2024 run rate AFFO per share, at the midpoint, will be $2.12, up 1.4% from 2023. We expect run rate FFO to be $2.38, up 80 basis points from 23. We expect this growth at the midpoint to be the result of $0.11 per share of incremental contribution from the same store portfolio earned by NOI growth of 3.8%, the result of 3.8% revenue growth previously discussed by Keith, and fence growth of 3.8% comprised of controllable operating expense growth of approximately 120 basis points, elevated above EIR's 13-year trend of negative growth by about half of expected CPI. Real Estate taxes are expected to increase between 5 and 8 percent. 2024 is a particularly difficult year to forecast, with two contrasting forces at play. Real estate values declined by approximately 30% during the past two years, as a result of rising interest rates.
Paul L. Beldin: We expect 2020 for run rate <unk> per share at the midpoint will be $2 12.
Paul L. Beldin: Up one 4% from 2023.
Paul L. Beldin: We expect run rate <unk> with $2 38 up 80 basis points from 23.
Paul L. Beldin: We expect this growth at the midpoint to be the result of <unk>.
Paul L. Beldin: <unk> <unk> per share of incremental contribution from our same store portfolio driven by NOI growth of three 8%.
Paul L. Beldin: The result of three 8% revenue growth previously discussed by Keith.
Paul L. Beldin: Expense growth of three 8% comprised of controllable operating expense growth of approximately 120 basis points elevated above <unk> 13 year trend of negative growth.
Paul L. Beldin: That half of the expected CPI.
Paul L. Beldin: Real estate taxes are expected to increase between five and 8%.
Paul L. Beldin: 2024 is a particularly difficult to forecast so two contrasting forces at play.
Real estate values declined by approximately 30% during the past two years, a result of rising interest rates.
Paul L. Beldin: While this provides a positive argument when challenging assessments, it is mitigated by continued healthy NOI growth. While the exact growth rate is subject to some uncertainty, I do know for certain that we'll be very active in appealing all assessments. Insurance expenses are also difficult to predict.
Paul L. Beldin: While this provides a positive argument when challenging assessments. It is mitigated by continued healthy NOI growth.
Paul L. Beldin: While the exact growth rate is subject to some uncertainty I do know for certain that will be very active in appealing all assessments.
Paul L. Beldin: Insurance expenses are also difficult to predict.
Paul L. Beldin: Despite minimal losses being tendered to our carriers during the past decade, our property and casualty insurance costs for like properties increased by approximately 30% in 2023. In 2024, I anticipate a significantly lower rate of growth, the amount of which I'll be able to address more specifically after our March 1st renewal, outside of our same store portfolio. We anticipate 2023 pair trades to result in a penny of NOI dilution but be a penny accretive to free cash flow. Please note, this calculation compares the NOI loss from properties sold in 2023 to the properties acquired with their proceeds, including the January acquisition of Sunnybrook. It also includes the benefit from share repurchase. Bear trades are anticipated to be accretive to NOI later this year. We also anticipate interest expense to increase by 7 cents or approximately $11 million year over year.
Paul L. Beldin: Minimal losses being tendered to our carriers during the past decade, our property and casualty insurance costs for like properties increased by approximately 30% in 2023.
Paul L. Beldin: 2024, I anticipate a significantly lower rate of growth the amount of which I'll be able to address more specifically after a march versus renewal.
Paul L. Beldin: Outside of our same store portfolio.
Paul L. Beldin: We anticipate 2023 pair trades to result in a penny of NOI dilution could be a penny accretive to free cash flow.
Paul L. Beldin: Please note. This calculation compares to the NOI loss from properties sold in 2023, so the properties acquired with their proceeds including the January acquisition of Sunnybrook.
Paul L. Beldin: It also includes the benefit from share repurchases.
<unk> are anticipated to be accretive to NOI later this year.
Paul L. Beldin: Yeah.
Paul L. Beldin: We also anticipate interest expense to increase by seven SaaS are approximately $11 million year over year.
Paul L. Beldin: I understand that the increase in interest expense was a little more confusing than I anticipated, so let me spend a moment diving into the details. 4 cents of the increase is due to higher weighted average interest rates. In 2023, our weighted average interest costs increased from approximately 4.1% at the beginning of the year to 4.3% at the end of the year. As a result, and all else held equal, the effective interest rates are expected to be 21 basis points higher in 2024. The increase was a result of our third quarter refinancing activity, which was Extended Duration, so it marked our debt to current rates of market inflation. Accelerating Interest Expense that would have otherwise occurred in future periods. However, economically, the acceleration neither harmed nor benefited AIR as the swap acceleration income, which is excluded from run rate FFO, offsets the higher interest cost.
Speaker Change: I understand that the increase in interest expense was a little more confusing than I anticipated. So let me spend a moment diving into the details.
Speaker Change: Or sense of the increase is due to higher weighted average interest rates in 2023, our weighted average interest cost increased from approximately four 1% at the beginning of the year.
Speaker Change: Four 3% at the end of the year.
Speaker Change: As a result, and all else held equal the effective interest rates are expected to be 21 basis points higher flying 24.
Speaker Change: The increase was a result of our third quarter refinancing activity, which extended duration marked our debt to current rates of market interest accelerating interest expense that would have otherwise occurred in future periods.
Speaker Change: Economically the acceleration either harm nor benefited error as the swap acceleration income, which is excluded from run rate Alfonso offsets the higher interest cost.
Paul L. Beldin: In order to appropriately reflect 2023 interest expense, we bifurcated the swap acceleration income between the amounts that were attributable to 2023, which we include as an offset to 23 interest expense, and allocated the remainder of the swap income, which was otherwise to be earned in 2024 and 2025, to other income and therefore excluded from run rate FFO. The result was to lower fourth quarter interest expense by $2.3 million.
Speaker Change: In order to appropriately reflect 2023 interest expense.
Speaker Change: Bifurcated the swap acceleration income during the mass that were attributable 2023, which we include as an offset to 'twenty three interest expense.
Speaker Change: And allocated the remainder of the swap income, which was otherwise to be earned in 2024 and 2025 to other income and therefore excluded from run rate <unk>.
Speaker Change: The result was the lower fourth quarter interest expense by $2 3 million.
Paul L. Beldin: For those of you that are annualizing our fourth-quarter interest expense as a proxy for 2024 interest expense, you need to increase our reported $33 million by $2.3 million. This results in an annualized expense of $141.2 million.
Speaker Change: For those of you that are Annualizing, our fourth quarter interest expense as a proxy for 2020 for interest expense you would need to increase our reported $33 million by the $2 3 million.
Speaker Change: This resulted in an annualized expense of $141 2 million.
Paul L. Beldin: There are then two other adjustments necessary to fourth-quarter interest expense to arrive at our $147 million guide for 2021. First, our average effective interest rate increased by five basis points during the fourth quarter due to changes in the mix of our debt driven by increased levels of borrowing. Applying this increase to our 12-31 debt balance increases 2024 interest expense by an additional $1.6 million, or one cent. Second, we anticipate $50 million of incremental borrowings to fund property upgrades and other improvements. R.O.I.
Speaker Change: They're then two other adjustments necessary to fourth quarter interest expense.
Speaker Change: Arrive at our $147 million guide for 'twenty four.
Speaker Change: First our average effective interest rate increased by four five basis points during the fourth quarter due to changes in the mix of our debt driven by increased levels of borrowings.
This increase to our 12 31 debt balance decreases 'twenty 'twenty four interest expense by additional $1 6 million or <unk>.
Speaker Change: Second we anticipate $50 million of incremental borrowings to fund property upgrades and other improvements whose ROI is included in our guidance.
Paul L. Beldin: is included in our guidance. The impact of interest expense, after consideration of any capitalized interest, is approximately $3 million or $2.6 million. A few other quick notes on guidance. First, run rate FFO at the midpoint of $2.38 per share. $0.02 above the 2023 run rate FFO, but $0.03 per share below our 2023 pro forma results, including five cents of net earnings that are anticipated to be non-recurring. Second, third-party service income is anticipated to be about $0.11 per share, six cents of which is anticipated to be earned through the execution of our currently in place property and asset management agreement.
Speaker Change: Impact to interest expense after consideration of any capitalized interest is approximately $3 million or <unk>.
Speaker Change: Two other quick notes on guidance first run rate <unk> at the midpoint of $2 38 per share <unk> <unk> above the 2023 run rate of <unk> <unk> per share below our 2023 pro forma results, which included <unk> <unk> of net earnings that are anticipated to be nonrecurring.
Speaker Change: <unk>.
Speaker Change: Second third party service income is anticipated to be about <unk> 11 per share six of which is anticipated to be earned through the execution of our currently in place property and asset management agreements.
The remaining <unk> will.
Paul L. Beldin: The remaining $0.05... will be earned from short-duration service income, an amount that is similar to that achieved in 2022 and 2026. Third, as our guidance indicates, we anticipate being active in the transaction market through paired trades and in partnership with our joint venture partners. However, given our certainty surrounding the cost of capital, the volume of transactions, operating plans, and timing, we are not providing additional guidance on the impact of these activities on 2024 results. Quarterly leveraged EBITDA will likely fluctuate during the year based on the timing of transactions and changes in EBITDA that is anticipated to end 2024 at approximately 6 to 1. Finally, the Air Board of Directors declared a quarterly cash dividend of $0.45 per share.
Speaker Change: It will be earned from short duration service income an amount that is similar to that achieved in 2022 and 2023.
Speaker Change: Third as our guidance indicates we anticipate being active in the transaction market through paired trades and in partnership with our joint venture partners.
Speaker Change: However, given the uncertainties surrounding the cost of capital volume of transactions operating plans and timing, we're not providing additional guidance on the impact of these activities to 2024 results.
Speaker Change: Fourth quarter.
Speaker Change: Quarterly leveraged EBITDA will likely fluctuate during the year based on the timing of transactions and changes in EBITDA. It is anticipated in 2024 at approximately six to one.
Speaker Change: Finally, the airport of directors declared a quarterly cash dividend <unk> 45 per share on an annualized basis. The dividend reflects a yield of five 7% based on our current share price.
Speaker Change: That we will now open the call for questions. Please limit your questions to two per time in the queue, operator, I'll turn it over to you for the first question.
Operator: On an annualized basis, the dividend reflects a yield of 5.7% based on the current share price. With that, we will now open the call for questions. Please limit your questions to two at a time in the queue.
Operator: Thank you Paul and at this time I would like to remind everyone in order to ask a question. Please press the star followed by the number one on your telephone keypad will foster Joseph Goldman to compile the Q&A roster.
Operator: Operator, I'll turn it over to you for the first question. Thank you, Paul. And at this time, I would like to remind everyone that in order to ask a question, please press the star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Eric Wolfe from Citi. Your line is open.
Operator: And your first question comes from the line of Eric Wolfe from Citi. Your line is open.
Eric Wolfe: Hey, thanks for taking the questions.
Eric Wolfe: Mentioned that the <unk> increase was due to your three Q refinancing activity.
Eric Wolfe: I was just wondering if you could give some more detail on exactly what that was what were the amounts where the rates go to and from.
Eric Wolfe: And just kind of like how you get to that sort of 6 million extra increase interest expense.
Eric Wolfe: Hey, thanks for taking the questions. You mentioned that the 4 cent increase was due to your 3Q refinancing activity. I was just wondering if you could give sort of more detail on exactly what that was. What were the amounts?
Eric Wolfe: Back into the <unk>.
Eric Wolfe: Thanks.
Eric Wolfe: Yeah, Eric This is Paul and I are.
Paul L. Beldin: There'll be two ways I direct you to to look at that as a first and probably the quickest and easiest way would be to compare the weighted average interest rate as disclosed in schedule five for the first and second quarters. So our weighted average interest rate in the fourth quarter. If you do that Youll see an increase of about 20 basis points. If you apply that 20 basis points to.
Paul L. Beldin: Where did the rates go to and from? And you know, just kind of like how you get to that sort of six million extra increase in interest expense. I'm just back into that from four cents.
Paul L. Beldin: Thanks. Yeah, Eric, this is Paul, and there would be two ways I'd direct you to look at it. The first and probably the quickest and easiest way would be to compare the weighted average interest rate as disclosed in Schedule 5 for the first and second quarters to our weighted average interest rate in the fourth quarter.
Paul L. Beldin: Our debt balance at year end, you get about six $5 million to $7 million and Thats the <unk>.
Speaker Change: Sure sure I guess, what I'm, asking but what what drove that that increase maybe like what drove the 20 basis. It would be great. It sounds like something you did third quarter. So what was it in the third quarter that drove that 20 basis point increase.
Paul L. Beldin: If you do that, you'll see an increase of about 20 basis points. If you apply that 20 basis points to our debt balance at year end, you get about $6.5 to $7 million. That's four cents.
Speaker Change: Yes, there were two two items, we refinanced to extend duration.
Speaker Change: <unk> $325 million of term loans that were otherwise coming due in 2024 and 2025 before consideration of extension options.
Paul L. Beldin: Sure, sure. But what drove that increase, meaning what drove the 20 basis point increase? It sounds like something you did in the third quarter. So what was it in the third quarter that drove that 20 basis point increase? Yeah, there were two items.
Speaker Change: And refinanced that that 325 with a five year and seven year debt that had an average interest rate of about 555, 4% the effective rate on that debt previously was about 4% four one.
Speaker Change: The second thing we did in one of our joint venture transactions, our joint venture partner assumed debt and so that reduced that was at a lower than market rate of interest, which we are paid for the transaction, but if you're just focused solely on the impact to average interest rates. The result of removing that lower cost that inflated the balance of the portfolio.
Paul L. Beldin: We refinanced to extend the duration of $325 million of term loans that were otherwise coming due in 2024 and 2025 before consideration of extension options and refinanced that $325 with five-year and seven-year debt that had an average interest rate of about 5.5, 5.4%. The effective rate on that debt was previously about 4%, 4.1%. The second thing we did in one of our joint venture transactions, our joint venture partner assumed debt, and so that was at a lower than market rate of interest, which we were paid for in the transaction, but if you just focus solely on the impact on average interest rates, the result of removing that lower-cost debt inflated the balance of the portfolio. And then just last question. Your 1-2 guidance bridge didn't show sort of any impact from the higher interest expense.
Speaker Change: Okay.
Speaker Change: And then just last question.
Speaker Change: Your <unk> guidance grids didn't show sort of any impact from the higher interest expense.
Speaker Change: Now is this something that ends up kicking in later in the year second quarter through fourth quarter, just trying to understand because it seems like there is I understand the offsetting adjustment you made in 2023, but I would think that would just go to a more normal level in the first quarter of 2024.
Eric That's a good question and the reason you don't see it pop in our bridge walking <unk> results to the first quarter results is that most of you probably noted in the supplemental schedule five we talked about fixing our interest rates on our revolver and also adjusting our hedges to better match the maturities of our term loans.
Speaker Change: And then after that was to give us a little bit of a pop of about a penny penny and a half or so in the first quarter.
Paul L. Beldin: Now, is this something that ends up kicking in later in the year, second quarter through fourth quarter? Just trying to understand, because it seems like, you know, there's, I understand the offsetting adjustment you made in 2023, but I would think that it would just go to a more normal level in the first quarter of 2024. Eric, that's a good question and the reason you don't see a pop in our bridge walking 4Q results to the first quarter results is that you probably noted in Supplemental Schedule 5 that we talked about fixing our interest rates on our revolver and also adjusting our hedges to better match the maturities of our term loads, and the net effect of that was to give us a little bit of a pop of about a penny, penny and a Okay, thank you. And your next question comes from the line of John Kim from BMO Capital Markets. Your line is open.
Speaker Change: So that's why we're we're consistent on a <unk> versus <unk> basis, and you'll see the increase then accused Q2 and beyond.
Speaker Change: Okay. Thank you.
Speaker Change: And your next question comes from the line of John Kim from BMO Capital markets. Your line is open.
John P. Kim: Thank you.
John P. Kim: One of the.
John P. Kim: Takeaways from last quarter was.
John P. Kim: The recent acquisitions that <unk> had one sits on your platform it would be growing significantly faster than domestic same store pool. So I wanted to focus on your class of 2022.
John P. Kim: Portfolio as well as other real estate.
John P. Kim: The class of 2022.
John P. Kim: Growth slowed considerably since the last quarter I realize that some of it's only four assets, there's probably some volatility in that but.
Speaker Change: Can you just comment on that slowdown and what you're expecting for the remainder of the year.
Speaker Change: John I'll start and see if Keith wants to add anything specifically on class a 'twenty two what youre seeing is the impact of a tax revaluation that was that occurred in the fourth quarter of 2023, and so that that incremental tax expenses, what's driving the slowdown in NOI growth.
John P. Kim: One of the takeaways from last quarter was the recent acquisitions that you've had. Once they're on your platform, they will be growing significantly faster than the rest of your same store pool. So I wanted to focus on your Class of 2022 portfolio, as well as other real estate. The Class of 2022, the growth slowed considerably since the last quarter. I realized that it's only four assets.
Anything you would add on the revenue side I think the other thing that I would just point to John is that.
Keith M. Kimmel: We basically we can see that the NOI growth of the class a 'twenty two is going to be about double that what we're seeing in our same store portfolio as we look forward. So.
Keith M. Kimmel: It's a combination of things in the early days of that transition we are.
Keith M. Kimmel: Repopulating, our residents and some some degree repositioning how we staff to communities and a whole series of different things that we go through and there can be some volatility in those in those early parts of the year.
Paul L. Beldin: There's probably some volatility in that, but can you just comment on that slowdown and what you're expecting for the remainder? John, I'll start and see if Keith wants to add anything. Specifically, on class of 22, what you're seeing is the impact of a tax revaluation that occurred in the fourth quarter of 2023. And so that incremental tax expense is what's driving the slowdown in NOI growth. I think the other thing that I would just point out, John, is that we basically can see that the NOI growth of the class of 22 is going to be about double that of what we're seeing in our same store portfolio as we look forward. So, it's a combination of things in the early days of, you know, that transition.
Keith M. Kimmel: Or for about a year or so and then and then we start getting into the stabilization of the RH taking taken hold.
Keith M. Kimmel: And can you remind us what's in the other real estate bucket at those four assets and if you see double digit growth from this group.
Keith M. Kimmel: John.
John P. Kim: For assets that are included in other real estate or the four properties that.
John P. Kim: We held a leasehold interest in at the separation from remain co and aimed co completed their redevelopment and upon completion of that redevelopment work, we bought out the value of the improvements and so that occurred in the summer of 2022, and so that those assets will be included in our same store pool in 2024 and as far as the expected growth rate.
John P. Kim: <unk> to the.
John P. Kim: Same store population as a whole we would anticipate growth rate in that portfolio to be fairly similar to the St legacy same store population because Keith and his great team are involved with the lease up and have been an operating those properties from day one.
Paul L. Beldin: We are repopulating our residents to some degree, repositioning how we staff the communities, and a whole series of different things that we go through. And there could be some volatility in those early parts of the year, or for about a year or so, and then we start getting into the stabilization of the air edge taking hold. And can you remind us what's in the other real estate bucket at those four assets? And if you see double digit growth from this group? John, the four assets that are included in other real estate are the four properties that we held a leasehold interest in at the separation from AIMCO, and AIMCO completed their redevelopment, and upon completion of that redevelopment work, we bought out the value of the improvements, and so that occurred in the summer of 2022, and so those assets will be included in our same-store pool in 2024. As far as the expected growth rate relative to the Okay, great.
Speaker Change: Okay. Great. My second question is on is with Terry on your opening remarks, you mentioned that Youre confident this year end.
Terry Considine: We will be performing favorably versus your peers.
Speaker Change: And I just wanted to clarify how you performed how are you.
Speaker Change: How do you define that.
Speaker Change: Well.
Speaker Change: And thank you very much.
Speaker Change: That is a very good question Jonathan.
Speaker Change: I wouldn't address it in my prepared remarks, which is to look at the big picture that the most important things that are happening at air are the increased quality of the portfolio higher average rents faster.
Speaker Change: Faster growth rates higher margins.
Speaker Change: Higher higher credit customers.
Speaker Change: Greater retention.
Speaker Change:
Speaker Change: Bigger margins and so forth.
Speaker Change: And off balance sheet asset of course is a stable and productive workforce.
Speaker Change: So those are those are things that when we look back at the end of 2024 will show up in free cash flow growth and you will show up in 2025.
Speaker Change: <unk> at a greater degree.
Speaker Change: In 2022.
Speaker Change: We had considerable nonrecurring income because of the acceleration of the divorce from from AMCOL, but we called it out so the market would fit and focus on the recurring number which continues to grow comfortably I think everything we see is that Russ continues.
Terry Considine: My second question is for Terry. In your opening remarks, you mentioned that you're confident this year AIR will be performing favorably versus its peers, and I just wanted to clarify how you define that. Well, thank you very much. That is a very good question, John.
Speaker Change: I want to emphasize one thing that again gets.
Speaker Change: It can be lost.
Speaker Change: In 2023, the real estate markets were largely paralyzed by at with low volume and transactions because of the standoff in pricing between providers of capital and users of capital.
Terry Considine: It's what I would have addressed in my prepared remarks, which is to look at the big picture and see that the most important things that are happening at AIR are the increased quality of the portfolio, higher average rents, faster growth rates, higher margins, Hired Credit Customers, and greater retention. Big Remark, so forth. And the off-balance sheet asset, of course, is a stable and productive work, so those are things that when we look back at the end of 2024, will show up in free cash flow growth, and they'll show up in 2025 FFO and AFFO to a greater degree. Well, in 2022,
Speaker Change: We were very successful in using the timing cadence of our joint venture partners.
Speaker Change: Participate to buy properties.
Speaker Change: Suitable discounts that are going to reward us in the future.
Speaker Change: We were able to do that also in a way that that increased our scale or our assets under management. So our net effective G&A, which is already low gets lower still.
Speaker Change: I just I just think when we focus on the use of proceeds and not just the cost of the proceeds we're going to be satisfied with the outcome.
Terry Considine: We had considerable non-recurring income because of the acceleration of the divorce from AIMCO, but we called it out so the market would see it and focus on the recurring number, which continues to grow comfortably. I think everything we see is that growth continues. I want to emphasize one thing that again gets lost. In 2023, the real estate markets were largely paralyzed, with a low volume of transactions, because of the standoff in pricing between providers of capital and users of capital.
Speaker Change: I think you mentioned that that was part of that just wanted to clarify.
Speaker Change: I think <unk> and I of course would inject people also the ASO.
Speaker Change: I think it's important.
Speaker Change: Consider both and net asset values, which discount growth rates I think I think that tree Umbrette wood will measure the value of the enterprise, which I predict will be significantly higher than it is today and we will have a rate of growth in 'twenty four that will compare very.
Terry Considine: We were very successful, and using the kindness of our joint venture partners to participate, to buy properties at considerable discounts that are going to reward us in the future. And we were able to do that also in a way that increased our... scale, or assets under management, so our net effective GNA, which is already low, gets lower still. So, I just think when we focus on the use of proceeds and not just the cost of proceeds, we're going to be satisfied with the outcome. I think you mentioned FBO as part of that, just wanted to point that out. I think FFO, and I, of course, would also direct people to AFFO, I think it's important to consider both and net asset values, which discount growth rates.
Speaker Change: <unk> to our peers, who who are wonderful companies, but face different challenges and different exposures to new supply at different exposures to.
Speaker Change: Foreclosures and their mezzanine loan portfolios different exposures do.
Speaker Change: Development and other such activities and I think net net we're going to do fine.
Speaker Change: Great. Thank you.
Speaker Change: And your next question comes from the line of Rob Stevenson from Janney. Your line is open.
Robert Chapman Stevenson: Good afternoon, guys I guess, just piggybacking off of your comments there Terry in terms of difference between you and peers. Keith can you talk about what your systems are telling you in terms of new lease rent growth goes from here you were negative for a very short period of time and by a much smaller magnitude that almost all of your peers and now it's Paul.
Terry Considine: I think that triumvirate will measure the value of the enterprise, which I predict will be significantly higher than it is today and will have a rate of growth in 24 that will compare very favorably to our peers, who are wonderful companies but face different challenges, different exposures to new supply, different exposures to foreclosures in their mezzanine loan portfolios, different exposures to development and other such activities, and I think net-net we're going to Great, thank you. And your next question comes from the line of Rob Stevenson from Jeanne. Your line is open. Good afternoon, guys. I guess I'm just piggybacking off of your comments there, Terry, in terms of the difference between you and your peers. Keith, can you talk about what your systems are telling you in terms of new lease rent growth from here? You were negative for a very short period of time, and by a much smaller magnitude than almost all of your peers.
Keith M. Kimmel: Positive on signed leases in January are you going to be able to stay positive on new lease rates in first quarter and does it turn back negative at any point in 'twenty four given what youre seeing today.
Speaker Change: Rob tanks Eaton I'll look at where we're.
Speaker Change: We're feeling very optimistic as we go into the year as you pointed out here and it's not just optimism the facts are our occupancy today at 97 seven is.
Robert Chapman Stevenson: Setting us up for a strong acceleration into the spring season, the one eight.
Robert Chapman Stevenson: Look in implying in our three 5% blend.
Blend.
Robert Chapman Stevenson: Would get us two or three 8% our revenue guidance.
Robert Chapman Stevenson: Puts a 2% new lease and a 5% renewal. So that's essentially what we have in we have a 1% market growth from today into call. It July ish, when we get into peak season, and we're already starting to realize that today. So.
What will happen next I will say these will be more importantly, known probably enabling.
Robert Chapman Stevenson: But we're already seeing volumes that are increasing coming out of the holidays and the winter months.
Robert Chapman Stevenson: And what we're seeing is more of a pre pandemic kind of acceleration when we look back.
Keith M. Kimmel: And now it's positive on signed leases in January. Are you going to be able to stay positive on new lease rates in the first quarter, and does it turn back negative at any point in 24, given what you're seeing today? Rob, thanks.
Robert Chapman Stevenson: Let's call it between 2014 and 2019 prior to the pandemic. This is the type of acceleration, we would've seen and so more work to be done, but we're feeling good about where we're at.
Speaker Change: Okay. That's helpful and then.
Keith M. Kimmel: You know, look, we're feeling very optimistic as we go into the year, as you point out here. And it's not just optimism. The facts are, our occupancy today at 97.7 is setting us up for a strong acceleration into spring season. The 1.8, you know, look, implied in our 3.5% blend that would get us to our 3.8 revenue guidance, it puts a 2% new lease and a 5% renewal. So that's essentially what we have. We have 1% market growth from today into, call it July-ish, you know, when we get into peak season. And we're already starting to realize that today.
Speaker Change: Has your southern California portfolio had any material damage from the recent extreme weather and all of your California assets, specifically insured for Florida or is that something that if it incurred would be self insured.
Speaker Change: Rob I'll I'll handle the first part of the question and turn it over to Patty Schrader, who runs our insurance program to dive into some of the particular details.
Patty Schrader: As far as any material damage.
Patty Schrader: No nothing material, we have seen what you would expect leaky roofs in spots.
Patty Schrader: Water intrusion, but the cost of which are less than half a million dollars based upon what we know to date.
And yes, we are insured for flat and all other perils in these properties around the country.
Speaker Change: That's great. Thank you I appreciate the time and have a great weekend.
Speaker Change: Thank you and your next question comes from the line of Handel St. Charles from Mizuho. Your line is open.
Speaker Change: Hey, there.
So I think you mentioned earlier that you.
Keith M. Kimmel: So what will happen next, I will say, will be more importantly known probably in April. But we're already seeing volumes that are increasing coming out of the holidays and the winter months. And what we're seeing is more of a pre-pandemic kind of acceleration. When we look back, let's call it between 2014 and 2019, prior to the pandemic, this is the type of acceleration we would have seen. And so, you know, more work to be done, but we're feeling good about where we are. Okay, that's helpful. And then, Paul, has your Southern California portfolio had any material damage from the recent extreme weather? And are your California assets specifically insured for flood, or is that something that, if it incurred, would be self-insured? Rob, I'll handle the first part of the question and turn it over to Patty Schweder, who runs our insurance program, to dive into some of the particular details. As far as any material damage, no, nothing material.
Speaker Change: I don't have plans at the current moment.
Speaker Change: Don't do transact.
Speaker Change: But that you're certainly in a position to be able to so I'm curious what you're seeing out there today.
Speaker Change: Terms of Catholic are ours, and may be where they need to see for you to get more active and where potentially you know could we see you get more active coastal sunbelt any any particular markets you'd like to highlight thanks.
Speaker Change: Thank you very much I think that.
Speaker Change: I like very much talking about the opportunities we see today.
Speaker Change: And your point pointing to something that that is.
Speaker Change: Real debt.
Speaker Change: A opportunity that benefit to people, who have access to capital and can make it worth more.
Speaker Change: Is that what we have and at a time when when sellers have few alternatives.
Speaker Change: Specific details I'd like to turn it over to Josh because he's nodding his head and eager to go and.
Speaker Change: I'd tell you what are you seeing out there Josh yes. Thank you Terry Thank you head down.
Josh: We're very active in the market in terms of.
Josh: Talking with potential sellers and evaluating opportunities in our markets.
Paul L. Beldin: We have seen what you would expect, leaky roofs and spots, some water intrusion, but the costs of which are less than half a million dollars, based upon what we know to date. And yes, we're insured for flood and all other perils in these properties around the country. Okay, that's great. Thank you. Appreciate the time. Have a great weekend.
Josh: We are seeing a pickup in likely transaction activity as measured by the chatter among sellers and broker listings as a proxy for what we might see in our typical off market approaches to transactions.
Josh: In terms of returns I think we're still seeing something of a bid ask spread most sellers are shooting for a low five cap rate and most buyers we are shooting for a high five to six.
Josh: We certainly would want to be at the very top end of the returns and will be focused on establishing our cost of capital and then executing transactions, where we have the opportunity to both improve our portfolio quality by buying assets with the opportunity to apply to air actually generate that outsized growth rate and ultimately generate a spread.
Haendel Emmanuel St. Juste: Thank you. And your next question comes from the line of Haendel St. Charles from Izuo. Your line is open. Hey there. Sorry, I was on mute.
Terry Considine: Terry, I think you mentioned earlier that you, I don't have plans at the current moment, to transact, but that you're certainly in a position to be able to. So I'm curious, what you're seeing out there today in terms of Catholic retirement funds and maybe where they need to be for you to get more active, and where, potentially, could we see you get more active? Coastal, Sunbelt, any particular market you'd like to highlight? Haendel, thank you very much.
Josh: A 200 basis points or more to our cost of capital.
Speaker Change: Got it got it thanks.
Speaker Change: Keith I guess, maybe one for you I think you you outlined I think in the guide market rate growth for this year effectively flat I think.
Keith M. Kimmel: With renewals.
Joshua Minix: I think that, I like very much talking about the opportunities we see today, and you're pointing to something that is very real, that a benefit to people who have access to capital and can make it worth more is what we have at a time when sellers have few alternatives, specific details, I'd like to turn it over to Josh because he's nodding his head and eager to go and Tell you what he's seeing out there Josh. Yes. Thank you Terry. Thank you Haendel We're very active in the market in terms of talking with potential sellers and evaluating opportunities in our markets we are seeing a pickup and likely transaction activities measured by chatter among sellers and Broker listings is a proxy for what we might see in our typical off-market approaches to transactions In terms of returns, I think we're still seeing something of a bid-ask spread Most sellers are shooting for a low 5 cap rate.
Keith M. Kimmel: Kind of in that plus five I'm curious if you're concerned at all about kind of creating a gain to lease situation for the portfolio next year and how that might impact your business.
Keith M. Kimmel: Push renewals next year.
Keith M. Kimmel: So just for clarification, we have a 1% market.
Keith M. Kimmel: Growth between now and in peak season, that's implied in the in the guidance. So just we do see we have some optimism that we will start seeing that and it could be better or worse than that but at the end of the day, we're seeing it already in our January numbers.
Keith M. Kimmel: I don't have any particular concern about a gain to lease condition I know that.
Keith M. Kimmel: To be clear about that I always get a little bit.
Keith M. Kimmel: I'll flip around those terminology is because there are points in time and so if we rent 10 apartments today that will change up and down loss to lease or gain to lease in and really the where I point your attention to is the two 4% an earn in.
Keith M. Kimmel: And more importantly, the three 5% blend that we have in our plan.
Keith M. Kimmel: And that would put us through 2024, all those things become Erica realities, which we anticipate that we'll then have earned.
Joshua Minix: Most buyers are shooting for a high 5 to 6. We certainly would want to be at the very top end of the returns, and we'll be focused on establishing our cost of capital and then executing transactions where we have the opportunity to both improve our portfolio quality by buying assets with the opportunity to apply the air edge and generate that outsized growth rate and, ultimately, generate a spread of 200 basis points or more to our cost of capital. Keith, I guess maybe one for I think you outlined in the guide market rate growth for this year effectively flat, I think, with renewals kind of in that plus five. I'm curious if you're concerned at all about kind of creating a game-to-lease situation for the portfolio next year and how that might impact your ability to push renewals next year.
Keith M. Kimmel: So I turned into 25 and beyond.
Speaker Change: Got it okay. Thanks for that and then lastly, I'm not sure if he outlined its expectations for turnover this year.
Speaker Change: Reflected in the guide.
Speaker Change: And.
Speaker Change: I think you mentioned the bad debt.
Speaker Change: Improved and I forgot the numbers, but maybe talk about how that plays into your outlook for expenses as well. Thanks.
Speaker Change: Well handle this is Paul I'll start with bad debt.
Paul L. Beldin: And bad debt, we've actually had a very good track record coming out of the pandemic. If I go back to 2021, I think our bad debt as a percent of revenues was one 6% in 2022 and improved to 1% and then in 2023, it improved to 60 basis points.
Paul L. Beldin: So we do expect continued improvement in 2024, I don't think we can bank on another 40 bps of improvement, but as Keith mentioned in his remarks, we expect about a 10 basis point improvement.
Joshua Minix: So, Haendel, just for clarification, we have 1% market growth between now and peak season that's implied in the guidance, so just, we do see, we have some optimism that we will start seeing that, and it could be better or worse than that, but at the end of the day, we're already seeing it in our January numbers. I don't have any particular concern about a gain-to-lease condition.
Speaker Change: And I'll just add a couple of pieces first of all I'll add a couple of things some insight on the bad debt and then the second piece I'll circle back to your question about retention.
Speaker Change: I think one of the things that has been a unique characteristic in our bad debt is just sort of a process.
Speaker Change: And some of the emphasis we put around our resident selection process and those folks that we went through that are not short term renters, but more importantly people that stay with us over long periods of time. This is going to dovetail right into your question about retention.
Keith M. Kimmel: I know that, to be clear about that, I always get a little bit... Off-put around those terminologies because there are points in time and so if we rent ten apartments today, that will change up and down, loss to lease or gain to lease, and Really, where I point your attention to is the 2.4 percent earn-in. And more importantly, the three and a half percent blend that we have in our plan that would put us through 20 Okay, thanks for that. And then lastly, I'm not sure if you outlined it, expectations for turnover this year, how that's reflected in the guide, and I think you mentioned the bad debt improvement. I forget what the number is, but maybe talk about how that plays into your outlook for expenses as well. Well, Haendel, this is Paul.
Speaker Change: But through that process of the resin selection and then secondarily.
Speaker Change: We collect our rent centrally and so I don't know if that's something we've talked about before but here in Denver Weaver centralized rent collection team and for a person that over multiple decades has done. This work typically you'd have you'd get 100 buildings you might have 100 can be mantra collecting rent and.
Speaker Change: You are trying to manage all of them and coach them up and figure out who is doing what and what we have here is about 10 individuals that theyre just experts professionals are doing this and so when you look at how this bad debt number has improved as Paul just went through the walk up a 106 to a 1% to 60 bps.
And when we get to 'twenty four there's a lot of very specific things, we do the one sort of fly in the ointment I would tell you in bad debt as is that of course has been a little bit slower coming out of the pandemic. So we'll see how that plays out in the future, but we are optimistic about our process.
Speaker Change: If you go into the retention.
Paul L. Beldin: I'll start with bad debt. You know, in bad debt, we actually had a very good track record coming out of the pandemic. If I go back to 2021, I think our bad debt as a percent of revenues was 1.6 percent. In 2022, it improved to 1 percent. And then in 2023, it improved to 60 basis points.
Speaker Change: What we have implied in our guidance.
Speaker Change: <unk> is essentially more of the same I just I just reported that we were at 62, 3%, which would be our best number that we have ever Mark we would anticipate something similar if not better and when I say if not better every single day, we have a very strong emphasis around longer standing residents less turnover avoided cost.
Speaker Change: In creating total contribution to the bottom line.
Speaker Change: And if I could join in carry.
Paul L. Beldin: So we do expect continued improvement in 2024. I don't think we can bank on another 40 BIF improvement, but as Keith mentioned in his remarks, we expect about a 10 basis point improvement. Haendel, I'll just add a couple of pieces.
I just want to emphasize two points part of it Keith touched on.
Speaker Change: Is the creditworthiness of our customer.
Speaker Change: And so we're just less exposed to bad debt.
Carry: As we have people, who have a track record of paying their bills.
Keith M. Kimmel: First, I'll add a couple of things of insight on bad debt, and then in the second piece, I'll circle back to your question about retention. I think one of the things that has been a unique characteristic in our bad debt is just sort of our process and some of the emphasis we put on our resident selection process and those folks that we went to that are not short-term renters but, more importantly, people that stay with us over long periods of time. This will dovetail right into your question about retention, but through that process of resident selection and then secondarily, is that we collect our rent centrally.
Speaker Change: The second is I want to throw a bouquet to Paul because we did not make it.
Speaker Change: Accruals based on optimism during the pandemic, we were very disciplined in our accounting and so we don't have to reverse those accruals. We don't have we're operating where anything any news is basically good news.
Speaker Change: And so our bad debt for the fourth quarter was falls flat zero.
Speaker Change: So net net of those recoveries and then we're going to stay at zero for the year I'm not trying to say that but I just wanted to point out two things that you can use and thinking about the future. One is that the air customer it's much less likely to have bad debt and secondly are counting is much more likely to be connected to cash.
Keith M. Kimmel: And so, I don't know if that's something we've talked about before, but here in Denver, we have our centralized rent collection. And for a person that has done this work for multiple decades, typically, you'd typically have, if you had 100 buildings, you might have 100 community managers collecting rent. And you're trying to manage all of them and coach them up and figure out who's doing what.
Very helpful. Thank you.
Speaker Change: Thank you and your next question comes from the line of Rich Anderson from Wedbush. Your line is open.
Speaker Change: Hey.
Richard Charles Anderson: Good morning.
Richard Charles Anderson: Good morning, I guess.
Richard Charles Anderson: So.
Richard Charles Anderson: I can't help but I'm a cynic to.
Richard Charles Anderson: 2.4% earn in is way above your peers, 2% new lease growth is above your peers. These are all really good operators of multifamily real estate.
Keith M. Kimmel: And what we have here is about 10 individuals who are just experts, professionals at doing this. And so when you look at how this bad debt number has improved, as Paul just went through the walk of a 1.6 to a 1 to a 60 bps and where we get to, you know, 24, there are a lot of very specific things we do. The one sort of flaw in the ointment I would tell you about bad debt is that courts, you know, have been a little bit slower coming out of the pandemic. So we'll see how that plays out in the future. But we're optimistic about our process. Going to retention, what we have implied in our guidance to the 3A is essentially more of the same. I just reported that we are at 62.3%, which would be our best number that we've ever measured. We would anticipate something similar, if not better.
Richard Charles Anderson: And so you know.
Richard Charles Anderson: I need to be a believer here, but.
Richard Charles Anderson: Is it is there is there an element of luck and.
Richard Charles Anderson: I don't mean that in the derogatory way, but supply is on everybody's mind of course, particularly in the Sunbelt are you finding yourselves just not positioned in a place where others are getting a lot of headwinds from new supply.
Richard Charles Anderson: You know what what besides the fact that you're good at your job and all that sort of stuff what is causing this outsized level of relative growth.
Richard Charles Anderson: For you guys relative to everybody else from a same store perspective.
Richard Charles Anderson: Yeah.
Richard Charles Anderson: Rich.
Richard Charles Anderson: Usual my Dear friend, you've got great questions and I look forward to the headline attached to it.
Keith M. Kimmel: And when I say, if not better, every single day, we have a very strong emphasis around longer stays, less turnover, avoidance costs, and creating total contribution to the bottom line. Thank you. Haendel. If I could join in, it's Terry.
Richard Charles Anderson: It's really two things there are really two and they are very different and but they are measurable and you can call them out.
Richard Charles Anderson: The first one is is operations.
Richard Charles Anderson: We have a customer that.
Richard Charles Anderson: As I, just said has better credit so it's more likely to behave.
Terry Considine: I just want to emphasize two points. Part of it that Keith touched on is the creditworthiness of our customers. And so we're just less exposed to bad debt because we have people who have a track record of paying their bills. The second is I want to throw a bouquet at Paul because we did not make accruals based on optimism during the pandemic. We were very disciplined in our accounting.
Richard Charles Anderson: The way, we expect more likely to be a good neighbor to the other residents.
Richard Charles Anderson: We have.
Richard Charles Anderson: As a result, we do more of our business at higher renewal pricing.
Richard Charles Anderson: And less of our business at lower new lease pricing and that's just those are structural advantages we have.
Richard Charles Anderson: A record of cost control that is superior.
Terry Considine: And so we don't have to reverse those accruals. We don't, we're operating where anything, any news is basically good. So our bad debt for the fourth quarter was balls slap, zero. Zero. So, net of those recoveries. Now, we aren't going to say it's zero for the year. I'm not trying to say that.
Richard Charles Anderson: And we give great credit for that to Keith, but I just have to say, that's Keith and Matt Holmes Who's here in the room and hundreds of teammates around the country that have done a really good job and are highly productive and highly stable.
So one of the most important metrics about operations is the turnover of our teammates and what you see is as high tenant.
Terry Considine: But I just want to point out two things that you can use in thinking about the future. One is that the air customer is much less likely to have bad debt. And second, air accounting is much more likely to be connected to cash. Very helpful.
Richard Charles Anderson: Mason engagement and stickiness.
Richard Charles Anderson: <unk> and stability, there well compensated good great job satisfaction, and they do a better job than our peers.
Haendel Emmanuel St. Juste: Thank you. Thank you. And your next question comes from the lineup: Rich Anderson from Wedbush.
Richard Charles Anderson: So that's one.
Richard Charles Anderson: The second one which which goes with it is.
Richard Charles Anderson: Your line is open. Hey, good morning. So, you know, I can't help it; I'm a cynic, right? 2.4% earn-in is way above your peers, and 2% new lease growth is above your peers. These are all really good operators of multifamily real estate. And I'm so, you know, I You Need To Be A Believer Here, Is there an element of luck, and I don't mean that in a derogatory way, but supply is on everybody's mind, of course, particularly in the Sun Belt. Are you finding yourself just not positioned in a place where others are getting a lot of headwinds?
Richard Charles Anderson: Portfolio composition.
Richard Charles Anderson: That that is intentional.
Richard Charles Anderson: But it's also a very difficult exercise because we're subject to political wins and economic changes that go back and forth.
Richard Charles Anderson: And at times, when a concentration pays off you will see that in the outperformance of the investor in California concentrated there.
Richard Charles Anderson: Did great for 10 or 15 years.
Terry Considine: apply. You know, what besides the fact that you're good at your job and all that sort of stuff is causing, you know, sort of this outsized level of relative growth? for you guys relative to everybody else. Rich, as usual, my dear friend, you've got great questions, and I look forward to the headline you attach to them, but there are really two things. They're really two, and they're very different, but they're measurable, and you can call them out. The first one is operations.
Richard Charles Anderson: Levered by prop 13 that was the <unk>.
Richard Charles Anderson: Terrific moment, you can see concentrated investors in sunbelt markets did great. During the pandemic. When you had this influx of in migration.
We're bar of the steady Eddie we'd want to avoid.
Richard Charles Anderson: We'd love to have those benefits, but to say that but we want to be balanced against those risks and so we've made independent decisions. We've made decisions about Florida that were different than peers make decisions about Philadelphia that were different than peers.
Terry Considine: We have a customer that, as I just said, has better credit, so it's more likely to behave the way we expect, more likely to be a good neighbor to the other residents. As a result, we do more of our business at higher renewal prices and less of our business at lower new lease prices. And that's just a, those are structural advantages. We have a record of cost control that is superior. And we give great credit for that to Keith.
Richard Charles Anderson: Both have pluses or minuses, but that's part of a differentiation, which provides which results from diversification, which which ends up with lower risk.
Richard Charles Anderson: So that's how we get there.
Richard Charles Anderson: Alright.
Speaker Change: Second question is entirely unrelated but on.
Speaker Change: On run rate <unk> is there I think I need another F O Def definition like a hole in the head and think I can speak of a lot of people why why didn't you just put this swap gain in core F. F. O and then there would have been a lot less misunderstanding about how people were growing 2020 for us there.
Terry Considine: But I just have to say that Keith and Matt Holmes, who are here in this room, and hundreds of teammates around the country that have done a really good job and are highly productive and highly stable. So one of the most important metrics about operations is the turnover of our teammates. And what you see is high tenant, high teammate engagement and stickiness. Stability, they're well compensated, great job satisfaction, and they do a better job than their peers, so that's one.
Speaker Change: A structural reason why you didn't just handle it that way and to can we get rid of it run rate <unk> for now in 2024 since it's the same thing as core <unk>.
Speaker Change: This is a little self serving but I I would love I'd love to hear your comments about those two.
Speaker Change: Yes, rich I E.
Terry Considine: The second one, which goes with it, is portfolio composition. That is intentional, but it's also a very difficult exercise, because we're subject to political winds and economic changes that go back and forth, and at times when a concentration pays off. You'll see that the outperformance of an investor in California, concentrated there, did great for 10 or 15 years, covered by Prop 13, that was a terrific moment. You can see concentrated investors in Sunbelt markets did great during the pandemic when you had this influx of in-migration. We're more of the steady eddy; we'd love to have those benefits, but we want to be balanced against those risks. And so we've made independent decisions; we've made decisions about Florida that were different than Pierce, and we've made decisions about Philadelphia that were different than Pierce. They both have pluses or minuses, but that's part of a differentiation, which results from diversification, which ends up with lower risk.
Speaker Change: I think I think Eric culture, and certainly my values are to be completely transparent.
Speaker Change: As best I can let you know what I know.
And what we wanted to communicate it with run rate <unk>, which was originated following the emco separation in 'twenty two.
Speaker Change: That's the original one and 2020.
Speaker Change: Was that a lot of the income that we real income cash money that we were receiving in 'twenty two with a one time event we need it.
Speaker Change: Wanted to ask the market to take the burden of it and a third definition of profitability, but to see that one parts recurring one part is it.
Speaker Change: We did it again last year with a lesser.
Speaker Change: Concerned, but we had these swaps that had been accelerated and we didn't want to.
Speaker Change: Either confuse the market.
Speaker Change: As the market confused that thinking we were confused.
Speaker Change: But we knew these were nonrecurring and were going to call them out. So we are completely transparent.
Terry Considine: So that's how we get. All right. Second question, entirely unrelated, but on run rate FFO. Is there, I need another FFO definition, like a hole in the head.
Speaker Change: And what we do and I think sometimes.
Speaker Change: People are used to that and.
Speaker Change: And despite the volatility of life upsetting, but that's why we do that I think in 2024.
Richard Charles Anderson: For more information, visit www.fema.gov. Why didn't you just put this swap gain in, you know, core FFO, and then there would have been a lot less... And two, can we get rid of the run rate FFO for now in 2024 since it's the same thing as core FFO? That was a little self-serving, but I'd love to hear your comments about that. Rich, I, I, um...
Speaker Change: You are right its increasing.
Speaker Change: Increasingly likely that we won't have that exposure, but we will have nonrecurring income and expenses that are unpredictable every year right.
Hopefully they won't be as material.
Speaker Change: Everything everybody does is the point, but.
Speaker Change: Fair enough thanks very much.
Speaker Change: Yeah.
Terry Considine: I think air culture and certainly my values are to be completely transparent, to the best I can, let you know what I know. And what we wanted to communicate, it was run rate FFO, which originated following the AIMCO separation in 22, not the original one in 2020, was that a lot of the real income cash money that we were receiving in 22 was a one-time event. We wanted to ask the market to take the burden of a third definition of profitability but to see that one part's recurring and one part isn't. We did it again last year with a lesser concern, but we had these swaps that had been accelerated, and we didn't want to either confuse the market or lead the market to believe we were confused, that but we knew these were non-recurring, and we're going to call them out. And so we're completely transparent in what we do. And I think sometimes, People aren't used to that and just find the volatility of life upsetting.
Speaker Change: Thank you and once again, if you would like to ask a question can you. Please press star followed by the number one on your telephone keypad.
Speaker Change: Your next question comes from the line of John Pawlowski from Green Street Advisors. Your line is open.
John Pawlowski: Thanks, Josh I have two questions on.
Recent acquisitions the last few quarters, just so I understand the underwriting process one the Raleigh market.
John Pawlowski: <unk> high single digit per annum supply growth this year and next year. So it feels like Reds in general can be more or less down than up so how do you get comfortable pushing chips neurology second.
John Pawlowski: Second question would be on the Bethesda acquisition several months ago.
John Pawlowski: 150, K per door, $3600, and it's really really high and so how do you get comfortable pushing rents over a longer period of time to get to these double digit IRR is your study.
Terry Considine: But that's why we do that, I think, in 2020. For, you're right, it's increasingly likely that we won't have that exposure, but we will have non-recurring income and expenses that are unpredictable every year. Hopefully, they won't be as mature. Right. Everything ever.
John Pawlowski: Yeah.
Speaker Change: Thank you John and both really good questions taken.
Speaker Change: Taking them in order with Raleigh. This has been a long term plan for us and part of our intentional portfolio diversification strategy. We're attracted to the market for all the reasons that are probably obvious favorable rule of law there.
Richard Charles Anderson: Fair enough, thanks very much. That. Thank you. And once again, if you would like to ask a question, simply press a star followed by the number one on your telephone keypad. Your next question comes from the line of John Polosky from Green Street Advisors. Your line is open.
Speaker Change: And we look to have a balance of factors across the portfolio, taking a long term outlook and looking at discounts to replacement cost we did underwrite the supply that's not.
John P. Kim: Thanks, Josh. I have two questions on recent acquisitions in the last few quarters, just so I understand the underwriting process. One, the Raleigh market, I think it's expecting high single-digit per annum supply growth this year and next year. So it feels like rents are going to be more likely down than up. So how do you get comfortable pushing chips into Raleigh?
Speaker Change: Not a secret to anyone and we are well aware, we think there's timing was a particular time where the.
Speaker Change: Buyers are all underwriting the supply and we had the opportunity to purchase an income that took that into account and it allow us to get an unusually attractive basis that we think will H quite well as we.
Joshua Minix: Second question would be on the Bethesda acquisition several months ago, $550K per door, $3,600 rent. It's really, really high. And so how do you get comfortable pushing rents over a longer period of time to get to these double-digit IRRs you're studying?
Speaker Change: Work in those properties and were benefited greatly by Keith and their edge, which will generate internal growth with those properties not relying on the market.
Joshua Minix: Thank you, John. Those are really good questions. I am taking them in order with Raleigh. This has been a long-term plan for us and part of our intentional portfolio diversification strategy. We're attracted to the market for all the reasons that are probably obvious, the favorable rule of law there, and we look to have a balance of factors across the portfolio, taking a long-term outlook and looking at discounts to replacement cost. We did underwrite the supply. That's not a secret to anyone, and we were well aware that this timing was a particular time when the Buyers were all underwriting the supply, and we had the opportunity to purchase on income that took that into account and allowed us to get an unusually attractive basis that we think will age quite well as we work in those properties, and we're benefiting greatly from Keith and the air edge, which will generate internal growth with those properties, not relying on It is an expensive building to buy and an expensive building to live in.
Speaker Change: To generate our returns, but really relying on the execution to generate the returns.
Speaker Change: Following up on Bethesda, the purchase of beyond there. We're very excited about it is an expensive building to buy and an extensive building to live out. It's also the highest quality building that I'm aware of in the greater D C Metro and.
Speaker Change: We bought it under both development and replacement costs and believe that that will be a long term asset with a strategic advantage in this space.
Speaker Change: Okay that averages.
Speaker Change: And if I might just add to Josh his comments.
Speaker Change: Just as to Raleigh.
Speaker Change: Missed the cost basis of buying at a discount to replacement and as to Bethesda, We've had a show and tell and the SEC filing which will walk through in great detail.
Speaker Change: Joe you exactly how we underwrote it.
Speaker Change: Okay, and maybe one follow up on the Raleigh. So.
Joshua Minix: It's also the highest quality building that I'm aware of in the greater D.C. metro, and we bought it for both development and replacement costs and believe that that will be a long-term asset with a strategic advantage in the space. And I'd just add, if I might, John, add to Josh's comments, just as to Raleigh, don't miss the cost. Basis of buying at a discount to replacement, and as to Bethesda, We've had a show-and-tell in this SEC filing which will walk through in great detail show you exactly how we underwrite. Okay, maybe one follow-up on the Raleigh. So what's the exit cap rate assumption or long-term NOI growth assumption, however you want to frame it to get from a mid 5% cap rate in a market where It seems like a massive pickup. Yeah, no, a really good question.
Speaker Change: Whats the exit cap rate itself for long term NOI growth assumption. However, you want to frame it to get from a mid 5% cap rate and a market where rents are going to be stagnant over a 10% IRR. It seems like you had a massive take off.
Speaker Change: Yeah.
Speaker Change: Yes really good question. It is a massive pickup and that's driven by Keith and his team not by just writing a market way. So we're really looking at the nuances of the property and taken the in place cap rate and then we're looking at what happens when it's Keith operates it is as usual level of efficiency and that provides a significant increase in the <unk>.
Speaker Change: Yield and you've seen that in our previous acquisition portfolios, where we've had roughly double at the same store growth and we expect that here and diagnose and market driven growth.
Speaker Change: And Keith driven growth. So that's the biggest driver in terms of exit cap rates were generally exiting roughly where cap rates are today.
Joshua Minix: It is a massive pickup, and that's driven by Keith and his team, not by just riding a market wave. So we're really looking at the nuances of the property, taking the in-place cap rate, and then looking at what happens once Keith operates it at his usual level of efficiency. And that provides a significant increase in the yield, and you've seen that in our previous acquisition portfolios, where we've had roughly double the same store growth. And we expect that here, and that isn't market-driven growth; that's Aaron-Keith driven growth. So that's the biggest driver.
Speaker Change: So we're not accounting for it we're not assuming the cap rates compress over time.
Speaker Change: Okay. Thanks, one more Terry on the on the balance sheet.
Terry Considine: So I know when you initially did the spin yeah, the mid five times leverage target.
Terry Considine: And there's been some good resistance around the six times Mark last few years I'm not worried about balance sheet risk, but there is a myth.
Terry Considine: Missed opportunities.
Terry Considine: And ability to play offense, if opportunities come up so I.
Joshua Minix: In terms of exit cap rates, we're generally exiting roughly where cap rates are today, so we're not assuming the cap rate's compressed. Okay, thanks. One more Terry on the balance sheet. So I know when you initially did the spin, you had a mid five times leverage target, and there's been some good resistance around the six times mark over the last few years.
Speaker Change: I guess, what I struggle with it.
Speaker Change: Not ripping off the band aid and getting the lower leverage that has prompted you guys scrambling a little bit to always derivative activity to the debt and so why not keep light lithium old fashion more why not keep life much simpler and just reduce the absolute level of leverage versus.
John P. Kim: I'm not worried about, you know, balance sheet risk, but there is missed opportunities and an inability to play offense if opportunities come up. So, I guess what I struggle with is... not ripping off the Band-Aid and getting the lower leverage because it has prompted you guys to scramble a little bit to do all this derivative activity to fix the debt. And so why not keep life, maybe old-fashioned, well, why not keep life much simpler and just reduce the absolute level of leverage versus having to go out and do all this derivative activity to fix the debt? Any comments there would be really appreciated.
Speaker Change: As having to go out and do all of this derivative activity too.
Speaker Change: Fixed fix the debt.
Speaker Change: Any comments there would be really appreciate it.
Speaker Change: Sure John.
Speaker Change: I mean first is.
John: As you know our debt is that much of it two thirds of it or more is nonrecourse.
John: One of my favorite analysts gives us a 10% discount in the burden of that debt. So just for that put.
Speaker Change: Second that the question of having an opportunity.
Terry Considine: In short, John, First, as you know, our debt is, much of it, two-thirds of it or more, is non-recourse. One of my favorite analysts gives us a 10% discount on the burden of that debt just for that reason. Second, that the question of having an opportunity is a good thing, but it's a good thing when you use it. Having it by itself is sterile, so the time to use it is when there's blood in the streets, when prices are low, and so waiting to do this at another time when everything's harmonious is to say miss the opportunity.
Speaker Change: <unk> is a good thing, but it's a good thing when you use it.
Speaker Change: Having it by itself is sterile so the time to use it as when there's blood in the streets when prices are low.
Speaker Change: And so waiting to do this at another time when.
Speaker Change: Everything's harmonious is to say to miss the opportunity.
Speaker Change: The.
Speaker Change: We embrace the opportunity to buy now and the fact that we've been able to do that and stay within the low leverage by certainly by comparison to the asset class and I think compared to our business model.
John P. Kim: So, we embrace the opportunity to buy now, and the fact that we've been able to do that and stay within low leverage, certainly by comparison to the asset class, and I think compared to our business model, is something that, and take advantage of what's a structural advantage for apartments generally, is something that we're paid to do because it creates value for shareholders. All right, thanks for the time. Thank you, and there are no further questions at this time. I would like to turn it back to Terry Contidine, CEO, for closing remarks. Well, thank you very much. And thanks to all of you who are still on the call. I appreciate your interest in AIR. I'm excited about the future. If you have questions, please feel free to call any of us. We look forward to seeing you soon at a number of conferences. Be well. Bye. Thank you, presenters. And, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: It is something that can take advantage of what's a structural advantage for apartments generally.
It's something that.
Speaker Change: We're paid to do because it creates value for shareholders.
Speaker Change: Alright, thanks for the time.
Speaker Change: Thank you and there are no further questions at this time I would like to turn it back to Terry Considine CEO for closing remarks.
Terry Considine: Well, thank you very much and thanks, all of you still on the call.
Terry Considine: I appreciate your interest in air I I'm excited about the future you have questions. Please feel free to call any of us and look forward to seeing you soon.
Speaker Change: A long number of conferences well.
Speaker Change: Thank you presenters and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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