Everyone, this is Brad Thomas, welcome back to the iREIT Podcast. Of course, today we're back again with another C-suite interview in the REIT sector. I'm pleased to have with me today Terry Considine. Terry is one of the co-founders as well as CEO of Apartment Income REIT. That ticker symbol is AIRC. Terry, it's good to see you today. Nice to see you, Brad. Great. Well, Terry, you know, we've been covering your company for a number of months, perhaps even over a year. One of my good friends, who's an analyst, that I really have a lot of respect for, is Haendel St. Juste. You probably know Haendel with Mizuho. Mm-hmm. I think he and I had a conversation one day, he said, "Brad, you gotta look at this company." I did, and I've really been impressed with the portfolio. Now I'm anxious to talk to the management team, which of course is you. Now, can you kind of back up a little bit? I know that this AIRC was spun out of Aimco. Can you kind of explain the history of how the Aimco got to become AIRC? Well, Brad, I might start earlier that as we were chatting before the podcast, I started my first REIT in 1971. I've had six of them and eight public companies. I'm a serial entrepreneur. I started AIMCO in July of 1994 as an apartment REIT, and five years later, we're the largest owner of apartments in the United States. Over the succeeding two decades, I just focused on what would make an apartment REIT attractive to an investor as I am. Parenthetically, I and most of management, but certainly I take my compensation primarily in equity, so I eat my own cooking. I thought what was most important was that it be simple, transparent, relatively low risk, in that we only own completed, stabilized, leased properties, and that we low leverage. Then I thought also low cost. During the time I've done this, we've seen the rise of passive investing, and half of its appeal is that it's hard to pick stocks, and they don't try. The other half is they don't charge as much. You can buy an index fund from Vanguard, which I'd recommend to your retail listeners, and know that it'll cost you 8 or 10 basis points for expenses. We made as part of our distinctive proposition that our costs, our G&A costs would be less than 15 basis points. We're very competitive. We're the most efficient operator in the apartment space. We're also the most effective operator. The difference, if I could, without being an English school teacher, which I was while I went through, while I was paying for my education, I would say that by being efficient, we get the most done with the least resources. By being effective, we're do the best job with customers and with our teammates and in our relationship with shareholders. By customers, we have the highest measured customer satisfaction, and we give the residents a chance to rate us on every interaction, and we publish it online. It's used to manage affairs on the site the next day. I found it's much more effective that Mrs. Smith in Apartment 1A had a good job or a bad job than hear it from a cowboy in Colorado a month later. You can tell the progress of our work online before I'll know. You'll see that a number of large national surveys have concluded we are the second-best in the entire industry and the best among the public companies. That's just one thing about being effective. Being efficient mean we have the highest margins, that we have the most amount of rent that gets through to cash flow to shareholders than any of the apartment REITs. The average difference is probably 10%, and it ranges from five or 6- 15, depending on which company we're comparing to. The most efficient and effective risk-adjusted way for individuals to invest in multifamily with public market liquidity. You've got something really They're located primarily in Southeast Florida, in the tri-county area, not that far from where you are today, to Washington, D.C., in the metro area, Virginia, Maryland, and the District. Philadelphia, Boston, I like those educational centers of those two cities. Denver, Colorado, on the Front Range, and then Coastal California. Great. Now, in terms of your rent, you're obviously not the affordable sector. Your average revenue per apartment room, again, this is the latest presentation, was about $2,700. Mm-hmm. That's up about 20%, by the way, from Aimco. How would you categorize your sector? You're not affordable, are you? You're probably not. Are you more on the luxury side, or how would you classify overall your business model? Brad, what I just say for context is for a number of years and all in public companies, 20 years ago, we were both the largest landlord in the country, but also the largest affordable landlord. I know the different segments. I've ended up in AIR in designing something, almost on a. Well, based on my retail experience, if you think of a shopping center and percentage rents and your success depends on the success of the tenant. I've, I've come to see that I'm in a business where it depends on the quality and income of my residents. We're very strict on resident qualification. In the last quarter or so, the average income of a resident was $225,000, and the median was about $160 some. They have FICO scores that are in the low middle 700s. So we're very selective, and our rents are in effect supported by our customers. Our ability to provide property upgrades and be paid for them is a function of their income and ability to pay. Our downside protection in a down cycle is, of course, buffered by their strength and credit ratings and ability to meet their rent. It's a virtuous cycle, and it results in us having the lowest costs in the sector. Also to have the lowest turnover. We have the highest retention of any of the public REITs. We have about 38% of our residents move out, in the last 12 months. I want to ask you. you know, I'm in, you know, I am down in Florida this week, and I'm sitting in this apartment here. Mm-hmm. I moved in January of 2019. Since that time, during, I think this happened in 2021 or maybe 2021 or 2022 or somewhere in the middle, rent increase, a very substantial rent increase of sixty-. 100% 60%. Yeah. Now, I'm looking out the window and of course, I'm sure you're familiar with Related. They basically have built this area. Yeah. West Palm Beach called Rosemary. Yeah. There's a rental that's filled up with hedge funds. Yeah. that have been, folks that moved from New York down to West Palm in the big COVID shift, I'll call it. Yeah. When they told me that it was 60%, I had no choice. It was either pay the rent or get out because we've got 10 people from New York ready to rent this unit right now, you know? Right. It's a shock. Tell me, how does that translate to your business? I mean, I'm assuming that obviously you have to sell, but how are you seeing the rental growth today, and especially in South Florida? Well, in South Florida, I would say we average probably more than 20% rent growth the last few years across the country, we have that. I would say, again, having done this a long time, there were times in Texas during the oil boom when we might have seen that, or in California, we might have seen it, or in Seattle, we might have seen it in technology. Today, for this chapter, the so-called Tri-County area of Palm County, Broward County, and Miami-Dade is the most dynamic part of the U.S. economy. You're at ground zero. You know, you're just doing podcasting, but you're right there rubbing elbows with the biggest movers and shakers and hedge funds. You're in a wonderful position to see what's happening. No question. I mean. You bring it to your viewers. Mm-hmm. It's amazing to see the growth down here and, you know, I just wish, I mean, like everybody, I wish I'd have got in early, you know, because there's... You know, it's not too late. I mean, there's plenty of, there's plenty of land. I'm seeing it out the window as I speak. It's not over yet. It just shows how dynamic a free market is and how important today political leadership is. I love when I come to Florida, and they say we're now entering the free state of Florida because what we have is a rule of law and a predictability that makes people comfortable making investments, committing capital, and providing good services to customers. That just brings more people, more business, and more prosperity to the state. Well, Terry, let's move over to the other side of the U.S. We cover obviously the multifamily sector in Essex. I've always liked Essex a lot, especially looking at the company's long-term dividend history. As you know, they're a Dividend Aristocrat, one of the only- Mm-hmm. Multifamily REITs that can say that. Boy, have the shares been beaten up. Obviously, that impact is due to the tech jobs. What are you seeing out there specifically in California right now? Is it that bad? In full disclosure, I do own shares in Essex, but I'm really watching that whole economy very closely. The first thing I'd say is George Marcus is a friend, a brilliant entrepreneur who's been successful in everything he's touched. He's just a gifted businessman, he's the chairman at Essex. Second, Essex has been highly successful during most of the last 25 years, or maybe most of the last 30 years, not so much the last five. The reason that I would call out is not as much the technology sector, more political risk. That in California, you have a government increasingly in the hands of people who substitute their judgment for that of consumers in the marketplace. In Los Angeles, which is an important market to Essex and to AIR, we have rent being voluntary for the last two years. Well, that's only now are we able to call people to account and ask them to pay their rent. That's a big challenge. It will reshape that economy. I'm a native Californian, fifth generation Californian, and I've owned property there for a long time, but it has a bigger risk premium today than it did for most of my adult life. Right. In terms of, I guess some of those other states that you mentioned, and I think, correct me if I'm wrong, up in the Northeast, do you have any exposure in any of the Northeastern markets? Well, we do in Boston. But we're primarily either suburban or Cambridge, which is to just tuck right in behind these wonderful schools such as Harvard and MIT, and benefit from the knowledge workers that are attracted to that. With political risk. It's hard to go anywhere with zero political risk. We've exited New York City and New Jersey. In Philadelphia, we have, which is northeastern, we have two portfolios, one in this so-called Center City of Philadelphia, which is very student-oriented, and the other is the other side of the Schuylkill River in University City, which is where the University of Pennsylvania and Drexel are. Again, we're in a university atmosphere which brings lots of demand with not so much students, but from graduates who are knowledge workers, who are involved in these new technologies and new industries. That's what we like about it. There's political risks. Appreciate it. All right. Terry, the balance sheet is really You've done a great job at de-leveraging your balance sheet. Right now you have around 26% net leverage to gross asset value. Mm-hmm. You've got the Triple B investment grade rating. Mm-hmm. I'm curious, I know you've been working on the Moody's rating. Mm-hmm. Has that come through for you yet? How are you utilizing that balance sheet to grow the, to grow the business? Well, Brad, thank you for knowing about Moody's. In fact, Moody's has come through and has rated us as investment grade. I have to say that I'm not particularly interested to use it. It's good to have, to have access to all elements of, sources of capital. We don't, we don't use debt very much, and we don't want to use debt very much. In fact, we could pay off our debt as it matures out of cash flow. That gives us a lot of safety that we can not be caught with illiquidity. We had our earnings call last Friday and our liquidity that day was $800 million for which there's no immediate use except sleeping at night and knowing safety. Those are the things I focus on first would be maturities and exposure to interest rate movement and just plain liquidity. Having done it a long time, I care about those things, and we're in good shape. I wanna touch on, I guess, the growth. You mentioned earlier you're pretty risk-averse when it comes to development. What is your primary sourcing capabilities? Do you provide any takeout funding for existing developers, or do you look for stabilized product once completion? Kinda walk us through the sourcing. Well, I'll come to sourcing in a minute, but let me just start. The sources of growth come from being in a market or from better operations or from creating value by construction and development. Those are sort of the underlying drivers. To take them in order, look very carefully at markets with great universities for the knowledge worker. It's why we like the East Coast. It's population growth and business growth in Chicago and Miami. It's markets where there are gonna be more use, more people there, and that increase in demand drives higher rents. A second way of creating value, which we don't do, is development, as you said. It can be a good way to make, create value, but it's difficult, risky, uncertain, has a long time cycle, things I choose against. The third way, which is operations, is one that is not commonly considered, but in fact, is it makes a big difference. I mentioned it earlier in our conversation that we are the most efficient, and so our operating margins are considerably higher than others. It's because we have a business model that we've emphasized over the last many years. I'll give you a number which may be a surprise to you and your listeners, but in the last 13 years, our controllable operating expenses, which is everything except for taxes, insurance, and utilities, has grown at a negative number, a negative number for 13 years. In the last year, when inflation was, we had the highest spurt of inflation since the 1970s, we were negative once again in terms of our controllable operating expenses. That doesn't come from cost control and beating up vendors. Sometimes people think it does, but you can't sustain that for 13 years. It comes from innovation and thinking of ways of reducing work and eliminating work and rewarding the highly productive. That's not as glamorous as acquisitions or development, but it's a very powerful force. Again, kind of going back, I guess, the sum of all those parts is, of course, the dividend. As you know, for retail investors, the dividend is critical. Not as much for institutions, but obviously for retail investors. I will highlight the fact that you've got a fairly low payout ratio. Again, I'm referring to a previous presentation where you're targeting a payout ratio of 75% on an AFFO basis. Is that the same policy today and is that, you know, do you feel like that's a reasonable target given the peer group that you have out there? I think it's a reasonable target, and I think that it's. We wanna be sure that the dividend is stable. You mentioned different people, institutions and retail investors. I wanna assure you and your viewers, I'm married to a retail investor, and she's highly focused on the dividend and considers it the most attractive part of what I do for a living. Being tax-oriented, I also look at it and know that it's the most tax friendly of any of the REITs by a considerable measure. One of the things we did in the separation of AIR from Aimco was we stepped up the basis of the assets. That sounds like an accountant, but that means that a lot of our dividend is either tax-free or capital gains. On a tax efficient basis, our dividend is worth probably 50% more, actually I think it's about 40% more than the peer average. In terms of your, I guess, growing that dividend, I know, you know, we look at some of the other analysts', consensus numbers. Again, I guess can you touch on, I guess, 2023, kind of what you're seeing forecasting, I guess, into 2023? Well, I think that Haendel is a very good analyst and a very good friend. Right there in Florida, there's a second I recommend to you, which is Buck Horne over at Raymond James. I think if you triangulate between those two, you'll be in good hands. Right now, in terms of forecast, there's a division in the view of experts, which is similar to the division in the broader economy, where you have the stock market and the debt markets just operating on different assumptions, conflicting assumptions. You have the chairman of the Fed, not sure whether it's gonna be too much or too little or... So that's why when we gave our guidance for this year, which we did on Friday, we said we're assuming no increase in rents. Nothing gets better, but also that nothing got worse. That would give us about 8.8%, I think, increase in income in our same store portfolio. That compounded with our other acquisition portfolio meant that on a recurring basis, our income's up 10% year-over-year. Although last year we had a non-recurring event. Like so many things, there's stuff to talk about. The view of the economy, I was asked on the call was, well, that's okay for the company and its guidance, but what was my opinion? My opinion is that inflation will last longer and stay higher, and that is friendly to us in operations because rents are effectively escalated by inflation, and our cost control is such that we have operating leverage that magnifies the impact on bottom lines and real assets do well. So that's, that's my personal, if you will, amendment to the guidance we gave last Friday. Well, I'm gonna close out and show you one last thing. This is. Sure. I'm gonna give you my secret sauce. A good friend of mine named Chuck Carnevale created this platform you're looking at here called FAST Graphs. I do these for our subscribers. We call them Analyze Out Loud, and I'm gonna analyze AIRC. The bad thing about AIRC is I don't have a lot of history on the company under this ticker symbol as the new company. This actually chart is very compelling because it shows me the dark green shaded area is the FFO per share, and the light green is the dividends. You can see the numbers below there along with analyst estimates. I've got pricing over here, I'm gonna show you real quickly and for the audience what I call a forecasting chart, which basically takes your current multiple. You're trading about 16x. Right. Your two direct peers, AvalonBay and Camden are trading at roughly 18 times. You're certainly trading below that. Now, if I were to initiate a buy today, if I bought shares today at $39.08, which is roughly the number, I believe that this company could, your company could generate, say, an 18 multiple, by the end of the year, end of 2023. Yeah. We're talking about a 22% total return, annualized return. If I bought today and if AIRC did move in line to that 18 multiple, we're talking about roughly a 22x forecast. That's my secret sauce revealed. That's what I like about AIRC. As long as you can keep blocking and tackling and you're doing the right thing with your very defensive balance sheet, even with this modest growth forecast that we have, 'cause we have a 12 analysts here that are giving us a consensus of about 1% growth in 2023, but then back to 5% in 2024. Even with that modest growth, if you can move in line with your peers, you're talking about a 20% total return. That's how I would sum up AIRC today. Brad, I appreciate that. That's a wonderful gift you've given me, and I'd like to give a gift in return if you promise to use it. You gotta read it first, which is that not all operators are the same. I'll send you some charts that were done by Citi that will just show you the comparisons. I think if you share them with your viewers, you and they will be impressed that there's a range and it happens that It's just something to think about. Thank you very much. It's fun to be with you. Enjoy the day. Absolutely. I'll look forward to doing this again. Even when I'm flying out west, I'll fly back over and drop into Colorado and see you in person. Come see us. I'd like that. I'd like that very much. Thank you. Awesome. Thanks, Terry.