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spk05: Welcome and thank you for attending today's AIR Community's first quarter 2023 earnings conference call. My name is Ciara and I will be your moderator for today's call. All lines have been placed on these to prevent any background noise. After speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to pass the conference over to Lisa Cohn, President and General Counsel of Air Communities. You may proceed.
spk01: Lisa Cohn Thank you, Ciara, and good day. My name is Lisa Cohn, and I am President and General Counsel of Air Communities. During this conference call, the forward-looking statements we make are based on management's judgment of current market conditions, macroeconomic trends, socioeconomic drivers, and other factors, including projections related to our 2023 performance 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. We will also discuss certain non-GAAP financial measures, such as FFO. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on AIR's website. Prepared remarks today come from Terry Considine, our CEO, Keith Kimmel, President of Property Operations, John McGrath, Chairman of our Investment Committee, and Paul Belden, our Chief Financial Officer. Other members of management are also present. All of us will be available during the question and answer session, which will follow our prepared remarks. I will now turn the call to Terry Considine. Terry?
spk08: Thank you, Lisa. And my thanks to each of you on this call for your interest in air communities. My comments will be brief. AIR's first quarter results were on track with our plans. AIR operations led all peers with the lowest expense growth, the highest margins, the most year-over-year growth in net operating income, the highest rental rate increases, and the highest rate of conversion of top-line revenue to bottom-line free cash flow measured after all corporate expenses. AIR is consistently the most efficient and effective way to invest in multifamily with public market liquidity. AIR culture emphasizes teamwork, and Keith leads a veteran team who know the AIR EDGE playbook, lead stable site teams, are committed to continuous improvement, and who consistently race AIR as the best place to work. Two important explanations of AIR's low controllable expenses are the high productivity of air service managers and their long tenure. Air values technological efficiency. It gives a higher priority to a sense of mission and a commitment to the personal respect and relationship that bind together teams and customers. Taken together, the result is sector-leading customer satisfaction, sector-leading customer retention, 62% in the last 12 months, and sector low rate of growth in operating costs. In a moment, John will comment on the quality of the air portfolio, in the top three of apartment REITs when measured by average rents, and number one in rent growth. Paul will follow to comment on the safety of the air balance sheet. No refunding required for two years, little repricing risk, almost $2 billion in liquidity, enough to refund all maturities until 2030. Looking ahead to this quarter and to the rest of 2023, shareholders should expect more of the same. Solid execution grounded in a strong culture, aggressive portfolio management, a safe balance sheet. With thanks to the entire air team, including my helpful and engaged colleagues on the air I'll turn the call to Keith.
spk06: Thanks, Jerry. The first quarter was a good quarter and on plan. Results like these are a team effort. Our success in OPSO is much to John, who has led the charge to transform our portfolio over the past two years, placing us in the right markets and with communities that residents find appealing. We also owe much to Paul. and his disciplined approach during the pandemic accounting for past due rent. It puts us in a good position now that restrictions on rent collections are winding down. Eric gets two benefits from Paul's approach. First, we do not have to make provisions today for rent not received two and three years ago. In fact, we have upsides when previously reserved rent is collected. Second, as non-paying residents move out of their apartments, we were able to re-rent those apartments and to add positive income. The number of residents two or more months delinquent in normal times is quite low. It ballooned during the government restrictions during the pandemic and now is steadily decreasing from 1,000 to begin 2022 to 250 in January to 130 today. And when these residents moved out, re-rented to customers who are now paying rent, and doing so with leases that are actually 10% higher than the previous resident. Most impactful is the operations team. We worked hard to develop a business playbook, what we call the air edge. And our first quarter performance is further evidence that our platform is impactful and leads to a different result. The air edge is a combination of process, technology, analytics, and most importantly, people. We begin with an approach tuned to attract high-quality residents that want to stay with us long-term. This is the core of creating a community where relationships matter and make our residents stickier. We're diligently provide world-class customer service with our residents scoring us 4.3 out of 5 on 10,000 surveys during the first quarter. That customer service is made possible by our on-site teams who are committed to not only maintaining our properties, but building the sense of community and taking care of residents. As a result, our residents stay put, leading to our retention of 61.9% over the past year or a turnover of just 38.1%. To put that in context, we had 110 fewer move-outs in the first quarter compared with 2022. That lower turnover is one of the key drivers of AIR's decade-long decreases in personnel, marketing, and turnover costs. Fewer units to lease drives higher pricing power. So too does the stable community created by friends and neighbors when turnover is so low. Not only that, Our experienced and motivated leasing team supports applicants throughout the process, matching their needs with available product and selling the value of the community, not just a commodity. This isn't just a philosophical stance. It translates into results. Let me walk you through our first quarter. Rate growth remained robust with signed new leases up 8.7%, renewals up 8.4%, and blended average lease rate growth of 8.6%. Occupancy was strong at 97.5% for the quarter, which translated into revenue growth up 10.1% from the prior year. Controllable operating expenses were down 20 basis points due to the lower turnover I mentioned, which allows us to be more efficient in our staffing and marketing efforts. Total expenses were up 3.3%, and as a result, net operating income growth was 12.7%. This culminated in a peer leading net operating margin of 73.9%, an increase of 170 basis points from last year. Adding the AirEdge to acquisitions is a predictable engine that drives above market growth, as demonstrated by our first quarter results. Our class of 2021 in Washington DC and Fort Lauderdale, now in the same store portfolio, and revenue growth 50% higher than the rest of our same store communities, contributing 60 basis points to same store growth. Controllable operating expenses at these acquisition communities were down 10% year over year. The efficiencies inherent in the AIR platform continue to earn in. Our class of 2022 is on track with the stabilized performance after the AIR-EDGE implementation expected to be similar with revenue growth roughly 50% above same store with decreases in COE. Our 2023 acquisition of Southgate in Miami Beach is in the very early days, but is on a similar trajectory. April is on trend and on plan, bringing the typical spring acceleration and the expected seasonal frictional vacancy. Rates continue to be strong with signed leases 8.1% above the prior lease, renewals up 7.8%, and blended average lease rates up 8%. Looking forward at rates, we see blends in the range of 8% throughout the second quarter. Leasing is accelerating in line with seasonal expectations, with April ending 45% up from March volume. And as expected, average daily occupancy has declined sequentially to 96.4% as we are beginning to see the planned churn of move outs associated with peak season expirations. We anticipate an occupancy rebound during the third quarter, similar to our performance in years past. It remains early days. We're roughly a third through our leasing for the year. And even so, everything I see gives me confidence. The demand is strong, rates are solid, our customer service remains world class, turnover is low, residents are paying rent, and the air edge will continue to drive above-trend results for the balance of 2023. My thanks to all the air team members for a great start to the year. Your consistent energy each and every day inspires me. I look forward to a successful peak season with you. And with that, I'll now turn the call over to John McGrath, the Chairman of our Investment Committee. John. Thank you, Keith.
spk09: main focus on repositioning the AIR portfolio through disciplined portfolio management and a creative capital allocation. Keith and his team's extraordinary work has made AIR the best operator among the multifamily REITs. This coupled with an improved capital allocation, including diversification by market and price point, has enabled us to take a portfolio that was already quite good and make it even better. Our improved portfolio quality is evident in average rents, where we rank number three among our peers, and in rental growth rate, where we rank number one. And that's in our same store portfolio. Our acquisition portfolio is growing even faster, thanks to Keith's team and the AirEdge. While we are proud of the results, there is still work to do. Looking ahead, I expect business as usual. Keith will focus on operational excellence, and I will work to improve portfolio quality by recycling capital into well-located, high-quality properties that will benefit from the air edge sufficiently to generate enhanced returns with limited business risk and no increase in financial leverage. Although we have no fixed goal for additional acquisitions in 2023, Josh and I are busy discussing possible transactions. I am confident in our ability to source and execute trades, which will continue to improve the quality of the air portfolio, and whose returns will be highly accretive to our cost of capital. With that, I'll turn the call over to Paul Belden, our Chief Financial Officer. Thank you, John.
spk10: Today I will discuss your high quality balance sheet, report first quarter results and our expectations for the full year, and conclude with a brief comment on our dividend. The AIR balance sheet is well positioned for the uncertainties of today's capital markets. I'd like to spend a moment today addressing its liquidity, repayment risk, interest rate risk, and leverage relative to EBITDA. Air available liquidity is approximately $1.8 billion. Adjusting for size, this is about three times the pure average. To put this in context, current committed sources are sufficient to repay all of our debt that comes due for the next six years. In April, we established a secured credit facility to complement our existing revolving credit facility. The new facility currently provides for up to $1 billion of committed financing on an as-needed basis for the next 10 years. Properties can be added and removed from the structure quickly and with minimal cost. The pricing is based on the Fannie Mae grid, which today is lower than bond financing by 50 to 75 basis points. While we have no current plans to access the new secured facility that provides inexpensive insurance. AIR has no debt maturities for the next 24 months and as noted previously, we have committed financing available at our option sufficient to refinance all debt maturing before 2030. Third, interest rate risk is limited to our floating rate debt, which approximates 4% of net leverage. A 1% change in rate would affect earnings by less than a penny per share per year. Fourth, Our leverage is elevated today by the acquisition of Southgate Towers in January. We expect that the amount borrowed will be reduced with proceeds from property sales and that EBITDA will increase from the earning of existing leases plus new and renewal leasing that captures our current 4.5% loss to lease. We expect to finish the year with leverage to EBITDA of 5.9 to 1. Turning to first quarter results. First quarter FFO was $0.55 per share. equal to the midpoint of guidance. Same store NOI growth slightly exceeded our expectations, but this recurring positive was offset by the non-recurring negative of higher than anticipated casualty losses. Looking forward, we anticipate second quarter FFO between $0.55 and $0.59 per share, driven by sequential NOI growth in our same store and acquisition portfolios. And we anticipate second half FFO at the midpoint of $1.29 per share, a 17-cent acceleration from what we expect in the first half. We anticipate that roughly two-thirds, or approximately 11 cents, will come from the earn-in of today's rent roll in the same store and acquisition portfolios. Another 3 cents or so is likely to be achieved through future leasing at today's loss to lease. The remaining 3 cents may be achieved through a variety of sources. including future market rate growth at levels consistent with typical peak season results and or lower off-site costs, collection reserve past due rent, or the successful resolution to a long-running real estate tax appeal at Lincoln Place. Last, the Air Board of Directors declared a quarterly cash dividend of 45 cents per share. On an annualized basis, the dividend reflects a yield of over 5% based on the current share price. Additionally, the tax-efficient nature of ARIS dividend allows taxable investors to retain 40% more of its dividend as compared to peer average. With that, we will now open the call for questions. If you have any questions, substitute for time in the queue. Sierra, I'll turn it over to you for the first question.
spk05: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Our first question today comes from Eric Wolf, Wolf City. Your line is now open.
spk02: Hey, thanks for taking my questions. First question is just on market rent growth. Just curious how it's grown so far this year, whether it's in line with your expectations, whether you still think that they're released in guidance, that there's not going to be any market rent growth for the year.
spk06: Hey, Eric, it's Keith. I would say that as we've started out the year, we've seen a little bit of market rent growth, about 2% that has been built in so far. Now, of course, we're only a third, a little over a third of the way into it. What I would tell you that we're seeing is that our blends at 8% in April, we think it continues through the balance of the second quarter. But to be clear, we have a lot of the leasing activity that really has to happen in June, July, and August. We wouldn't get ahead of ourselves, but we're seeing some good indicators.
spk02: I understand. And then your release highlighted the upside from implementing your system on new acquisitions. But just curious, for Southgate Tower specifically, could you just help us understand what kind of NOI upside you see there, where it's coming from, when do you think you'll achieve it?
spk06: Eric, can you repeat it? The question came in a little bit. It was hard to hear.
spk02: Understood, yeah. I said that your release did a good job highlighting the upside from implementing your system. So I was just curious for Southgate Tower specifically whether you would expect a sort of similar 20% increase in NOI and sort of where that's coming from.
spk09: Hi, Eric. This is John. On Southgate, when we underwrote the opportunity, We were looking at the fact that we had a wonderful acquisition that we had the ability to implement the AirEdge, specifically looking at opportunities to capture the loss of lease, reduce cost due to QIES operating platform and performance. And we're seeing that, although early days, we're seeing it actually coming to fruition today. Pass it over to Kate to give more specifics, but that's how we underwrote it in the beginning.
spk06: So, Eric, when we first took a look at Southgate, one of the things we went and looked at is we saw that we believe there was about a 30% loss to lease opportunity. Now, of course, that has to become realized and takes a couple of cycles to actually work its way through. But it was one of the greatest upsides that we saw in taking that one over.
spk02: Got it. Thank you.
spk05: Our next question comes from . Your line is now open.
spk07: Hey, I guess good morning to you guys out there. How are you? Great, great, thanks. First question's on the new billion dollar secured credit line. I was hoping you guys could expand a bit on the decision to pursue a secured line here. What's the pricing? Why secured? Why now? And beyond the incremental liquidity, are there any other messages that we should be taking away from this decision? Thanks.
spk08: Well, let's take them in reverse order. There's no particular message except that the world's unpredictable and there are various extreme possibilities inside the current economy. And it's good to have ready cash. And so we want to be sure that we've got lots of liquidity. And Paul's done a great job in arranging this facility, which is very low cost, very long term, and gives us lots of optionality.
spk07: Can you share the term and the pricing? I didn't notice the pricing in the release.
spk10: Yeah, Handel. This is Paul. So the facility has a duration of up to 15 years where new loans can be originated during the first 10 years. So you can think of that as a 10-year facility. And then pricing for the loans will be based upon market at the time a loan is desired. So at today's rates, that would be probably around the 5%, 5.1% level. But today, we don't have a need or an intent to access the facility. So as I mentioned, my remarks is viewed from our perspective as insurance, because as Terry said, the future is uncertain.
spk07: Great. Thank you for that, Collar. Keith, quick one for you. Maybe you could touch a little bit on the deceleration of renewals in the quarter. Is that an intentional decision on your part, perhaps, to moderate turnover, or are you sensing any pushback here? I'm curious on the, again, the renewal trend in the quarter fix.
spk06: Endell, thanks for the question. No, absolutely not. It's really just what becomes the take rate. So when we send them out, they'll have a range of possibilities that could be from 8% to 10%. What will happen is some folks will take some of the increases those that are at the higher levels and lower levels. We get a different blend and a different mix. But no particular strategy. We ultimately always solve to total revenues at the bottom line. So we want residents to stay with us longer. That gives us pricing power, but not anything here that was intentional.
spk07: Great. Thank you.
spk05: Our next question comes from the line of John Kim with CMO Capital Markets. Your line is now open.
spk04: Thank you. Good morning. I wanted to ask about occupancy. Your lease growth rates are healthy and sector leading, but it seems to be at the expense of occupancy, which declined 90 basis points in April versus March. And Keith, you mentioned last year that during the second quarter occupancy trended down, I think it was down 120 basis points during the quarter. And I was wondering if you were expecting a similar trajectory in the second quarter this year.
spk06: John, thanks for the question. When you look at the occupancy move that happened from March to April, there's two factors that really play into it. The first one is, by design, we had 60 basis points that came down through seasonal frictional vacancy. And that's just additional lease expirations that are going through the process of moving out and moving in. And then the second piece to that would be the impact of the 200 additional skips and evicts that happened in the first quarter that we're reoccupying through the balance of the year. And that's about 30 basis points. So when you look at those two pieces, that's really where you see the deceleration in occupancy. What I would further say is that it's exactly what we would have anticipated in our plan. And what we anticipate is we'll see even further occupancy that will drop as you get into, call it July being the low point, that we'll hit in the 95s. And then it will bounce back and we'll grow back. And we ultimately will finish up the year at 97 in that range.
spk04: Okay, just to clarify, in July it would be in the 95% range or it would drop down to 95%?
spk06: It'll be in the range of 90, in the 95s.
spk04: Okay. My second question was on insurance. You noted in your press release a 40% increase in your same store pool and that was a million dollars above budget. I was wondering if you can comment on how the insurance came in on your overall portfolio just given there's a fair amount of your Florida assets not in the same store pool.
spk10: Yes, John, this is Paul. The pricing that we quoted in our release is really applicable to both the same store and the overall portfolio. And so to provide a little bit more context and color, our overall increase is 40%. About 10% of that is due to increased TIV or increased value of the properties. And the remaining 30% is due to premium increases. But I think the most important thing that I don't want anybody to miss is the fact as we went through the renewal process, Patty Schwader and our team did a wonderful job of negotiating our policy for this upcoming year at levels and risk consistent with what we've had in the past. When we executed this renewal, we did not take on any additional risks. We're not self-insuring more. We have very high-quality carriers, and we feel quite good about it, although the costs are higher than we would like.
spk03: That's great. Thank you.
spk05: Our next question comes from Shawn Meehan with RAL, with Goldman Sachs. Your line is now open.
spk00: Hi, good morning, good afternoon, everyone. Guys, could you talk about non-themed store expense that rose substantially in the quarter? What was the biggest driver, and was this all insurance? It's just a different way of asking the question that was just asked on the conference call just moments ago.
spk10: Shawnee and our supplemental, as you know, we report two different portfolios. One is our same store and the second is other. What's in other is our couple of assets in New York City. And so if you look at our first quarter property revenue and property expenses from 2022, you'll see about a million, million and a half of each. That's the New York City portfolio. But then if you look at that in the first quarter of 23, you'll see that that has increased substantially. And that's just due to the acquisitions that we've completed in 2022 and 23. So there's nothing really unique or unusual that's happening there. It's just a function of our acquisitions in the past 12 months.
spk00: Noted. Thank you. And could you talk about some, you know, color across different markets? Are there any markets where you are using concessions at the moment, you know, house supply tracking, any general markets? geographic market color would be very appreciated. Thank you.
spk06: Hey, Sharni, it's Keith. And well, let me walk you through a few things that I think about. The first one is that in D.C., we're seeing just a market that just has been extremely strong and stable. I'd say that not only has the occupancy has been Incredibly good, but we've seen the ability to be able to continue to press rents there, and I'd say that that stands out. Los Angeles is a standout because we have good, bad news going on there. One of the questions that came up was part of the occupancy trade. Well, those evictions, skips, and evicts that have occurred, those really have multiple benefits to come back to us. The first one is that what we're seeing is that those late leases are trading out at 10% plus. The addition to that is that we have residents who are paying rent compared to those that weren't. And then the third piece is the great work that Paul has done, reserving, gives us the opportunity to have further collections for past due balances from previous periods. So we see LA as one that we have a lot of optimism around while there's a short-term transition in occupancy. There's an upside that comes with that. And then I would just point out, of course, Miami and San Diego have been top winners for us. Denver is showing acceleration in a variety of places. So those are the way I'd walk you through the markets.
spk00: Great. Thank you so much for that detail.
spk03: Thank you.
spk05: Thank you for your question. Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Our next question comes from John Polosky for Spring Street. Your line is now open.
spk11: Hey, thanks for the time. A question for Paul or Keith. I'm looking at the components of SAMHSA revenue growth in the table you guys put at the bottom of Page four in the SUP. The 80 bps sequential increase in residential rental income struck me as quite low relative to the really high blended lease spreads you achieved. Was there anything unusual drags in the first quarter outside of the late fees that would have suppressed sequential revenue?
spk10: This is Paul. I'll start and see if Keith would like to add anything. There's nothing unusual about I guess what I would probably have you think about is the timing of expirations and how it's rolled through the rent roll. But the business, as Keith has mentioned, has proceeded consistent with what we expected.
spk06: John, I wouldn't add anything other than it's playing out as we would expect. So maybe some timing in there, but nothing to point out.
spk11: Okay. Was there an unusually low percentage of leases that actually expired outside of the, you know, in addition to the normal seasonally low period?
spk06: No, nothing unusual outside of our norms. What I would tell you is our turnover was low when we had a low number of move outs.
spk11: Okay. Last one for me, Paul, just in terms of the trajectory of the leveraging you're trying to get to by the end of the year. Can you just clarify for me, I'm unclear, what type of dispositions are contemplated through the balance of the year? I know you only have $50 million outlined on page 10 of this up, but it feels like you need more in dispositions to get to the leveraging. So how much are you looking to sell this year?
spk10: I think you're correct in our supplemental. We got it to $50 million of dispositions. That's the plan. John and team are working on that, and we expect that will get executed. We also expect the benefit of EBITDA growth. And so if you think about the cadence of our FFO growth during the balance of the year, I commented earlier on the 17 cents of acceleration in the second half. That is really what's going to drive increased levels of EBITDA, and that will allow us to reduce our leverage ratio as we wrap up the year.
spk02: Okay. Thanks, Luton.
spk05: There are no further questions at this time. I will now turn the call over to Terry Cossodyne with any additional remarks.
spk08: Well, I just thank each of you for your interest in CARE. If we've left you with any questions, please call Paul or Matt O'Grady or myself. We'll do our best to answer them. And we look forward to seeing many of you next month at NERI. Be well.
spk05: That concludes today's conference call. You may now disconnect.
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