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spk02: Good morning, ladies and gentlemen, and welcome to the Amada Hofla third quarter 2023 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 2nd, 2023. I would now like to turn the conference over to Chelsea Forrest. Please go ahead.
spk00: Good morning, and thank you for joining Armada Hoffler's third quarter 2023 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO, Matthew Barnes-Smith, CFO, and Sean Tibbetts, COO. The press release announcing our third quarter earnings along with our supplemental package were distributed this morning. A replay of the call will be available shortly after the conclusion of the call through December 2, 2023. The numbers to access the replay are provided in the earnings press release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, November 2, 2023, and will not be updated subsequent to this initial earnings call. During this call, we may make forward-looking statements, including statements related to the future performance of our portfolio, our development pipeline, the impact of acquisitions and dispositions, our mezzanine program, our construction business, our liquidity position, our portfolio performance and financing activities, as well as comments on our guidance and outlook. Listeners are cautioned that any forward-looking statements are based upon management's beliefs, assumptions, and expectations, taking into account information that is currently available. These beliefs, assumptions, and expectations may change as a result of possible events or factors, not all of which are known, and many which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure in our press release that we distributed this morning and the risk factors disclosed in the documents we have filed with or furnished to the FCC. We will also discuss certain non-GAAP financial measures, including, but not limited to, FFO and normalized FFO. Definitions of these non-GAAP measures, as well as reconciliations to the most comparable GAAP measures, are included in the quarterly supplemental package, which is available on our website at armadahoffler.com. I'll now turn the call over to Lou.
spk07: Thanks, Chelsea. Good morning, everyone, and thank you for joining us. Today, we reported normalized FFO for the third quarter of 31 cents per share, in line with our expectations and consistent with our four-year guidance. As you can see from our press release, the portfolio continues to deliver positive growth in same-store operating income and releasing spreads, while maintaining company-wide occupancy in the high 90s. We continue to prove that best-in-market properties yield impressive results in most any economic climate. Sean and Matt will give you the details on the quarter, as well as the current state of operations and financial metrics. I'll take a few minutes to highlight just a few examples of the key advantages to having a diversified business model. While others may be at the mercy of their particular sector and whether it's externally under pressure or out of favor, our ability to adapt to changing market conditions across asset classes and business lines gives us the unique ability to preserve earnings growth while making the right real estate decision for the long-term health of any given property versus accepting substandard outcomes in the name of preserving short-term earnings. As a case in point, we, like all landlords who hold leases with WeWork, have been asked to take substantial rent reductions in order to preserve their lease commitments. As you may know, we have two leases with this tenant in the total portfolio. At the interlock in West Midtown Atlanta, and at One City Center in Durham, North Carolina. Both are new, trophy-class, mixed-use buildings in vibrant, urban, walkable locations. We have no interest in impairing either of these prime assets with a below-market lease and are very comfortable with prospects for backfill should we choose to reclaim the space. We're always willing to help our tenants who, despite good faith efforts, may be going through a rough patch. That's just good business. However, we will not compromise superior locations with low yielding material leases in either office or retail assets. Due to the strength of the vast majority of our holdings as well as our construction and development division, we are comfortable to assert that full year 2023 guidance remains unchanged and that we expect continued earnings and dividend growth next year irrespective of the WeWork outcome or that of a handful of other smaller tenant challenges we face within a few assets. Sean will give you an update on the robust leasing activity we are seeing across the portfolio in the small amount of vacancy that we possess. The second area that diversity yields significant advantages versus narrowly focused companies is that of finance. Through a decades-long successful track record in multiple business lines, we've achieved a triple B credit rating and have accrued a large and growing stable of banks that continue to extend additional credit to us. At a time when lenders are shying away from most commercial real estate, we continue to receive increasing commitments, and we are successfully mitigating future risks through derivative purchases. The end result of which is that we've been able to continue our development activities, initiate the $50 million share repurchase program, and lock in relatively low interest rates on all portfolio debt for the next two years. Matt will fill you in on the details of these transactions. Yet another major benefit comes from our construction and development operations. With third-party fee income at all-time highs and an elevated level of backlog, our expectation is for 2023 to be our most profitable year ever, and we expect similar results in 2024. These earnings allow us to further flexibility in dealing proactively with potential issues elsewhere without endangering profit growth. Additionally, we expect development activities at our two Harbor Point joint ventures to give us a significant source of capital to reduce leverage once they are completed in about a year. This will be especially important if equity prices remain suppressed for the longer term. Sean will give you an update on that progress as well as the strong pre-leasing activity occurring at Southern Post. For years, we have been describing the advantages of our business model. Vertical integration of the development process, asset class diversification, mixed-use environments, and best-in-class properties are all important factors in our platform, as well as our value proposition. While we understand some investors focus on single asset class REITs, our ability to dominate submarkets with multi-use projects is its own unique advantage. This approach to real estate, 44 years in the making, has produced substantial growth over the last 10 years, despite the challenges of the pandemic and the current disfavor of the commercial real estate sector, which has impacted property values, consequently reducing our multiple and undervaluing our equity. While this may be viewed as respectable performance by many, it's by no means satisfactory to us. Our goal remains to demonstrate the true worth of superior assets, both property and human, and return the equity value to its previous highs, regardless of the macro environment, while providing solid interim returns to a safe and growing dividend. We fully intend to continue adding to earnings and dividends in 2024 as we wait for the market to recognize superior outperformance. Over the next one to two years, In addition to continuing measurable growth, we intend to make strategic moves that should further separate our trajectory versus that of our peers, as well as reinforce the flexibility, resiliency, and foundational strength of our diversified platform. I'll now turn the call over to Sean to review the operating metrics.
spk04: Thank you, Lou. We at Armada Hoffler remain highly focused on running our playbook. by developing high quality real estate, safely and efficiently constructing buildings, all while operating and managing the stabilized properties with intentionality and purpose. The combination of discipline execution in accordance with our corporate values serves as the foundation of the Armada-Hoffler value creation model. The supplemental package contains a recap of our operating highlights. I would like to call out a few of the noteworthy metrics that are contributing to our continued growth and sustained high occupancy across the portfolio. Quarter three year over year same store NOI was positive in all segments and was 4.4% on a gap basis and 5.9% on a cash basis. Quarter three year over year releasing spreads on the commercial portfolio were positive 14.5% on a gap basis and 4.9% on a cash basis. Leasing activity was robust during the third quarter. We executed leases on over 120,000 square feet within the stabilized commercial portfolio. It's important to note that less than 3% of our 6.2 million square feet of commercial space is currently vacant, 58% of which has active deals being contemplated. Our multifamily portfolio continues to perform in a consistent and sustainable manner as a result of the trophy quality and superior location of the assets. Our team continues to grow NOI at a mid single digit pace. We intend to replicate this optimal performance as our footprint expands throughout the Southeast over time. The retail portfolio is also outperforming at 98.1% occupancy. As I mentioned earlier in the call, Retail has been very active over the past few quarters with continued levels of elevated leasing activity throughout our 4 million square foot portfolio. Tomorrow, Lego will hold a grand opening celebration for their new store at our flagship town center location. We are capitalizing on this high profile momentum and are currently in discussions with other credit tenants for space within our town center ecosystem. Although not consistent with the broader narrative, our office portfolio continues to remain highly leased and occupied. In terms of additional leasing activity, we continue to experience strong demand for our trophy office product in the submarkets within our geographic footprint. This flight to quality is tangible in terms of both the occupancy of our buildings and the rents that are collected, ultimately adding significant value despite headwinds present in the broader market. The percentage of office leased sits at 96.1%, led by town center office at 98.9% of the nearly 800,000 square feet. Our tenant watch list has remained consistent over the past few quarters. Lou touched on WeWork earlier, so I'll focus on other notable inclusions. The former Bed Bath and Beyond in Durham has also remained top of mind and discussions with a short list of suitors for that space are progressing. As mentioned last quarter in the Virginia Beach location, we have used the opportunity cost equation to narrow the programmatic options to best fit our strategy. We are very pleased that out of the over 700 tenants in our portfolio, only 11 are on watch list status. At Harbor Point in Baltimore, we continue to make significant progress toward completion of the T. Rowe Price Global Headquarters, scheduled to be delivered in the third quarter of 2024. Additionally, Allied, the 312-unit luxury apartment project, will be integrated into the Harbor Point ecosystem and delivered in a similar timeframe. We couldn't be more excited to realize the benefit of completion of these projects. In Roswell, Georgia, we are making significant progress toward completion of the Southern Post mixed-use project. Sixty-eight percent of the commercial space is now leased or under LOI with a roster of high-end experiential dining and retail offerings, as well as high-credit corporate office tenants at well above pro forma rents. Additionally, the 137-unit multifamily project at Southern Post Chandler Residences is already seeing strong demand with a prospect list of over 500 people. These high quality units are positioned at the high end of the sub market and are expected to be put in service beginning February 2024. Our construction team is focused on delivering high quality real estate that will significantly expand our portfolio, thereby serving the long term strategy of our company and therefore our shareholders. We have a robust third party contracted backlog that is currently over 500 million and our shadow pipeline looks robust. Portfolio of preferred equity investments is progressing nicely and we anticipate payoff of these positions according to plan. As discussed previously, our partners are best in class in the residential space and we, if given the opportunity, would love to own one of those assets at the appropriate price, especially given their proximity to our target markets in the southeast. I will now turn the call over to Matt.
spk01: Good morning and thank you, Sean. The team continues to perform extraordinarily well even against the adverse backdrop of the broader macroeconomy. For the third quarter of 2023, we recorded FFO at $0.31 per diluted share and normalized FFO at $0.31 per diluted share, in line with both guidance and analyst consensus. We maintained our guidance range accordingly at normalized FFO of $1.23 to $1.27 per diluted share. Our stabilized leverage metric was 6.2 times this quarter. which is slightly above our target range due to the debt incurred in connection with our acquisition of the interlock asset earlier this year. When our ancillary debt is included, leverage is 7.1 times consistent with last quarter. As articulated on the previous earnings call, this metric will temporarily increase over the next few periods until the assets in our development pipeline start producing cash flow. The leverage is anticipated to decrease back into our target range as EBITDA continues to grow. Our debt service coverage ratio and fixed charge coverage ratio were 2.5 times and 2.2 times respectively, with our weighted average cost of debt maintaining its level just above 4% for the quarter. The team's continued ability to manage and execute our balance sheet strategy and these adverse market conditions will yield benefits far past this economic cycle. Our liquidity position continues to be strong at roughly $190 million, more than ample to cover the 2023 cash requirements for our remaining development pipeline and our preferred equity investments. This combined with our well-structured debt maturity ladder means that we can adequately support the team in achieving our portfolio growth objectives. On the call last quarter, I discussed our 2024 derivative maturities and indicated that we would monitor the environment to ensure we either convert the variable rate debt to long-term fixed rate debt in the private placement market or layer in new hedge positions when our current set of positions mature. With interest rates expected to be higher for longer, we moved ahead and replaced the derivatives that were expiring in the last quarter of this year and the first quarter of next year, with the intent to maintain that our debt is close to 100% fixed or hedged in the short term. Our intent is to continually mitigate the risk of rising interest rates in the most efficient manner. To that end, we also entered into two short-term swap locks on our portion of the construction debt associated with our joint venture partnerships in Harbour Point. As Lynn mentioned earlier, we may look to exit our positions in these assets at the appropriate time. As you will all recall, in June, our Board of Directors authorised a share repurchase programme. In late September, we took advantage of market conditions and initiated the programme purchasing back our daily allowable limit for a seven-day period. During this time, we purchased back a total of nearly 600,000 shares of common stock at a weighted growth average price in the low $10 range. Given the increased uncertainty in capital markets, we intend to continue to monitor the program against market conditions. Whilst our conservative posture is biased towards capital preservation, we appreciate our board of directors authorizing this tool to use our discretion. I will now pass the call back over to Sean.
spk04: Thanks, Matt. Finally, thank you to our talented team at Armada Hopler. It is a pleasure to work with a group of individuals who are harnessing the power of a team to continuously create value for our shareholders. On behalf of our board of directors and the executive leadership team, we appreciate your focus and attention to detail that ultimately results and quality real estate that is poised to produce value for decades to come. Thank you for all that you do. Operator, we are ready for the question and answer session.
spk02: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for the first question. Our first question comes from Rob Stevenson from Jani. Please go ahead. Your line is now open.
spk08: Good morning, guys. You talked a little bit about WeWork. Are they still current on their rent?
spk07: They're current as of now, Rob. But our expectation is that they're going to be asking for concessions. And as I said earlier, we're We're just not interested in preserving that lease in those locations with the amount of activity that we're seeing.
spk08: I mean, is there any value to you guys? I mean, you guys have done this in the past, you know, but is there any value to letting WeWork play out through bankruptcy, which is, you know, in the news that that's coming up? pretty quickly here and be thrown into the unsecured pit? Or do you just go to them now, ahead of that, let them out of the leases and get the space back now so that you don't have to wait months and months and months for that to play out and just move on?
spk07: There is value in that, Rob. It's difficult to say. It's a very fluid situation with them, as you might expect. It's difficult to say if that's going to be possible in the amount of time and between now and when we believe that they'll file. In any respect, assuming that they continue to operate, then they will continue to owe rent irrespective of bankruptcy proceeding. So as I said earlier, we're going to make the right move for those properties. They're strong properties in great locations. And irrespective of whatever turns out with WeWork, our expectation is for growth next year.
spk04: Okay. It may not be a one-size-fits-all for the locations, Rob, right? So to Lou's point, we're looking at this property by property, so dynamic situation, and we're all over it.
spk08: Okay. I mean, is there an option for you guys directly or with some sort of local partner in those two markets if you get that space back to continue to operate the built-out space as
spk07: co-working or is it likely to just be all ripped out and released as normal straight out office to you know multiple tenants uh if both options are on the table however i don't i don't believe that there's going to be a rip out option um they're really well appointed and and frankly there there doesn't seem to be anything wrong with the co-working model i think the problem is unique to we work or maybe there's a couple others but there's several other operators A couple of which are in our buildings that are doing just fine. So we'll see. There may be an opportunity to just keep going business as usual on the coworking side. But there's also some nice tenants in the market that are looking for trophy space. So in any respect, we're confident of the outcome on the other side of this thing.
spk08: Okay. And, Sean, I think you said the construction company's shadow pipeline is robust. How much of that is Armada Hoffler business versus stuff for other parties?
spk04: Yeah, so what we're referring to in the shadow is the third-party piece. So 100% of what I mentioned would be third-party. We're still seeing activity out there. Obviously, it's not at the same level that it was two years ago, for instance, but we feel comfortable maintaining that strong pipeline on a go-forward, at least in the short run.
spk08: Okay, and are any new developments, even multifamily, making sense for you guys to put shovels in the ground at this point, given the cost of capital, or are you waiting to see what 24 brings before making those type of decisions?
spk07: Yeah, thanks for the question, Rob. As you might expect, we're seeing countless opportunities as smaller developers and landowners are looking for any way to get their potential projects off the ground. As you might expect, we've raised the bar considerably. So unless something is yielding in the high single or low double-digit range, we're not going to be pulling the trigger anytime soon. We're comfortable with the avenues we have for growth for next year. So I think the prudent thing is to sit tight, but for a tremendous opportunity that you just don't want to pass up.
spk08: Okay. And then last one for me, I think you guys touched a little bit on some of the retenanting, redevelopment plays in the portfolio. It sounded like that the Durham Bed Bath is just going to be retenanted. But the Virginia Beach one, in terms of narrowing the options, is that is a whole scale redevelopment and some other use for that space, whether it be apartments or something else still on the table there? Or is that just basically a retenant and it's a question of whether or not it's broken up into multiple parcels, multiple tenants, or just one at that size, et cetera.
spk07: Yeah, two different things there. As you know, part of that, the total parcel is 10 acres, with the bed bath piece being roughly half or a little bit over half of that, the other being Regal Cinema. Regal Cinema continues to go, and at some point, if that becomes available, That would probably be a multifamily portion. But right now, the program is on the Bed Bath site. And we're dealing with a few high-end, new-to-market retailers that we hope to be announcing in the next quarter or so. But that'll be essentially retail. And whether or not there's any reuse of the box that's there remains to be seen.
spk08: Okay. And what about the movie theater out parcel that you were thinking about doing multifamily on? I think it's – is it James Madison? Is that still on the drawing boards? Is that just going to be a movie theater? How is that – what are you guys thinking about that at the moment?
spk07: Well, again, Regal is going to take advantage of their remaining options. They seem to be doing just fine. As far as the multifamily piece of that – It's victim right now to what we were just talking about, Rob, in that that return doesn't justify us throwing another $40 or $50 million out there. So we'll most probably just sit back and collect coupons for the foreseeable future.
spk08: Okay. And then I guess I lied, just one other one. On the MES portfolio, anything sort of penciling out? Where do returns need to be for you guys to start or to fund a completely new project there with your partners today?
spk07: So again, as you might expect, that bar has been raised as well. And so with our partners, unless they have healthy, high single-digit returns that we see in their pro forma that gives us the room to deploy our equity. And ultimately, if we can bring the project on balance sheet, then they aren't going to get funded. I put that in the same boat with what I was saying earlier, that there is a ton of opportunities out there. It's just with rates where they are and costs where they are, the vast majority of them need to stay on the drawing board and not in our portfolio.
spk08: Okay. I appreciate the time, guys.
spk07: Thanks, Rob. Thank you.
spk02: The next question comes from Peter Abramowitz from Jefferies. Please go ahead. Your line is now open.
spk06: Yeah, thank you. I appreciate the comments on potentially the yields you're hoping for on multifamily developments. I guess Wanted to ask a similar question on the retail side, if you're seeing anything in the acquisition market and what kind of yields or IRRs would entice you right now and then whether or not you're seeing those.
spk07: Thanks, Peter. So cap rates have widened a bit, but the kinds of retail that we'd be willing to transact on are essentially high credit and well-located grocery stores. Those cap rates have moved somewhat, but as you know, unfortunately, our cost of capital has moved materially as well. So there is probably a little bit of spread to be gotten if we were to transact there, but right now we're more interested in capital preservation, making sure that we can continue some growth internally as well as raising the dividend and not marginally looking at at new acquisitions. Again, much like on the development side, if something appears in one of our target markets that's just too good to pass up or has a redevelopment opportunity or additional value add we can do, then you may see us transact. But as far as real solid grocery-anchored shopping centers of the sort that we already own, I don't think you'll see us be a player.
spk06: Got it. And then you've talked about potentially monetizing the TRO headquarters. Just wondering if you've seen any relevant transaction comps in any of your markets for that type of office product and kind of how it impacts your thinking in terms of potentially doing a deal there.
spk07: Again, thanks for the question. It's interesting. There aren't any transactions of trophy quality buildings that we see out there. I say there aren't any. Maybe there's one or two somewhere, but largely anybody with the kinds of assets that those represent is not trying to transact right now. It's at absolutely the worst time. So for us, obviously the fond hope is that 18 months from now, things have normalized a bit to where you can get real value out of that type of asset. And alternatively, I don't Don't discount the idea that should our cost of capital go in the right direction and the equity price go in the right direction, we may well bring those things on the balance sheet. But right now, we wanted to make sure everybody understood if push comes to shove, that's a great asset to bring cash back on the balance sheet.
spk06: Got it. And then Last one for me, you've had some elevated growth on the real estate tax side, particularly multifamily, a little bit on office as well this year. Are you contesting any of those that could potentially be a tailwind for expenses in future quarters and just kind of how should we think about growth in real estate taxes generally?
spk04: I think the industry should be thinking about that generally. But yes, we are contesting nearly all of them. I mean, it is our practice to assess them one by one and try to make sense of where we should apply our efforts. We have a good third-party vendor that assists us in that regard, and we've had a lot of success there. So, you know, obviously municipalities are different up and down the, you know, Mideast, Mid-Atlantic coast, down throughout the Southeast. But yes, we We push back on those often and early and have seen relatively good success there. So we plan to continue to do that. Obviously, we can't control the macro environment, and it's something to watch for. It's something we're focused on.
spk06: Got it. That's all for me. Thank you. Thanks, Peter.
spk02: Thank you. Our next question comes from Wes Holliday from Baird. Please go ahead. Your line is now open.
spk05: Hey, good morning, everyone. Can you talk about the leasing environment in multifamily? A lot of the peers had, you know, some tough quarters and tough outlooks, whether it's supply pressure or fraud. Are you seeing any of that?
spk07: We are. I'm going to let Sean answer that specifically. But we are seeing things normalized. You know, people got used to double-digit growth quarter over quarter for a while there. We're seeing it normalized back into the mid-single digits. Sean, are you going to be specific on that?
spk04: Yeah, I think Lou hit the nail on the head. We've been saying for multiple quarters now, we think things go back to the mid single digits, which they are. And that's what we forecast and that's where we sit. Our trade outs in quarter three were around 4% across the board, which is good. It's about where we thought we would be. And I think for us, our view is let's maintain high quality trophy assets. Let's be in the best locations. As you know, that's part of our formula. And there's a flight to quality happening, especially when the pressure turns on. I think generally speaking, we see strength continued. Again, maybe not double-digit growth, but we're feeling good about our location. We're feeling good about our product, and our team's doing a heck of a job managing said product. So we're comfortable with what we've underwritten.
spk05: Yeah, I think a lot of people would take growth at this point. You know, turning to the 11 tenants that are on the watch list, is there any way to quantify that as a percentage of ABR?
spk04: I'm glad you asked the question. We did some work on that, hoping someone would ask that question. So, Lou talked about WeWork. Let's talk about a net of WeWork because that's a separate situation. Essentially, the total ABR is about $2.5 million. Um, so for us, that's, you know, obviously over the 11 tenants, we can, we can, we can handle that. We can manage that. Um, we'll see some successes there and certainly some folks may not make it. However, as I indicated, um, a significant majority of those spaces, um, at least the vacant spaces have the opportunity to kind of take up that slack. So we're, we're excited about the activity, both in the retail and the office, frankly, in our sub markets. And we feel good about. being able to stabilize that if in fact it becomes an issue.
spk05: And maybe just a little bit more context, you know, when you look at the 11 on the watch list, is that about normal for the portfolio? You know, I guess, you know, adjusted for the current size versus the prior year, is it worse or is it better? Just some context on, you know, having 11 on the watch list.
spk04: I think we're pretty consistent with where we have been over the past few years. Certainly folks come and go. Obviously we took the bed bath numbers out of our numbers. It's already removed. So we're looking at tenants that on an individual basis are not consequential. But yeah, I think in terms of the number, in terms of the size and the magnitude, that's about where we are. And frankly, that's about where we should be.
spk07: Peter, just to follow up on that. The total value there is in line with what we reserve for bad debt on an annual basis. So it's really not an issue there. And as I said much earlier, we're going to make the right real estate decision. We're just not interested in folks limping along at paying half rent. So hopefully things will look up for those tenants. And if not, we'll be moving on.
spk05: Thanks, everyone. Thank you.
spk02: Thank you. Our next question comes from Camille Bonney from Bank of America. Please go ahead. Your line is open.
spk03: Hi. Good morning. Just one follow-up on an earlier question. Can you expand a bit more on the new versus existing renter dynamics in your multifamily portfolio? And what's the decline in occupancy this quarter? more seasonal in nature, or are you starting to see any changes in behavior there? Thank you.
spk07: Yes, Camille. Again, I'll let Sean answer that specifically, but I do want to mention, and part of the other side of the coin, we talk about our 98%, 99% occupancy across the portfolio. We fully expect that over time, that we'll be back in the mid-90s, that those kinds of rates just aren't sustainable just because of the inflow and outflow of tenants. So in terms of the decrease in occupancy on multifamily, somewhat is seasonal, but at the same time, we are not programming in 98% leased for next year. We believe that things will go back to the center line. And again, of course, the trade-off is how much we were able to boost rents versus keeping the higher occupancy.
spk04: Yeah, I think, you know, to add to that, the income is up, right, on an aggregate basis. And to Lou's point, it's very difficult to maintain 98, 97. Some it's inefficient in some ways to maintain that occupancy. Um, we use, we take the emotion out and we use rent optimization software and essentially we are driving to the mid nineties in terms of occupancy, obviously with an eye toward enhancing the NLI. We're seeing the NLI continue to climb. Um, the occupancy did dip. We would love to have that extra 1% back. We're looking for ways to do that, but I think we're pretty healthy now. And there's a, there's the supply demand kind of balance to ensure that we're running the property as efficiently. And frankly, as profitably as we can. So I think we feel comfortable here. We haven't really seen a dynamic shift other than the market macro. But again, you heard me say a second ago, we're nearly 4% on trade out still in the last quarter. And that's above where we were in the comparative quarter previously. So we feel good about the continued growth.
spk03: Actually, just one follow-up on that point. You said you're using AI to help drive the pricing. I guess of that platform, how much of the inputs do you have control over or is this outsourced? Thank you.
spk04: We use a third-party platform. We can control kind of our desired occupancy level, and it uses market inputs that we do not control that are organic, you know, what's happening in the broader market, broader sub-market to be more specific, to kind of enhance, you know, where does the pricing need to be to hit this occupancy target. We can certainly ratchet that up, but I would imagine, you know, there's going to be a trade-off at some inflection point in this current market environment between what rent you can achieve and what occupancy you can achieve. And we feel like in the mid-90s is where we want to shoot for. We do run sensitivity on that. We're taking a look at that now and trying to understand what's the best kind of mousetrap, how to best set the mousetrap, maybe is a better way to say it.
spk03: Thank you for the additional color.
spk07: Yes, thank you.
spk02: Thank you. There appear to be no further questions. I'll return the conference back to the speakers.
spk07: Thanks very much for your time and attention this morning. We hope to have further announcements between now and the end of the year, and everybody have a great day. Take care.
spk02: Thank you. This does conclude today's conference call. Thank you for participating. You may all now disconnect your lines.
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