Apartment Income REIT Corp. (AIRC) Q4 2022 Earnings Call Transcript

Apartment Income REIT Corp. (NYSE:AIRC) Q4 2022 Earnings Conference Call February 10, 2023 1:00 PM ET

Company Participants

Lisa Cohn – President and General Counsel, AIR Communities

Terry Considine – CEO

Keith Kimmel – President of Property Operations

John McGrath – Co-CIO and Chairman of Investment Committee

Paul Beldin – CFO

Conference Call Participants

Haendel St. Juste – Mizuho

John Kim – BMO Capital Markets

Nick Joseph – Citi

Chandni Luthra – Goldman Sachs

Rich Anderson – SMBC

John Pawlowski – Green Street

Operator

Welcome, and thank you for attending today’s AIR Communities Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Alexis, and will be your moderator for today’s call. [Operator Instructions]

I would now like to pass the conference over to Lisa Cohn, President and General Counsel of AIR Communities. You may proceed.

Lisa Cohn

Thank you, Alexis, and good day. My name is Lisa Cohn and as Alexis said, I am the President and General Counsel of AIR Communities. During this conference call, forward-looking statements we make are based on management’s judgment, among other things, current market conditions, macroeconomic trend, socioeconomic drivers, including projections related to 2023 performance expectations. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings.

Actual results may differ materially from what may be discussed today. We will also discuss certain non-GAAP financial measures such as funds from operations. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of our 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, Co-CIO and Chairman of our Investment Committee; and Paul Beldin, 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?

Terry Considine

Thank you, Lisa, and welcome to all of you on this call.

AIR was designed to be the most efficient way to invest in public ownership of multi-family properties. The past year provides this confirmation. At 74%, AIR operating margins are the highest among our peers. At 67%, AIR has by far the highest rate of conversion of revenue into free cash flow. The highest among our peers and 10% higher than peer average. And for your information is posted on our web page and you might be interested to review the calculation.

One foundation is the prowess of Keith and his ops team. Like other apartment owners, rent growth last year was good. AIR same-store revenue was up more than 10%. But unlike all other owners that I know AIR’s COE, Controllable Operating Expenses actually declined by 10 basis points in the most inflationary economy of the past 40 years. How does Keith do it?

A second foundation is the portfolio management of John McGrath. Roughly 3 times is active in the past two years as the average apartment REIT. John and his team sold 21% of our starting assets and purchased about $2 billion of acquisition assets.

The acquisition Class of 2021 increases the overall same-store NOI growth rate by about 100 basis points. The Class of 2022 about the same size, it’s outside the same-store portfolio, and has net operating income growing at faster than 20%, approximately 2.5 times the growth rate of the same-store properties.

A good example of the consistency of AIR ops can be seen in the fourth quarter in January and now February leasing activity, and without the seasonal slowdown others faced. A good example how AIR paired trades improved portfolio quality and revenue growth can be seen in John’s fourth quarter trade of 50-year-old Garden apartments in the outer suburbs of Boston, for an almost new mid-rise in dynamic Miami Beach.

It also shows how we like to invest on Highland, where zoning or neighborhoods or mother nature make a location attractive to high-quality residents and is protected in some part from competitive new supply. Good ops and dynamic portfolio management, combined with Paul’s balance sheet with little floating rate debt and Lisa’s disciplined oversight of off-site activities in costs, makes for growth and the greatest efficiency of any public apartment REIT in converting revenue to free cash flow.

Looking to 2023, this year, we plan for more of the same. Keith and his team will select the best residents and then work hard to satisfy and retain them. John – Josh and John Stein will look for acquisitions whose returns magnified by the AIR Edge are accretive to AIR’s cost of capital. Paul will keep score and our balance sheet safe with low leverage long maturities, limited interest rate exposure and abundant liquidity. And Lisa will develop our precious human capital, manage risk, upgrade corporate systems, most important Gardner priced culture.

They’re conflicting views about what to expect from the economy this year. I note that the stock market and the bond market are pointing in different directions. AIR is prepared for both. If inflation continues higher and longer, AIR customers can afford higher rents, and Keith has proven decent control costs. If the Fed raises interest rates, their bottom line is little affected because Paul has only 4% of borrowings and floating rate debt.

If the economy turns down, AIR is resilient with residents with high credit scores, incomes averaging $225,000 in the latest quarter and a greater than 60% propensity to renew. If the transaction markets prove difficult, John and Josh have demonstrated their ability to source capital from property sales and to invest in properties with big upsides when added to the AIR platform.

I note that Paul’s guidance assumes no increase in market rents and yet results in same-store net operating income up almost 9%, and FFO up 10% over last year’s run rate FFO. It’s not guidance and only my opinion, but I expect inflation to linger and net rents in our portfolio may grow faster than we expect. I’m optimistic about AIR’s future.

Efficiency and effectiveness provide comparative advantage in operations and acquisitions. We are a veteran team committed to continuous improvement and to each other. Our intentional culture makes AIR a great place to work. I take pride in its regular recognitions and National Top Workplace Award is the most recent.

I look forward to the opportunities of this year and appreciate my teammates for their exceptional work last year. I thank Tom Keltner, Chairman of the AIR Board, and my fellow Directors for their engagement and good counsel, I’m grateful to shareholders. We work hard to be good stewards of your precious capital.

With no more, I’ll turn the call to Keith Kimmel, Head of AIR Op. Keith?

Keith Kimmel

Thanks, Terry.

I’m pleased to report we wrapped up a good 2022 with a solid fourth quarter. On today’s call, I will cover: AIR’s operations, which have had a more positive trajectory over the past four months than multi-family in general; AIR’s acquisitions, a second portfolio that drives elevated growth as we apply the AIR Edge; and AIR’s revenue outlook, which is highest amongst our peer group and based solely on facts and evidence today.

Now to the details. First, the core business continues to do well. Revenue was up 9.9% from last year and the sequential growth of 1.8% made it the fastest-growing fourth quarter in our history. We saw rate growth in double-digits, with signed blended lease rates up 10.2% during the quarter. Occupancy increased each month from 96.7% in October to 97.4% in December. January further improved with occupancy of 97.5% and rate strengthening sequentially.

Second, AIR Edge is a unique predictable advantage. While AIR Edge is comprised of a multitude of innovations, I boil it down to a single concept, consistency. It is consistency of resident selection, ensuring we have the highest income requirements, credit standards and resident quality. It is consistency of customer service. Our teams deliver day in and day out, relishing the opportunity to provide a world-class experience.

Our residents scored us over 4.25 on satisfaction surveys in the fourth quarter, leading to our trailing 12 month turnover of only 38.9%. It is consistency of execution and innovation delivered by a talented and seasoned on-site team, bolstered by a platform of technology, process and centralized support.

As a result, fourth quarter expenses were down 10 basis points year-over-year and controllable operating expenses were down 30 basis points. And it is consistency that is the key to AIR’s operating margin. We established a new high watermark, achieving 76.1% in the quarter.

Third, AIR has a proven track record of above-trend growth and acquired properties, what we call the AIR Edge portfolio, which will generate long-term outperformance. The great work of John and his team has positioned us in superior submarkets with higher rents, higher quality customers and higher upside for growth. For our AIR Edge Class of 2021, both revenue and NOI have grown about 50% faster than our same-store communities in the fourth quarter.

We project these communities to grow at twice the same-store pace in 2023 as the AIR Edge continues to lead to both additional revenue and expense decreases. The contribution of the AIR Edge at these communities is worth about an additional 100 basis points to the same-store growth rate. Our acquisition Class of 2022 is on a similar trajectory. These communities are ahead of our underwriting and are expected to grow significantly faster than our stable portfolio of communities.

Fourth, 2023 has the makings of another good year. Our revenue growth of 8% is a direct result of three facts and evidence today. AIR has 5% earned in from leasing activity in 2022. Our 5% loss to lease today will contribute 2% growth in ’23, and our program of upgrading apartment homes will drive another 1%.

Those three factors, none of which rely on market rate growth, will result in an 8% increase in AIR’s revenue. Occupancy is anticipated to be 96.9%, flat from last year, with January occupancy of 97.5%, continued strength in February and robust demand, which is 10% ahead of 2022.

Bad debt is expected to improve. Excluding the noise of repayments and delays, the run rate of bad debt is around 50 basis points. Residents are increasingly paying rent on time. And in the cases that they don’t, our options for collections are returning to pre-COVID norms. At the beginning of 2022, we had 1,000 residents more than two months delinquent, and today, that is down to 250.

Of those residents, a vast majority are now in the collections process. The final input to ’23 revenue is market rate growth. And while we don’t have a crystal ball, here’s what I do know. Rates have strengthened this year as we have increased asking rents by $40 or 1.5% thus far in ’23. In total, we are projecting 8% revenue growth based on 8% rate growth that we can directly see today, flat occupancy and no additional market rate growth.

Now look at it another way. We can view 2023 revenue growth through second lens. In most markets, our outlook is in the mid-single-digit revenue growth. We add to that the benefit of our market allocation, AIR’s portfolio is over 20% allocated to South Florida, where earning alone is in the double-digits, and we anticipate growth in the high teens.

Finally, we had the benefit of John’s refresh of our portfolio. Our 2021 AIR Edge portfolio now entering our same-store population is expected to see revenue growth in the mid-teens. In the way we look at it, AIR a clear path to strong revenue growth in 2023. My thanks to all the AIR team members for a fantastic year. Their consistent attention to our residents and communities has set us up for a great shared success in 2023 and beyond.

And with that, I’ll now turn the call over to John McGrath, the Chairman of our Investment Committee.

John McGrath

Thank you, Keith.

We are focused on repositioning the AIR portfolio for disciplined portfolio management and accretive capital allocation. Since the separation from Aimco, $4.1 billion of transactions or approximately 41% turnover of GAV, about 3 times the turnover of our peers has transformed our portfolio in terms of value, growth, risk and quality.

We have recycled capital into higher quality properties and higher gross markets, materially reduce exposure to markets with greater regulatory and political risk and an uncertain rule of law. Continue to improve our capital allocation, including diversification by market and price point and improve the quality of our portfolio as measured by expected rent growth, average rents, age and physical condition. And we increased the allocation of GAV to our high-growth AIR Edge portfolio from 0 to over 17% today.

As shown in the supplemental schedules of the earnings release, during 2022, we furthered our goal of continuously improving portfolio quality by selling 18 of our lower-rated properties, which were located in slower growing markets with high regulatory exposure, had average rents 20% below our portfolio average and whose average effective age was about two-thirds older than that of the portfolio. We also allocated $840 million of capital in 2022 and another $298 million in January 2023 to neighborhoods that exhibit high growth due to durable demand factors and have constraints on competitive supply.

These accretive acquisitions were match funded and are earning an attractive spread over the unlevered equity cost of capital. Turning to 2023. Market uncertainty and volatility have changed the calculus. However, therein lies the opportunity. During the recent boom times, cheap money and over-speculation attracted investments from every corner.

As the market downturn set in, investor sentiment sourced, competitors were forced to pull back and buyer pools became shallow. An elevated cost of capital made it harder for buyers to make deals pencil, sidelined levered investors and forced others to take a cautious view of the future.

As a result, transaction volumes are well off peak levels, driving uncertainty of pricing and a widening of bid-ask spreads as many sellers hesitate at the change pricing and choose to wait for greater clarity or better days. To be sure, uncertainty makes it tough. But our experience, economic downturns present a tremendous opportunity for profitable growth. AIR is well positioned to invest through a downturn and capitalize on the opportunities being presented and these exciting, albeit uncertain times.

We have comparative advantage in transactions market due to our ability to generate enhanced returns through non-market advantages such as Paul’s balance sheet, which is safe, secure and flexible, with ample liquidity and access to all sources of capital. The ability to use non-market currencies, such as OP units, to provide significant tax advantages and greater after-tax cash proceeds

Incidentally, we use OP units in 50% of our acquisitions, which Paul neutralizes by repurchase of AIR shares. And most importantly, the AIR Edge, simply put, properties are worth more in Keith’s hands. As I’ve stated on past calls, errors in the spread business, and we will continue to execute a capital allocation strategy that utilizes our paired trade philosophy. Paired trades improve both portfolio quality and rental growth rates and allow us to be relatively agnostic to market volatility while also establishing the cost and availability of our equity capital.

Consistent with our strategy in November, we locked in an attractive cost of capital by closing the sale of six 50-year-old Garden apartment properties in outer suburbs of Boston. The proceeds from the sale were used to fund the $298 million acquisition of Southgate Towers in January. Southgate, which has got rehabbed in 2016, is located a few blocks away from our Flamingo assets in the South Beach neighborhood of Miami Beach.

The acquisition improves the quality of our portfolio by recycling capital into a high-quality asset located in a high-growth, supply-constrained and regulatory-friendly submarket. Like our cost of ’21 and ’22 acquisitions, which are performing well ahead of underwriting, the investment in Southgate is expected to be accretive and earnest spread over the cost of capital of 200 basis points or more.

Looking ahead, we are confident in our ability to continue to source and execute similar trades whose returns magnified by the AIR Edge will be highly accretive to our cost of capital. However, given market uncertainty, we have no fixed goal for additional acquisitions in 2023. While Keith is rightfully optimistic, when buying, I take a more cautious view. Growth for the sake of growth is not a strategy I advocate. We will look to continue investing in neighborhoods and addresses that are attractive to high-quality residents and have some protection from competitive new supply.

Despite having a cautious disposition, I remain bullish on our 2023 growth prospects. AIR’s future investments, irrespective of the economic climate in which they are made, are expected to be highly accretive and an attractive spread over the equity cost of capital within the company’s leverage policies and be built upon the company’s solid operational foundation.

With that, I’ll turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Paul Beldin

Thank you, John.

Today, I will discuss AIR strong and flexible balance sheet, full year 2022 results, our expectations for 2023 and conclude with a brief comment on our dividend. AIR’s balance sheet is well positioned for a period of economic uncertainty, including today’s unsettled interest rate environment.

First, leverage is low. Leverage EBITDA is 6.05:1, and variance to our target range of 5 times to 6 times of some $26 million as a result of the timing of share repurchases, which I’ll discuss further in a moment. In 2023, we anticipate the leverage to EBITDA levels will vary from quarter-to-quarter, but our year-end target range remains unchanged. Second, liquidity is ample, with well over $800 million now available under our revolving credit facility. Third, we have limited repricing risk and limited exposure to floating interest rates.

Subsequent to year end and on a leverage-neutral basis, we borrowed $320 million for 10 years at a fixed rate of 4.9%. Proceeds were used to refinance our sold debt maturity before May 2025 and to reduce borrowings by $230 million on our revolving credit facility. This transaction reduced floating rate debt to $150 million or 4% of total leverage and increased our weighted average maturities by nine months.

The quality of the balance sheet is not just my opinion Moody’s issued a Baa2 issuer credit rating, supplementing our BBB flat rating from S&P. With two investment-grade ratings, we have access to the full suite of debt capital markets. We have access to the public and private bond markets, the bank debt market and non-recourse property-level debt.

Now turning to full year 2022 results. Full year FFO was $2.41 per share, inclusive of a $0.22 contribution from a now repaid Aimco note. Last spring, we decided to allow prepayment on the note to delever and extend debt maturities, all while lowering our engagement with Aimco to advance the separation begun the year before. When we announced the prepayment, we provided guidance for run rate FFO that is FFO exclusive of the contribution from the Aimco note expected to be $2.19 per share.

Full year 2022 run rate results delivered that 2019 run rate. In same-store operations, we outperformed our expectations, with full year same-store NOI growth up 14%, 200 basis points ahead of our beginning of year expectations. Revenue was up 10.2%, and operating expenses were up only 40 basis points. Furthermore, controllable operating expenses were down 10 bps, a remarkable achievement in a year when the CPI increased 6.5%.

Outside same-store, a 21 acquisitions did even better, with fourth quarter growth rate in NOI almost 50% higher than in the same-store pool. We used our strong balance sheet and abundant liquidity to take advantage of the stock market doldrums to repurchase a total of 8 million shares, 5% of our shares outstanding at the start of the year at an average price of $39.49 and an expected IRR of approximately 10%.

These repurchases are inclusive of 654,000 shares repurchased in November and December to neutralize the OP units issued in connection with the January acquisition of Southgate. As we look forward to 2023, we expect FFO per share at the midpoint will be $2.41, up 10% from 2022’s run rate FFO of $2.19 million.

We expect this growth to be the result of a $0.24 addition from 8.8% NOI growth in the same-store pool, inclusive of an approximate 100 basis point benefit due to the inclusion of the faster-growing Class of 2021 properties, partially offset by a $0.02 subtraction due primarily to the combination of NOI loss due to property sales and higher interest expense from a combination of earning of higher interest rates from 2022 financing activities and higher average outstanding balances, partially offset by benefits from incremental contribution from our 2022 acquisitions, the January acquisition of Southgate and a net $0.02 benefit from share repurchases.

Finally, a few quick comments on our dividend. This refreshed tax basis continues to result in a taxpayer-friendly dividend. In 2022, AIR’s dividend of $1.80 per share with 86% taxable at capital gains rates and 14% at ordinary income rates. For those investors who are tax-sensitive, each dollar of the AIR dividend was worth 39% more after tax than was the peer average. In 2023, we anticipate our dividend will continue to be the most tax efficient of the multi-family peer group.

With that, we will now open up the call for questions. Please limit your questions to two per time in the queue. Alexis, I’ll turn it over to you for the first question.

Question-and-Answer Session

Operator

Absolutely. The first question comes from the line of Haendel St. Juste with Mizuho. You may proceed.

Haendel St. Juste

Good morning to you guys. So first, I guess, congratulations on another strong quarter. My first question is on the blended rents here, which are holding up much better than your peers, especially on the new lease rate side. So I was hoping if you could provide some color on the trend of the blended rate throughout the quarter and into early this year? And I’m curious if your expectations over the next few months into the spring, what sort of path would you expect the blended rates to follow? Thanks.

Keith Kimmel

Haendel, it’s Keith. Thanks for the question. Well, you can see in our walk as we’ve been looking at our blended rates that they’ve been in around the 10% plus range. As we look into January, we’re in the 9s, essentially, is what we’re coming in at. And when we look forward, we can see our signed leases that are looking forward or maintaining a very similar type of trajectory.

Now of course, it’s early days in just January and a week into February. So there’s a lot still in front of us. But what I would tell you is, is we have an expectation that we’ll continue to see something similar like that over the next, call it, 30 days or 45 days.

But the important part is that, in January, we saw an acceleration. And so seasonally, we’re starting to see a pickup. We had raised our rates by about $40 or 1.5%. And we’ll see how that plays out. But of course, we’ll get together in another 90 days, and we’ll be able to give you a better update.

Haendel St. Juste

Got it. I appreciate that, Keith. And what am I missing on the new lease rate side, your new lease rates are much stronger than your peers. Maybe some color on that would be appreciated.

Keith Kimmel

Of course, Haendel. Look, I’d point to three different things. Our resident quality, our team members and our portfolio. And just – if you start with our – starts with our residents, and we are really highly focused on high-quality resins with high incomes, high credit scores. Our average FICO score is 725.

These are individuals that have the ability to sustain and be able to pay increases. And they’re just a different customer who wants to stay longer with us. That’s backed up by team members where our community managers and service managers have – they’ve worked for us for eight plus years on average.

So these are individuals who give exceptional customer satisfaction, knowing that all these things work together where residents will stay with us longer, team members work for us longer. And then, of course, not to be missed is the portfolio. And I talked about this in my prepared remarks. But when I think about the work John and his team are doing, we have multiple things that are really contributing to this.

One, let’s talk about Miami. Our position in South Florida, 20% where we’re getting really high rents, of course, that helps bolster. But not to be missed is the Class of 2021 that’s coming into play. And where we could apply the AIR Edge and where we can actually see upside when we take over a building, we can raise rents more than others. And between the combination of those things, I believe that’s really what you’re seeing that’s coming through in those numbers.

Haendel St. Juste

That’s helpful. That’s helpful. I appreciate that. One more, if I could, just on the expense side, maybe some color on the building blocks for the pressure you’re seeing. And then, I guess, just looking ahead, are you expecting to return to a more normal kind of low single-digit level beyond this year? I mean, obviously, that’s been a hallmark of the platform last several years. So I’m just wondering this year is more of an anomaly? Or if there’s something structural that perhaps could prevent you from going back to those lower levels? Thanks.

Paul Beldin

Thanks, Haendel. This is Paul. And I appreciate the question. I mean you’re very right to point out that our guidance for expense growth next year is very abnormal and atypical for us, our portfolio. There are really two factors that are driving the increase in our expense expectations. The first is an real estate taxes.

And so before talking about ’23, I just want to focus on the past for a second real estate taxes. Not only we did we have negative growth in real estate tax expense in 2022, but if you look at our compounded growth rate for the past three years, it has only increased on average by 1.7%.

And so what we are seeing in 2023 is a catch-up in valuations in many markets and the impact of two large tax appeals that occurred in 2022 that we don’t have as part of our guidance in 2023. And when we combine those two factors, you get an expectation of a real estate tax growth next year in the 7% to 8% range, which, if you look at our long-term trends, should moderate in future years, especially when you consider that 40% of our portfolio roughly is located in California and protected by Prop 13.

So the second factor in increasing expenses is on the insurance side of the equation. As I’m sure you’ve learned from talking with other multi-family companies and just through your industry context, you know that the property market right now is very difficult. It’s hard and premiums are increasing. So we think we have a potential for a sizable increase in insurance costs in that line of business. And that’s really what’s driving our expectations for this year.

Haendel St. Juste

Very helpful Paul. Thank you guys.

Operator

Thank you for your question. The next question comes from the line of John Kim with BMO Capital Markets. You may proceed.

John Kim

Thank you. I wanted to follow-up on the lease growth question because it is a bit of an outlier in the sector. I was wondering if you could break down what markets are driving that high lease growth rate? Is it just Miami? Or are there other markets that are giving you above your peers at 9%? And also how much capital enhancements or revenue had some CapEx, how much of that split additive to these growth rates?

Keith Kimmel

Hi, John, I’ll start with it, and then maybe I’ll turn it to Paul. But when we go through the lease to lease rates, we see it strong across the board, quite frankly. Miami would be – the highest would be in the mid-20s. But we have lots of other places that are coming in 8s to 10s, I think D.C., our Los Angeles portfolio that’s also in the 10 to 13 range. So we have a variety of places that we’re getting high rents and those new leases, not just any one particular spot.

Paul Beldin

John, and to address the capital enhancement spending, in 2022, we invested about $90 million in capital enhancements. The vast majority of that was in K&B programs across the portfolio. And so as we underwrite those projects, we anticipate not only a high yield on the initial investment but we underwrite an expected internal rate of return or an investment of 10% on our money in the way that the majority of that is manifested is through higher revenue growth. And so you are seeing a benefit of that investment in our – in the lease rates.

John Kim

Okay. Now that you’ve closed Southgate, and you have, I guess, a better idea of where rents are coming in at least in the beginning of the year. Can you disclose what the year-end cap rate is on the asset?

John McGrath

Hi John, this is John McGrath. We’re looking at a year one cap rate right around 5%.

John Kim

5%. So when you say 200 basis points above the cost of capital, is that just over a five year period? Or what can you specify on that?

Paul Beldin

That’s over the IRRs. So our deals will be accretive on – from the beginning, if you will, of our fair trade. And over the IRR period – 10 year IRR period, we expect to have a spread of 200 basis points or more over that cost of capital.

John Kim

Great. And then one final question for me is just you made a lot of discussions today or discussion points about getting into lower regulatory environment. So I was wondering if you were going to continue to pursue that path of reducing your exposure to California and some other highly regulated markets and allocating more towards the Sunbelt?

Paul Beldin

I’ll start and then maybe Terry would be to jump in. As part of our capital allocation, we are very focused on looking at concentration and concentration risk. And one of those areas is, of course, regulatory and political environments. So we will continue to balance our portfolio, both on where we see high growth, but also where we can reduce risk within the portfolio.

Terry Considine

John, I don’t have a lot to add to that. I note that there’s even discussions of national intervention in housing policies. So it’s just a fact of business in America today. We look at expected outcomes in different markets, and we look at the risk factor of regulatory excesses as part of that.

John Kim

Thank you. And sorry, for going over two questions. Sorry for that.

Operator

Thank you, Mr. Kim. The next question comes from the line of Nick Joseph with Citi. You may proceed.

Nick Joseph

Thanks. I appreciate the comments on kind of the AIR Edge and the benefits from the incoming same-store assets as well as, I guess, the acquisitions of 2022. When you look at those deals that you done over the past two years, were any of those pre-stabilization? Or is all the outperformance just from putting it on to your platform?

John McGrath

Hi Nick, this is John McGrath. The AIR Edge is what’s created the opportunity. We buy stabilized product. We put it onto our platform. The greatest advantage that I have as a deal guy, plain as simply as Keith and his team. I can drop the product on to the platform, and they take it from there and the magic has worked.

Nick Joseph

But all the acquisitions were stabilized when you acquire them?

John McGrath

Yes.

Terry Considine

Nick, what I would add to that is that, that also continues. So it’s not a one-time event. But we believe will happen over those 10 years is that in the first time, you’ll have this rate of increase as the customer selection process takes a couple of turns of the rent roll, the capital investment based planning and then investment and then rolls of the rent roll, so that when we take a stabilized asset and add to its value, that will be so much in the first year, but there will also be another increment in the second and another increment in the third and so forth, so that the first five years are likely to be elevated and then some reversion to trend.

Nick Joseph

Yes. Absolutely. I think a lot of the questions have just been really focused on January results and kind of the – maybe the diversion to trends that you guys are putting up versus peers and recognize it’s a competitive acquisition market. A lot of peers are very good in operations as well. So just trying to understand where that difference is coming from. But maybe the second question just on kind of capital allocation going forward. You’ve been doing some buybacks. What is the appetite going forward, just given where the stock trades relative to at least consensus NAV?

Terry Considine

Well, we have zero appetite to issue shares, if that’s your question. What we’ve done in paired trades is, if we’ve sold real estate –

Nick Joseph

On the buybacks –

Terry Considine

And reinvested where we have higher growth rates, when we look at the – where the stock trades, we see that as an opportunity. And it’s been about a 20% element of our investment policy over the last year or so.

Nick Joseph

Sorry, yes, the question was on more buybacks, not on issuing equity here.

Terry Considine

Well, as I said, we bought back 5% of our capital in the last year. And if pricing continues, we’ll continue to buy more. And when we look at the – this is part of a balanced program. We see that the real estate returns are that – equal to or greater than those of share buybacks.

Nick Joseph

Thank you.

Operator

Thank you, Mr. Joseph. The next question comes from the line of Chandni Luthra with Goldman Sachs. You may proceed.

Chandni Luthra

Thank you for taking my question, and congratulations on a very strong quarter. I’d like to go back to market trend growth a little bit. Look, I understand that guidance assumes no increase in market trends. But then, Terry, you did say that your view of inflation is that it will continue to linger. So in light of that, are we to then basically take away that guidance is conservative or the other end of that could be that things might fall off the cliff as the year progresses and therefore, market rent growth is not there, 0, because we all understand that you’ve obviously started with such a strong generally. So why not give a view of market rent growth in the slides?

Terry Considine

Chandni, it’s because we’re giving guidance for the year. And at a time when the Chairman of the Fed is trying to figure out what to think about the future, I think it would be foolhardy for me or AIR as a team to give specifics about what’s going to happen going forward.

So there is a conservative bias in what we do. It’s based on what we know today. That’s likely to change. In our remarks, we talked about what would happen if it changed in a positive way. And what would happen if it changed in a negative way.

And we know that on this call are people that are far more expert about the macro economy than a group of apartment operators. And so you can overlay your macro objectives and see what they would choose. After my own unworthy opinion that I think it’s going to be harder to get inflation under control. And if that’s the case, the likely outcomes are going to be higher rent growth, but also higher interest rates. Now we’re not too exposed on an operating basis to higher interest rates, thanks to Paul.

But going back to Nick’s question, that may show up in net asset values and property pricing. So those are all dynamic factors that could unfold in the year ahead. But for the moment, we think a very reliable basis to say that we don’t – we think you can probably rely on it not being worse than it is today and that there’s some upside in those numbers.

Chandni Luthra

Sounds fair. Absolutely. So my follow-up, I’d like to touch on the supply in some of your Sunbelt markets. Now we all know that there’s been a lot of capital, at least there was a lot of capital that was chasing some of these markets that are obviously, like you said, lease rates in Miami are still very strong. So curious as to how you see supply risk in some of the markets where you have been recycling capital into?

Paul Beldin

Hi Chandni, this is Paul. I’ll start and Keith, if you have anything to add, please jump in. Your question was framed in a manner of our supply risk in some of our new acquisition markets, and that has predominantly been in South Florida and then in the Washington, D.C. area. So just starting with South Florida, there is a lot of construction when you look at Miami Dade in that area in aggregate in total. But if you drill down and look at supply in close proximity to our properties, particularly the properties in Miami Beach, there’s very, very little competitive new supply in those particular areas.

And so while there might be some ancillary effects from new buildings delivered in other parts of town, we don’t expect that to meaningfully impact our business in 2023. Similarly, in Washington, D.C. our assets and our locations at our price points, we don’t have a concern. More broadly, where we do see supply though is that many of the submarkets that we’ve talked about on past calls, we see the Cedar City, Philadelphia area continue to have high deliveries as a percentage of existing stock.

There’s about 1,600 units that are being delivered within a mile of our Cedar City properties in 2023. And then the only other location of appreciable supply is here in the Denver area, where we see competitive new supply being delivered in the area of our 21 Fitzsimons and properties, but we have a very critical advantage in that and that our properties are the only multi-family properties that are actually on campus. So when you’re choosing a place to live, our location is far superior.

Chandni Luthra

That’s very helpful. Thank you so much.

Operator

Thank you, Ms. Luthra. The next question comes from the line of Rich Anderson with SMBC. You may proceed.

Rich Anderson

Thanks. Hello, everybody. So I want to go back to this January, 9.4%, blended number. And you said that the 2021 acquisitions added 100 basis points to your same-store growth profile, I think you said that. Is it a similar level of additive impact when it comes to this new renewal and blended math? Or is it substantially more impactful for some reason? Because the multi-family REITs tend to move in a pack in terms of operations and the numbers there, but this is just quite, quite different.

I’m just wondering if that’s driving as the differentiator if you’re – if there’s maybe a difference in the calculation methodology? Is there anything you could say that kind of explains this a little bit more than just saying you have the best residents and best properties?

Keith Kimmel

Rich, it’s Keith. When we look at the numbers that came in, in January, they are impacted very little, frankly, by the 2021 number that came – or the 2021 population as far as it goes as the new lease rates or the blended rates. While they’re impactful, they weren’t the thing that drove it. What we really saw was strength in places like Miami, Los Angeles, D.C. And frankly, San Diego would be another one that I would point out, in which we were able to continue to press rates and we had residents who are just continuing to stay with us and put us in that position.

Now of course, 2021 will earn in even further as we – or the Class of 2021 will earn it further as we get into the balance of this year, and we think it will – just as you pointed out, that 1% will be for the full year, but not in particular around January’s results.

Rich Anderson

Okay. The other outlier for you guys is bad debt running at 50 basis points. That’s also eventually better. Can you give some color behind that, why you’re doing so much better on that number? And maybe a related comment on how San Francisco is moving along these days in your eyes? Thanks.

Paul Beldin

Hi, Rich, good to hear from me. This is Paul. On the bad debt question, what we have seen as we looked at our bad debt experience through the quarter is that our bad debt expense has trended down. But I think a very important distinction to make is what is the net bad debt expense and what is the gross bad debt. And the difference between the two relates to government assistance payments or collections from former residents.

And so what we have seen that our gross bad debt has trended down quarter-by-quarter from about 240 basis points in the first quarter down to roughly 150 basis points in the fourth. And then if you look into that detail a little bit further, our fourth quarter, 150 basis points of bad debt, is made up of 100 bps of bad debt related to residents that Keith mentioned that are more than two months delinquent. And our confidence in lower bad debt experience next year is driven by the fact that whereas we had 1,000 of these residents in the beginning of the year, we only have 250 today.

And most of those are in eviction process, and we’re optimistic that we’ll be able to re-lease those units to rent paying customers in the relatively near future. And so that’s really what is driving our opportunity and our expectations going forward for next year.

Rich Anderson

Okay. And then –

Terry Considine

Hi Rich, I would just add to that Paul is too modest to say so, but our accounting has been quite conservative, and we basically reserved uncollected bad rent. So the noise about collections is almost always going to be a good guide to us in terms of reported bad debt. But the metric we focus on is what Paul mentioned, which is run rate and bad debt, is happening today. And as the economy has healed and the restraints on normal collection have ended, we’re getting back to sort of an AIR standard of 50 bps or lower.

Rich Anderson

Okay. And any quick comment on San Francisco trending?

Terry Considine

It’s really not particularly material to us, particularly different, if you’re talking about the city of San Francisco.

Keith Kimmel

Rich, can you just clarify your question on San Francisco?

Rich Anderson

Bay Area, excuse me.

Keith Kimmel

But is it – just how is the Bay are you doing in general or it’s been –

Rich Anderson

Yes.

Keith Kimmel

So what we’ve seen in the Bay Area is that we’ve seen some strengthening as it comes to demand with leasing apartments. So one of the things that had been for – as you might recall, over the past 18 months or so, there was this outgoing of folks that would go work remote and different things. And what we’ve seen on the ground is, is people coming back. And so it’s not clear to me if that’s a reflection of some of these tech layoffs that are occurring that essentially, people are coming back saying, I want to get back to the hubs and the home basis of these companies.

The point I would give you is our occupancy in the Bay Area is in the high 97s, and we had struggled previously being at 95 as an example. So we are seeing a shift that’s there. Now the rents haven’t fully recovered. The Bay Area was one of the slowest and most impacted. And so there’s still more work to be done, but we’re feeling good about where the Bay Area is as we start the year.

Rich Anderson

Okay. Good results guys. Congrats.

Terry Considine

Thank you.

Operator

Thank you, Mr. Anderson. The next question comes from the line of John Pawlowski with Green Street. You may proceed.

John Pawlowski

Thanks for the time. Please bear with me one more question on new lease changes. Paul, can you just give us a sense without revenue CapEx, how much lower new lease changes in rates and months would have been versus the roughly 10% reported?

Paul Beldin

John, that’s a question that we’re going to have to dive into and get back to you on because when we talk about the contribution from revenue-enhancing CapEx, that revenue enhancing is a little bit of a misnomer, because it’s not all revenue enhancing, but it’s also expense reducing. And so there is a mix issue there, and I don’t want to give you a number off the top of my head that isn’t precise. So let us follow-up with you on that.

John Pawlowski

Okay. No problem. Then just a few quick market level questions. Keith, your Miami portfolio, obviously, the composition of the assets has changed and rents are up massively in the market. Can you just give us a sense for rent-to-income ratios in your current Miami portfolio, how that compares to the total portfolio?

Keith Kimmel

So the renting – let me see if I have that right at my fingertips here. It’s – well, so I’ve got Matt Homes who’s just giving me the detail right here. We’ve been running at 20% rent-to-income ratio in Miami, which is actually quite similar. And the reason that is, is because we don’t actually have a different requirement from city to city.

So regardless of the product type, what we do is whether the rents are $8,000 a month or $4,000 a month, we have a very high standard of having the incomes being substantially high enough to cover and to grow into it. So it’s about 20% in Miami.

John Pawlowski

Okay. Last one for me. The 1% sequential decline in revenues in Washington, D.C. Keith, can you provide a little more color about what’s going on in terms of demand trends in the D.C. Metro?

Keith Kimmel

Sure. So really, what we had there was some transitions of some AR accounting that we had that happened in the third quarter and fourth quarter, the transition between the two. So it was really a matter of that happening between those two months. The broader points on D.C. is that DC is one of our strongest markets, and it’s at 98% occupied. And really, as we look forward, it would be one of our strong. So it’s really just some noise between those two months. If you look at the total overall number, it’s in great shape.

John Pawlowski

Okay. Understood. Thanks.

Keith Kimmel

Thanks, John.

Operator

Thank you, Mr. Pawlowski. There are currently no further questions registered. [Operator Instructions]

Terry Considine

While we wait for questions, I just want to thank everyone for their interest in AIR. Please call if you have any questions any of the management team. The conference season is assumed to be upon us. We look forward to being together. And – or if you’re in Colorado, we welcome you to visit us in our offices. But thank you very much.

Operator

There are no additional questions at this time. I will now turn the line back to the management team for any possible additional remarks.

A – Terry Considine

Thank you.

Operator

Absolutely. That concludes the AIR Communities fourth quarter and full year 2022 earnings conference call. Thank you for your participation. You may now disconnect your lines.