Apartment Income REIT Corp (AIRC) CEO Terry Considine on Q1 2022 Results - Earnings Call Transcript

Apartment Income REIT Corp (NYSE:AIRC) Q1 2022 Earnings Conference Call May 3, 2022 1:00 PM ET

Company Participants

Lisa Cohn - President and General Counsel

Terry Considine - CEO

Keith Kimmel - President, Property Operations

John McGrath - Co-CIO and Chairman of Investment Committee

Paul Beldin - CFO

Patti Shwayder - SVP and Chief Corporate Responsibility Officer

Conference Call Participants

Rob Stevenson - Janney

John Kim - BMO Capital Markets

Nick Joseph - Citi

Haendel St. Juste - Mizuho

Chandni Luthra - Goldman Sachs

Richard Anderson - SMBC

Operator

Good afternoon, my name is Austin and I will be your conference operator today. At this time, I would like to welcome everyone to the Apartment Income REIT's First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Lisa Cohn, you may now begin your conference.

Lisa Cohn

Thank you and good day. My name is Lisa Cohn, and I am President and General Counsel of Apartment Income REIT Corp or AIR Communities. During this conference call, forward-looking statements we make are based on management's judgment, including projections related to 2022 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 the full earnings release published on AIR's website.

Prepared remarks today come from Terry Considine, our CEO; Keith Kimmel, President, in charge of Property Operations; John McGrath, our Co-CIO and Chairman of our Investment Committee; and Paul Beldin, our Chief Financial Officer. Other members of management are also present, and all of us will be available during the question-and-answer session that will follow our prepared remarks.

I will now turn the call to Terry Considine. Terry?

Terry Considine

Thank you, Lisa. And thanks to all of you for your interest in AIR. The year is off to an excellent start as detailed in the earnings release. My colleagues will provide further details. My comments will be few. I have three chief points. First, business is good. Keith and the Ops team continue to deliver outstanding results. Second, our balance sheet will be low leverage with fixed interest rates, limited repricing risk, great flexibility and simple.

Third, we did what we said we would do; focus on property operations where we have a comparative advantage, commit to low leverage, simplify our business, have low G&A in order to be efficient at conversion of rent growth to cash available for shareholders, be transparent and provide a high quality of earnings, establish our relationship with Aimco so that each is independent and stands on its own.

One more point - now comes growth. Organic growth from a high quality portfolio improved by the sale of our lower-rated properties, organic growth from focus on AIR's core competencies in customer selection, satisfaction and retention and using productivity to control operating expenses.

External growth funded by pair trades and leveraged neutral where our cost of capital is established by the properties sold where the underwritten accretion is meaningful and the key to success is the excellence of our property operations, what Keith calls the AIR Edge.

We will be good corporate citizen, continuing to be a great place to work, engaging positively with the communities where we do business, conducting our business with sensitivity to its environmental impacts and we'll measure these results and seek their certification by independent third parties. And we will do all of this as a team and I want to thank my teammates for the success of the first quarter that will be discussed on this call.

I look forward to working with you to achieve the high goals we've set for the balance of this year and for the years ahead. I also want to thank our engaged Board. You are most generous with your time; you contribute from your wide range of life experiences; you keep us focused on creating value for shareholders.

Now I'd like to turn the call to Keith Kimmel to discuss our operating results and prospects. Keith?

Keith Kimmel

Thanks, Terry. Our first-quarter results exceeded our expectations and reinforced our outlook. The 2022 will be an exceptional year for the business. Occupancy continued to record high levels, with the first quarter result 98.1% flat to the fourth quarter and up 270 basis points from last year. Rates again reached new high watermarks.

We signed new leases up 17.8%, renewals up 11.3% and blended rates up 14.1%. Our world-class customer service remain consistent with nearly 10,000 surveys during the quarter, scoring us 4.3 out of 5 stars. Our trailing 12-month turnover reached a record low of 38.7% with 200 fewer move-outs in the first quarter of 2022 than in 2021. Strong operations translated into robust financial results for the quarter. Revenue was up 9.2% from the first quarter of 2021.

Net debt continued it's choppy but gradual improvement reaching a 120 basis points for the quarter, 30% lower than one year ago. Expenses were up 3.1% year-over-year with controllable operating expenses up 2.8% due to timing of the increased maintenance of our communities, offset by lower personnel, internal expenses.

We anticipate full-year controllable operating expenses will be on plan flat to last year. Net operating income was 11.7% from the first quarter of 2021. As a result, our net operating margin was 72.8%, up 160 basis points from one year ago.

In our acquisitions portfolio, performance and income growth outpaced our stabilized assets during the first quarter as we continued to see the impact of implementing the AIR Edge. Our 2021 class of acquisitions performed well. With 275 leases signed in the first quarter, new leases increased 28% above the prior lease.

Renewals were up 19% for a weighted average increase of 23%. These acquisition properties' occupancy was above 96% while both rate increases and lease space exceeded that of our same-store communities. As a result, our 2021 class has financial results above our expectations.

We anticipate further upside is the AIR Edge is fully implemented across every aspect of these communities, leading to income growth this year 50% higher than our stabilized communities and accelerating to a higher multiple in future years.

In April, we've seen momentum build as we enter peak leasing season. Occupancy during the month was 97.4% in line with our expectation of frictional vacancy associated with the start of peak leasing season. Lease space was strong with the seasonal increase of demand coming earlier than ever.

So, our new lease rates increased 18.8% from the prior lease, renewals increased 10.3%, leading to blended rate growth of 14.9%. Our loss to lease is currently in the low double digits, and we expect healthy rate increases throughout the remainder of peak in the balance of the year.

Our customer selection is such that despite the historically large rent increases, our affordability ratios are actually improving with rent to income at 20.1% in the first quarter, down from 20.7% last year and with median resident income up to nearly a $150,000. Perhaps most notably, in April, we may have reached an inflection point for bad debt.

California recently reduced some of the limitations of our ability to collect unpaid rent, and we've seen a corresponding shift in resident behavior with an additional $1.4 billion in payments from residents in April. As a result, April bad debt is outperforming our expectations by $500,000. And while there is much work yet to be done, there is now more indicators that anytime post pandemic, that we are on the road back towards recovery to normal bad debt.

In summary, we expected the business to be exceptional and through four months of the year, it is outperforming our lofty expectations. Our leading indicators continue to show strength for the balance of the year, fueling our optimism as we head into the peak months ahead. My thanks to all of AIR team members. Your dedication to serving our residents and your drive to continuously improve our business has made this quarter a great success.

With that, I'll now turn the call over to John McGrath, the Chairman of our Investment Committee. John?

John McGrath

Thank you, Keith. With another busy quarter on the transactions front, I am pleased to announce that we have completed $1.7 billion of dispositions over the past eight months, had prices above our reported GAV with the boost from historically low interest rates. All of the proceeds from these sales was used for deleveraging and strengthening our balance sheet, positioning us well for future accretive growth.

We're in the first quarter, and at very opportune timing and pricing, we sold eight apartment communities for $578 million with approximately 1330 apartment homes located in San Diego, Los Angeles County, the Bay Area and Chicago. Additionally, in April, we sold three apartment communities for $161 million with approximately 560 apartment homes located in San Diego, Orange County and the Bay Area.

In aggregate, we raised equity capital at a current NOI cost of 4.3% and long-term expected IRR cost of 6.4%. Completion of these sales increased our allocation of capital to higher growth markets with lower regulatory risk and improved the quality of our portfolio with significantly higher rents.

Turning to growth. AIR was designed to create shareholder value by bringing properties onto our platform where the AIR Edge will drive outsized growth and incremental value for shareholders. Over the past 10 months, we invested in five properties at a total cost of $730 million before property upgrades or approximately 6% of our portfolio value today.

These acquisitions will produce a long-term IRR of 9%, a spread of more than 260 basis points with the pair trades used to fund them. Encouraged by these results, we continue to execute a capital allocation strategy that utilizes our pair trade philosophy while maintaining leverage in our targeted range.

Pair trades allow us to be agnostic to periods of market volatility while also establishing the cost and availability of our equity capital. We remain firmly committed to disciplined capital allocation. We look to invest in top-rated sub-markets, maintain broad portfolio diversification and earn IRR spreads of 200 basis points or more above our cost of capital.

In short, we are focused on the continued systematic enhancement of our portfolio through disciplined accretive growth funded by pair trades for properties, which will benefit from the AIR Edge. Our future acquisitions will build upon a track record of creating shareholder value by delivering predictable performance of above-market growth.

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

Paul Beldin

Thank you, John. Today, I'll discuss our strong and flexible balance sheet, our updated expectations for 2022 and conclude with a brief comment regarding two recent Board actions. Starting with the balance sheet, we've taken two significant steps to improve our balance sheet. First, after reducing leverage by $330 million last year and $630 million year-to-date through April, we plan to reduce total leverage by another $557 million in the second quarter with proceeds from June's anticipated collection of the Aimco note together with the prepayment penalty.

The prepayment penalty varies with the exact time of prepayment and with interest rates on short-term treasury notes. We estimate that the prepayment penalty will be approximately $23.5 million. Pro forma these repayments, our March 31 leverage to EBITDA is 5.4 times, well within our targeted leverage between five and six to one.

Next, we fixed interest rates on $800 million of previously floating rate debt. To do so, we first entered into $400 million of floating to fixed rate swaps at an all-in cost of 3.99% and a weighted average duration of 4.5 years.

And second, we entered into a $400 million treasury lock in anticipation of a second quarter refunding of currently outstanding term loans with proceeds from a private placement of a debenture whose terms are expected amount of $400 million, expected duration of 10 years and expected pricing of around 170 basis points over the 10-year treasury now locked at 2.39%, 59 basis points below yesterday's closing 10-year rate.

Pro forma debt reduction that I have just described, there is no unhedged floating-rate exposure. Additionally, our weighted average maturity with 8.2 years, an increase of almost two years. As a result, the balance sheet transformation is complete and 18 months ahead of plan.

Since our IPO, we will have reduced gross leverage by $1.5 billion or 40% such that gross and net leverage are now the same with leverage to EBITDA at 5.4 times. We will have increased our pool of unencumbered properties to $7.9 billion, almost tripling from $2.8 billion. We will have increased liquidity by over $600 million to over $1 billion available under our credit facility and cash on hand and we will have reduced refunding and re-pricing risk for balance maturity and re-pricing ladders. In fact, only $146 million or approximately 6% of our debt will reprice through the end of 2024.

Additionally, we intend to limit any future floating-rate debt to 60% or less of apartment revenues, which we consider to be an indirect hedge of interest rates. Today, that limit is about $380 million, around 14% of total debt, and less than 3% of our gross asset value. These characteristics strengthen our investment-grade BBB flat rating from S&P and will bolster our case when we seek an investment grade rating from Moody's later this year. We are well positioned to access the public bond market and doing so makes sense.

Now turning to our expectations for the balance of 2022. First-quarter FFO was $0.57 per share, $0.02 ahead of the midpoint of guidance due to $0.01 of stronger-than-anticipated operating results and one penny of items that may reverse during the balance of the year. For the full year, we expect FFO between $2.37 and $2.45 per share. We now expect same-store NOI growth of 12.5%, up 50 basis points from our expectations one quarter ago, adding a penny per share to FFO.

The early collection of the Aimco loan adds interest income of $0.14 in the second quarter on the prepayment penalty, offset by interest income of $0.09 loss in the second half for a net increase in 2022 of $0.05 per share. And lower borrowings reduce interest expense by $0.04, while higher rates increase interest expense by $0.09 for a net increase cost in 2022, a $0.05 per share.

Our same-store guidance range contemplates the potential for continued same-store revenue and NOI outperformance, driven by higher rental rate achievement, lower bad debt expense and lower property operating expenses. There is also the potential for lower general and administrative expenses.

Accordingly, we see a path where the $0.05 of incremental interest expense is offset by these items. At the midpoint, the result is 2022 FFO of $3.27 before consideration of the prepayment penalty income and $2.41 inclusive of it.

We anticipate that our second quarter FFO will be between $0.66 and $0.70 per share including the estimated $0.14 of one-time income from the early repayment of the Aimco note. For the second half of the year, which reflects no contribution from Aimco note and does reflect higher interest expense associated with fixing $800 million of debt, we anticipate FFO between $1.13 and $1.19 per share.

Finally, the Board recently authorized both the common stock repurchase program of up to $500 million and an at-the-market offering program also up to $500 million. To date, neither has been used. With that, we will now open up the call for questions. Please limit your questions to two per time in the queue.

Austin, I will turn it over to you for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Rob Stevenson from Janney. Rob, your line is open.

Rob Stevenson

Good afternoon, guys. Keith, what are you running in terms of average fees per unit per month, and how much do you guys increasing fees in addition to the current rent increases?

Keith Kimmel

Rob, thanks for the question. When we think about fees, we - there is probably a couple of things to think about. The first one is maybe like parking and storage, those types of fees. We try to increase those that follow a commensurate of how we're raising rents, and so, we will see similar impacts, but when you look at the actual fees, it represents just about 10% of the total revenue. So it's not a big impact.

Rob Stevenson

Okay. And then Paul, on the guidance, what's going to drive any of the G&A and the other savings that you talked about over the remainder of the year, is that just not replacing people because of technology, is that targeted headcount, is that something else that you guys are doing? Can you elaborate a little bit in terms of the expense savings that you could realize over the remainder of the year relative to previous guidance?

Paul Beldin

You bet, Rob, and thank you for the question. And as you know, we designed AIR to be very efficient and so that more of our revenue will flow through to the bottom line of our shareholders and part of that efficiency is maintaining G&A expenses equal to 15 basis points or less of our GAV and for the current year at the original guidance of $17 million, we anticipated not only achieving that 15 basis part - basis point benchmark, but coming in well under that.

In the first quarter, we have updated our range, we do have some efficiency projects that are ongoing that might provide some benefit this year, but also I would just call out that our incentive compensation program is variable and spin up on our results. And so there is the allowance in that G&A range for maybe a performance target that might not fully achieve the budgeted levels.

Rob Stevenson

And are the property people, I mean if you guys wind up doing 10% plus or minus revenue growth this year on same-store basis. Is that going to impact the bonuses, et cetera, paid to the property operation staff, is that going to - could that cancel out any of this G&A savings you guys hit the upper end of your range?

Paul Beldin

Rob, I'll start and then turn over to Keith if he wants to add anything. We have separate bonus programs for our on-site teams from our corporate teams, and so, those on-site teams are incentivized based upon the performance of their properties relative to their budgets and so any incremental cost that would run through our property operating results because the property performance will be more than offset by higher revenues.

Keith Kimmel

And Rob, I would just add that the way that our incentives are handled on-site is they are actually individually associated with position and by community by community. So each one has an individual goal to achieve and outperform.

Operator

Our next question is from John Kim from BMO Capital Markets. John, your line is open.

John Kim

Thank you, good morning. There is a big difference in leases signed, new versus renewal. I'm wondering how much of that is 80 - 1482 related, given your California exposure?

Keith Kimmel

Hey, John. It's Keith. You're seeing it relatively correctly. So what we see is that when we think about renewals, they go out and we really focus on not just what market rents are today, but what they will be in the future periods when we send the increase out and so you will see varying degrees of results. I'd point you maybe to Florida where you might see increases that could go out as high as 50%, where you could see increases in Denver go out in the teens and then you would see increases in California that will have some restrictions for 1482 that would be between 8% and 10%. So between the combination of those things, that's how you get to those numbers.

John Kim

And Keith, you mentioned Southeast Florida, Miami has been a very strong market, how concerned are you of rent controls in that market and conversely, what's your appetite or ability to expand your presence in Miami?

Keith Kimmel

Well, I'll start with - there are certainly concerns about rent control that comes up in a lot of scenarios. But I'll let Patti Shwayder in a moment chime in on a particular in Miami. But, what we've seen most recently is that it was more about an extension of time to give inclinations of how much - when the increase will go into place and there hasn't been any limitations around how much we can push the rents, but of course, we recognize that there is lots of talk about that. Patti, anything you would like to add to that?

Patti Shwayder

Sure. Hi, John. Florida has prohibited rent control at state level, and if it is to be enacted at a local level requires two things; one is if there is a state of emergency and two, if there is a vote of the people. So that is sort of hard barriers to cross, and for now, we have [indiscernible] there.

John McGrath

And this is John McGrath, on your question about increasing our presence, we're looking for market anomalies to give us an opportunity to have a comparative advantage from our AIR Edge and where we can invest in deals where IRR spreads are 200 basis points or greater than our cost of capital. And if we find those deals in Southeast Florida, we will certainly pursue them.

John Kim

One final question if I may, what are your expectations as far as the Resident Relief Funds that you'll be receiving for the remainder of the year?

Keith Kimmel

John, it's Keith. Can you - I'm not sure I'm clear on your question. Are you talking about government assistance on rents or what is it that you're looking for there?

John Kim

I mean, just improvement in bad debt, I think in the first quarter, you had $1.9 million from the California rent relief program. I was just wondering do you expect that pace to continue for the rest of 2022?

Keith Kimmel

Okay. I got you. So, well, here's how I would describe it. What we've seen recently is that in April, we were allowed to start giving notices for folks that had not paid the month - paid the rent for actually the month of April. So unless they had COVID protection, we were able to start serving notices for non-payment.

As a result of that, what we're seeing is, is that not only do we have residents coming in that are paying rent for April, but if they've had back payments, we're getting a combination of - well, let me just, I guess, I'm going to have to pay it up, so let me pay the whole thing or I can pay 20,000, can I come up with a payment plan?

So, it's early days, but we're seeing some really good results of that and what I've - what we've sort of said all along is our average FICO score for a Los Angeles resident is at 735. They have high incomes and we believe that they will be good for their dollar. So more to become, we know there's a lot of work in front of us, but we do believe it will continue to improve.

Operator

Your next question comes from Nick Joseph from Citi. Nick, your line is open.

Nick Joseph

Thanks. Keith, could you walk through the conversations and the decisions around the prepayment of the Aimco note purchase, just letting it mature in January 2024 and then the benefits for AIR of doing it now?

Keith Kimmel

You bet. I guess the way we've thought about it was first the market and at least a number of the analysts and shareholders who spoke to me price the spread income at a low multiple even one times, knowing that would end in two years and we could see that the loan was losing profitability even sooner as higher interest rates narrowed the spread between interest income on the Aimco loan and the interest expense on AIR borrowings to fund the loan.

And we also thought that higher interest rates would increase Aimco's refunding risk and therefore our credit exposure. So waiting seemed a bet on interest rates a year from now. And that's just not our business and most important, we were able to do what we said we would do by moving AIR to low leverage and now AIR has it. We all just - a little bit more than $2 billion against a $13 billion GAV. So the combination of timeliness and doing what we said motivated us and we feel good about our balance sheet, which is I think bulletproof, so we're committed to keep it that way.

Nick Joseph

Thanks. And then after obviously the repayment of the note, what's the remaining relationship with AID?

Keith Kimmel

The remaining relationship will be cordial, collaborative and independent, that we will get contract

Nick Joseph

…on the contractual side.

Keith Kimmel

Yes, we will contract with them when it's to our advantage to do development activities at their risk, not ours because we've said we won't take that on, but we'll do that with third parties too, and so we'd be able to see our pricing with people without a historic relationship to know that our pricing vis-a-vis Aimco is at market and we think they will do good work and we think the third parties will do good work.

Operator

Your next question is from Haendel St. Juste from Mizuho. Haendel, your line is open.

Haendel St. Juste

I guess my first question is on the, I guess, operating strategy here, Keith, as we push further into peak leasing season. I guess I'm curious how you're thinking about occupancy versus the rate. The occupancy is down 100 basis points versus January, while blended rates have accelerated. So I guess I'm curious how far you might be willing to let occupancy flex here as you [indiscernible] rates, and what's the underlying turnover assumptions this year?

Keith Kimmel

Haendel. Thanks for the question. This is by design and not planned. So what we do is we want to have frictional vacancy to be occurring when we have the greatest demand in the market with the greatest pricing opportunities to push rates, and so we've moved from 98 into the 97's, call it when we get into the peak of the peak, July, July-August, we could go into the 96's, and then we will build back up and recover from then - from there.

And as we think about turnover, I would tell you that we anticipate and expect that we're going to continue to have low turnover, much like you've grown to become accustomed to and as a result of it, it's something that we feel like we can backfill quicker if we do have churn during the peak season.

Haendel St. Juste

Okay, fair enough. I get it. I get it. Maybe one on the ATM, the new $500 million on ATM, I guess, just curious which are the scenarios under which you may consider issuing equity. You don't have any real debt maturity near term, you lowered deleverage here, sounds like match funding still that be the capital plan going forward? So I guess I'm curious maybe you guys could talk about under what scenarios or maybe guide flows that you would consider issuing equity? Thanks.

Terry Considine

Haendel this is Terry, we don't have any current plans to issue equity at these prices, we're just putting in place the sort of difficult corporate infrastructure to have options to do - either to buy or sell our issue equity.

Haendel St. Juste

Okay, no, no. Listen, I understand that Terry, just curious that if there would have to be a change in funding going forward, if perhaps new equity could play a role, would perhaps could change the approach, given your match funding strategy in the past. I was just curious if that could be something in the future we could see?

Terry Considine

I think decisions like that always turn on the use of proceeds. And so, having the ATM in place does give us optionality, but that's a general thought and therefore a little hypothetical and not of current application.

Haendel St. Juste

Okay, fair enough and then maybe one last one. Maybe some commentary on the transaction market, you guys have been fairly active here, maybe discuss how the credit interest rate has impacted the market as you perceive it, are you seeing a pause, maybe change in buyer tightened by demand, change in cap rates? Thanks.

John McGrath

Haendel, this is John. Thanks for your question. First of all, I can't predict the future. But what I can say is that there's a lot of capital still out in the market and we've not seen significant changes to our values. The assets in the best markets are still trading at high end of estimates. At the end of the day, apartment fundamentals remain very strong, and any cap rate expansion is being outpaced by the historically high NOI growth.

We are seeing the buyer pools becoming a little shallower, but they are very competitive still, highly levered buyers are the ones who are having a harder time making their deals pencil. And what we're seeing is this becomes particularly true in larger transactions, say $300 million-plus.

From our own perspective, I am comforted by the fact that we have a pair trade philosophy, which we're executing, which allows us to lock in a cost of capital, we are going to be out in the market looking for opportunistic acquisitions, which we have a comparative advantage because of the AIR Edge and we're going to be looking to invest where we can earn spreads, as I mentioned earlier, about 200 basis points or more above that cost of capital.

Haendel St. Juste

So it sounds like that the margin you're not seeing any change in value yet, but that's not to say that underwriters underwriting them today, putting that in that there's so much demand and perhaps going to take less of the churn? Or is this translating into lower expected returns as the capital is still foreseeing [indiscernible]?

Keith Kimmel

Again, I don't have a crystal ball to say what the future will be, we are seeing values are holding right now. I can't speak to other people's underwriting, we're underwriting ours the way we always have based on our opportunity to have the advantage through our operating platform and we will continue to do so.

Operator

Your next question is from Chandni Luthra from Goldman Sachs. Chandni, your line is open.

Chandni Luthra

Hi, thank you for taking my question. So just building up on that last question. I mean now that leverage is where you want it to be, is there potential for more acquisitions in 2022 and how would you would you - would pair trade be still be kind of the right way that you would go about it?

John McGrath

Thank you very much for your question, this is John. The first as I'd say, our guidance includes $500 million of accretive acquisitions. It's an amount which we already have under some form of agreement. We will provide more information on those transactions when they close, but beyond that guidance, we have no fixed goal for further acquisitions. As I mentioned that we are continuing to look at systematic enhancement of our portfolio through accretive growth which will be funded through those pair trades we mentioned.

To your question about the pair trades, pair trades gives us an opportunity to lock in our equity capital today, but we will also obviously always look at what the best cost of capital could be, so that we are able to make the best investments and create the most shareholder value.

Chandni Luthra

And as a follow-up to that, speaking of cost of capital. So you expect to go to Moody's soon, could you talk about, what kind of cost of capital advantages you'd get down the line, as you get to IG?

Paul Beldin

Chandni, this is Paul. Yes, what we look for is to have the broadest options possible when it comes to financing our activities and so, and we are currently a mid-tier investment-grade rating from S&P, a BBB flat. Moody's has a different metric that they use for their ratings methodology, one that was very focused - is very focused on the percentage of non-recourse debt as compared to undepreciated book value of basis.

And so one thing, we've been very focused on during the past 15 months has been to improve that metric, and we have done so. And now, it's less than 20% of our undepreciated book value. So we're in great shape from a ratings perspective and it doesn't mean that once we get those ratings, we'll definitely tap the public bond market, but it gives us greater optionality and that's as the CFO, something that's very important to me.

Chandni Luthra

And Paul, one housekeeping one. There are no changes to the master lease agreement in kind of, Know that cash lease payment from redevelopment properties from Aimco, is that correct?

Paul Beldin

Yes, under the leases that are effective with Aimco, there has been no changes to those arrangements, and as long as they continue to own those properties from a accounting sense or lease it from a legal sense will continue to receive those lease payments.

Chandni Luthra

Perfect, thank you

Operator

Your next question is from Rich Anderson from SMBC. Rich, your line is open.

Richard Anderson

Thanks, good morning out there. So I was looking at the guidance and specifically juxtaposing it to the pro forma run rate that you provided and I know we talked about this little bit earlier to make sure I understood it, but as I look at this, it seems as though you're - not that you're going to give '23 guidance, but it seems as though you're $0.23-ish cents behind as a starting point when you say - when you remove the prepayment penalty income and also take the full allotment of reduced interest income for the full year. So, am I thinking about that logically correct in terms of how to grow off of 241 next year, because you're missing two chunky things or two chunky things will impact your growth profile in 2023.

Now you might not have $0.45 of delta from sales - from dilution from sales, but I'm just wondering how the building blocks are starting to stack up when you start to think about formulating your view for 2023 with this pro forma run rate in mind?

Paul Beldin

Yes, Rich, I don't think it's probably the appropriate time or place to get into too many nitty-gritty details around 2023. But what I'd point out is that AIR is a simple business and now that our balance sheet is in order, that our fixed-rate debt and floating-rate exposure are very limited, maturities over the next three years, there's not that many moving parts. The most significant moving part as you point out is in same-store operations and we - our leasing activity in 2022 should set us up for a very good 2023.

As far as what's in our numbers for '22, that won't be there next year and we try to do our best to lay that out on the bottom of page nine of our earning supplemental. I would just point out though to try to avoid any potential confusion and we do have a benefit in our numbers this year from the Aimco note that will not recur next year.

We also will have higher run rate interest cost from fixed in the $800 million of debt - or excuse me, the majority of those cost will run through our numbers this year, but we will have a little bit of our earning next year, so that's why we provided that 219 run rate. And so if you take that 219, which is a pro forma, assuming that the Aimco note was fully paid off in 2021 and that our current balance sheet structure was in place on 1/1/22, that would be our 2022 FFO. And so you could grow your NOI expectations from Same-Store in there and have a really good starting point to think about 2023.

Richard Anderson

Okay, fair enough. And I do appreciate the added disclosure there. The second question from me is I've heard this from you and from others about moving away from regulated areas into less regulated areas and sometimes, obvious things to do in the present tense often have negative consequences in the future tense and in this case, you could be walking into elevated supply. There's a lot of things that aren't perfect in a non-regulated world or area of the country, not forgetting the fact that they could become regulated someday soon too.

So I don't know if for some reason that sort of escape from regulated areas of the country seems a little reactive and not proactive to me and talk me off the ledge on this one. Why is it the right thing to do to make that step today?

Terry Considine

Well, Richard. It's Terry and first, it's good to hear your voice. I'd say second that there is nothing reactive today. This is of course we've pursued for example in Florida the last number of years. And like all things in life, it's a question of balance and we have felt that under current circumstances, there are some markets where the burdens of regulation outweigh the benefits, but we've got plenty of capital invested in California, we've got plenty of capital invested around the district where there is - whether it's in Virginia or rather in Maryland District.

So we're exposed to regulation in our portfolio, we're just trying to find where there is the right balance between as you point out, the discipline of expected competitive supply and the discipline of government. For example, we have exited from Texas for a decade, having been previously a large landowner there because competitive suppliers is so burdensome, but we'll look for a spot and try to find the right balance.

Richard Anderson

I guess I would say regulated and cut areas of the country are also appealing to tenants. So, don't want to lose sight of that, but yes, I get it. And I appreciate the balance commentary. So, I guess I'll leave it at that. And thanks very much. Great quarter.

Terry Considine

Thank you.

Operator

There are no further questions at this time. Mr. Considine, I turn the call back over to you.

Terry Considine

Thank you, Austin, and thank you for your - all in this call for your interest in AIR. If you have any questions, please call me or Paul or John or Keith or anyone who've spoken and we look forward to seeing many of you hopefully at NAREIT just next month. So thanks again.

Operator

This concludes today's conference call. You may now disconnect.