AIV (2020 - Q4)

Good day, and welcome to the AIR Communities Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Lisa Cohn. Please go ahead, ma'am. Lisa Coh

Thank you, and good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2021 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'll 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, aircommunities.com. Prepared remarks today come from Terry Considine, our CEO; Keith Kimmel, our President, in-charge of Property Operations; Paul Beldin, our Chief Financial Officer. Other members of management are present and will be available during our question-and-answer session, which will follow our prepared remarks. I will now turn the call to Terry Considine. Terry?

Thank you, Lisa, and good morning to all of you on this call. Thank you for your interest in AIR. 2020 was a transformative year with the separation of AIR from Aimco. Through the separation, we were able to unlock $1 billion of shareholder value. The total return of the combined companies outperformed the 6 large apartment REITs by more than 1,900 basis points from our announcement in September through the end of the year. On the same combined basis, shareholder returns were the best of the coastal apartment REITs for the past 1, 2, 3 and 5 years. In years 4 and 10, we placed second. In a Board-led process, my superb fellow Directors, Bob Miller, Tom Keltner, Devin Murphy, Kathleen Nelson, John Rayis, Ann Sperling, Mike Stein and Nina Tran worked hard and well to make the right decisions with 2 dozen meetings over a 6-month period as well as numerous smaller meetings, plus calls with individual shareholders and proxy advisers and so on. At a time when many Boards were hunkering down, I'm grateful for their self confidence, their commitment to shareholder value creation, their sound advice and thoughtful decisions. The separation also required long hours of work for a great many of my teammates, led by Lisa Cohn and Paul Beldin, who joined me on this call, and also by Lynn Stanfield and Jennifer Johnson, who remained with Aimco. Most of all, I thank our shareholders for their recommendations, engagement and encouragement as we made important changes at a difficult time in the economy. We listened carefully to each of you and searched for the right balanced response. I'm delighted that the share price has been rewarding, and I look forward to further gains in the future. And of course, the separation was about the future. We believe AIR is the simplest, most efficient way to invest in apartments and will attract traditional REIT investors and also yield investors generally who prefer AIR to other investment vehicles designed to provide current income with predictable growth. Through AIR, investors own a share of a simple, transparent business with best-in-class property management, the safety of a diversified portfolio and a strong balance sheet and low overhead costs that together provide a high current return. We believe that recovery from COVID-related stresses is well underway, and we expect further gains this year, as Keith will discuss in greater detail. Over the longer term, we are bullish on our strategy, our markets and our team. We believe our markets will perform better than United States as a whole, and we're confident that our team will outperform in those markets. We have a solid path for growth based on best-in-class operations, regular property upgrades and what we expect will become a more favorable cost of capital. As I close, I again offer my AIR teammates many and sincere thanks for what they accomplished last year and for the opportunities they've created for this year and beyond. With that, I'll turn the call to Keith Kimmel, Head of Property Operations. Keith?

Thanks, Terry. Today, we'll look back at our results for the full year 2020 and also for the fourth quarter, then I will discuss our January results and what leading indicators tell us about the new year. And finally, I will discuss our outlook for 2021. Before doing so, I want to take a moment and look at the big picture. Our 10-year revenue CAGR is 3.4%. As you'd expect, there's always a short-term variation around the long-term trend. In 2020, it was negative. It was a tumultuous year and yet revenue was down only 2.4%, and net rental income was down only 4%. We expect revenue growth to resume later this year and refer to our long-term growth rate in 2022. Now turning to our full year results. Revenue was down 2.4%. Residential net rental income, which we define as residential occupancy times average rate and is the most straightforward measure of the health of our core business, was down only 10 basis points. Controllable operating expenses were down 1.1%, and total expenses were up 1.6%. This extended our decade of expense leadership with a 10-year CAGR for controllable operating expenses of negative 10 basis points. Finally, net operating income was down 4%. Operationally, turnover in 2020 was 42.1%, 80 basis points better than 2019. And customer satisfaction was over 4.3, as measured by 57,000 resident surveys, demonstrating the consistency of our team even during unsettled times. In the fourth quarter, the financial results were negative. The lagged echoes of 3 events earlier in the year. The virus and lockdowns in the second quarter, increased lease terminations due to economic stress and onerous regulations put in place by the city of Los Angeles. Fourth quarter residential net rental income was down 4.3%. During the quarter, blended lease rates were down 8.5%, with renewals up 1.4%. In new leases, which made up the lion's share of transactions, were down 10.9%. Revenue was down 7.4% after the impact of a $1 million reduction in commercial income, and a $4 million year-over-year increase in bad debt, with over half coming from Los Angeles. Expenses were up 7.6% as compared to the 1.6% growth for the full year, but the increase in the fourth quarter was strictly a matter of timing. As a result, fourth quarter net operating income was down 12.5%. On last quarter's call, I pointed to lead indicators, including an acceleration of leasing base and a strengthening of our lease percentage as predictive of stabilizing or recovering occupancy. As predicted, average daily occupancy improved from a trough of 93.3% in August to 95.4% in January and further to 95.6% today as we speak. Residential net rental income has increased sequentially for 5 consecutive months. These leading indicators continue to show that more occupancy growth is on its way. Our lease position continues to strengthen relative to last year, and leasing paces accelerating with prospects, leasing tours and net leasing, all up in January from the fourth quarter. In short, demand is good, and I'm optimistic that occupancy will return to pre-COVID levels by the end of this year. With higher occupancy comes pricing power. We see indicators that rent has stabilized and is beginning to strengthen. Blended rates for leases signed have increased every month since September. In January, these signed lease rates were negative 3%, 260 basis points better than in December, and we expect that typical seasonal improvements will reinforce this trend. Given this, I'm optimistic new lease rates could be positive by the midyear. With those leading indicators in mind, I look to our 2021 prospects, dividing our portfolio into 2 populations. In 5 of our 8 core markets, about half of our portfolio, we expect revenue growth to be flat or positive in 2021, with particular strength in San Diego and Denver, where revenue growth is expected to be over 2.5%, and stability in Boston, Miami and Washington, D.C., where revenue growth is expected to be flat or slightly up. Our 3 other markets are also recovering, but at a delay due to specific factors I will discuss next. And in these markets, we expect revenue growth to be negative from negative 2% to negative 7%. In Los Angeles, our largest market, 20% of our portfolio is located in Los Angeles County, but outside the city of L.A. For that 20%, we had good results in 2020 and anticipate positive revenue growth in 2021. 80% is located inside the city of Los Angeles on the West side. Leasing has been steady and occupancy has improved in recent months. Rate, while still challenging, has also improved. And residential net rental income grew 50 basis points sequentially in January. However, this good news is clouded by bad debt. City ordinances permit those in need to live rent free. The same ordinances also enabled those inclined to abuse the system to live rent free. In the fourth quarter, these communities with 19% of our total revenue contributed more than half of our nationwide bad debt. And we expect this will continue in 2021 until the unjust laws repealed or corrected. In Philadelphia, our third largest market. Almost all of our portfolio is located in Center City and University City, serving both universities and a large population of office workers. We faced challenges throughout 2020 as schools were virtual and employees worked from home. The student return has already begun. Drexel recently welcomed freshman and seniors back to campus. And 3,000 students attended in person during Penn's spring semester, and we anticipate a full reopening of both schools for the fall of 2021. Comcast, the employer most important to our Center City communities, expects to recall workers to their offices by midyear. We are encouraged as January leasing has been strong, 75% ahead of last year's pace. That said, we have a long way to go, both in occupancy and rate. We expect tough, but improving results in the first half of the year, followed by more normal demand and results in the second half, assuming these returns do occur. In Northern California, our fifth largest market, our portfolio is located 40% in San Jose and Marin County. These properties have been strong performers, with fourth quarter revenue growth up 1.4%. The 60% of our portfolio located on the San Francisco peninsula has been impacted by work-from-home policies. Rents on the peninsula dropped about 20% from their pre-COVID peak with big tech decided to move its workers home. At that lower price, the submarket became highly attractive to rental prospects, drawing interest from throughout the Bay Area, with a January leasing pace that exceeded any month in 2020. Many of the largest tech companies, including Google, Facebook and Apple, have communicated return to office dates ranging from June to September. We expect the return of these high income jobs will stabilize the San Mateo County market and improve results gradually throughout the course of the year. Our expectations for 2021 results are based on both optimism based on leading indicators we can see and caution based on external factors that we cannot control. We forecast quarter-to-quarter improvements in revenue for every quarter of the new year, but we also forecast year-over-year negative revenue growth between negative 3% and negative 20 basis points, with the first quarter being the most negative as we turn over a significant number of leases where rents are well above the current market. We expect COE to be a good guy, again, and as it has been for the past decade. We expect taxes to increase 4.5% to 5%, with the trend of 2% to 3%, but inflated by larger increases due to a new assessment regime in Colorado and expiration of a tax abatement in Philadelphia. We expect insurance to increase about 30%. Even though our losses and claims are at industry lows as premiums are accelerating after a long down cycle. In total, we expect expense growth of 2.75% to 3.75%. As a result, we anticipate 2021 net operating income to be between $424 million and $443 million or a decline year-over-year between negative 1.4% and negative 5.6%. We anticipate net operating income will increase in each quarter with positive year-over-year results beginning in the second half of the year. I'd like to conclude with 2 keys to a successful 2021, our operational architecture and our team. First, as ever, we're working hard to get better. We believe in our unique approach to innovation, which begins not with technology, but with a deep understanding of our customers, team members, processes and markets. To this perspective, we've grafted expertise in machine learning and robotic process automation. These tools are being used throughout AIR, driving higher customer satisfaction, streamlining operations and enhanced results. Finally, my thanks to the entire AIR team. Your perseverance during a challenging 2020 was inspiring. 2021 will be a year of recovery. Your relentless drive and determination to deliver outstanding customer service and outperforming results is what will set AIR apart. And with that, I'll now turn the call over to Paul Beldin, our Chief Financial Officer. Paul?

Thank you, Keith. Today, I will discuss 2021 guidance, leverage and conclude by discussing AIR's dividend. Starting with 2021 guidance. Our narrow focus, together with high-quality cash earnings, allows for easy financial analysis and modeling. In fact, approximately 98% of 2021 FFO is derived from only 3 sources: first, property-related income, including in 2021, income from redevelopment and development communities leased to income; second, the cost of our leverage; and third, off-site costs. In 2021, we forecast FFO to be between $1.91 and $2.05 per share, representing growth between 10% and 18% from 2020's pro forma $1.73 per share. We expect incremental growth of $0.02 to $0.15 from property-related income, approximately $0.09 from lower leverage costs and approximately $0.06 from lower off-site costs. Next, I'd like to spend a moment discussing leverage. At December 31, AIR's pro forma leverage to EBITDA was 7.5x, 1.6 turns higher than our expectation when we announced AIR's separation from Aimco; 0.6 of a turn increase is a result of lower NOI from property operations and 1 turn is attributable to $440 million of debt incurred subsequent to our September announcement. Of the $440 million, $240 million was used to increase Aimco's capitalization, $135 million was invested in upgrades to AIR's communities, and $65 million was used to pay a larger cash dividend in the fourth quarter. We expect to repay the incremental borrowings with proceeds from the sale of a whole or partial interest in low-cap rate properties. Our guidance does not explicitly contemplate property sales, though we believe that sales of low-cap rate properties will result in minimal FFO dilution. Finally, on January 25, the AIR Board of Directors declared a quarterly cash dividend of $0.43 per share, a 5% increase over the regular quarterly dividends paid by the combined companies. The increased dividend reflects AIR's high quality of earnings, lower leverage and greater predictability of cash flows. With that, we will now open up the call for questions. Please limit your questions to 2 per time in the queue. Rocco, I'll turn it over to you for the first question.

[Operator Instructions] Today's first question comes from Rob Stevenson with Janney.

What is the $45 million to $55 million of capital enhancements? Is that all just to get your bad programs? Does that include your technology upgrades? What is included in that? And then what else are you spending the free cash flow on if you don't make any acquisitions this year?

Rob, this is Paul. Thank you for the question. In our guidance, you're right to point out that we are guiding to $45 million to $55 million of capital enhancement spending. As you know, those are projects that we expect will either increase our revenue growth going forward or reduce costs. In 2021, our plans are heavily weighted towards the continuation of our [ K&B ] programs that we put on pause during the 2020, and those will get reaccelerated in 2021.

And from a capital standpoint, if you don't make any acquisitions, I mean, where else is the capital going? Is it just repaying debt, lowering those leverage levels that you were talking about?

Rob, this is Terry. If we don't otherwise address leverage, we would use it to reduce leverage. Once we're at our leverage targets, additional cash flow would go to increase the dividend.

Okay. And then, Keith, you were talking about positive lease rates by sort of middle of the year in your sort of commentary. I mean, when you get there -- I mean, are you expecting that to be on a blended basis? Is that new lease rate? Help us understand sort of the cadence that in your guidance estimates that's implied by the 1 91 to 2 05. Is that a blended number? Or is that just the new lease rates, et cetera?

Rob, it will be on a blended basis. It is how we're thinking about that. So what we know is that in all of 2020, our renewal rates were positive the entire year even despite the challenges that the pandemic and the disruption to the economy occurred. And so we think that, that will build upon as we get into 2021. And we're seeing the bottom of new lease rate pricing that has started to tick back up. And so we think as we get to the middle of the year that, that potential exists once we get there.

And where are concessions today for you guys across the portfolio?

So we don't think about concessions maybe as others might traditionally talk about it. So we just think about net effective rents. And so whether -- that's really driven market-by-market. You think about some markets -- the Bay Area is an example where there's a lot of competitors who will use a month free. We think of it at the end of the day as, is it a combination of what the occupancy is? Is it a lower rate? And so as we look through it, we can see that most of that pressure will come in the first quarter and the second quarter, and then we get stronger as the balance of the year goes on.

And our next question today comes from John Kim at BMO Capital Markets.

Just a follow-up on that. So the blended lease growth rate that you had, that's negative 8.5% in the fourth quarter. How does that compare to the third quarter? I know Aimco had minus 3%, but it's not quite apples-to-apples. And then that minus 8.5%, how much of that is concession versus reducing the face rent?

So John, I'll have to see if I have the exact third quarter comparable going back to Aimco. But when we look at the combination there that it's mainly driven in the fourth quarter by new lease rates because what we were doing is we were building the occupancy in places like the Bay Area, in Los Angeles, where there is a greater gain to lease. And so those rates really were the ones that were more impactful, but we continue to have positive blended rates in the fourth quarter -- or excuse me, positive renewal rates, which is really the offset.

Do you find it harder to increase face rents rather than decrease concessions when the pricing environment improves? Or basically no difference?

No, at the end of the day, we think it's the same as when we think about the net effect of rent that it basically isn't any different. There's certainly maybe some markets that will have a very particular unit type or something like that, where someone will be concessing something that you have to deal with on a one-off basis. But we don't price as a blanket way across the country. We price every single property individually. But even more particularly, we price by unit type. And so we could have a 1 bedroom unit that is in limited supply that we are actually raising rates, and at the same time, you could have a 2 bedroom that is in a different condition in which it could be something that is being more lowered on a net effective basis.

Okay. And then you mentioned as one of your objectives, reducing your cost of leverage. Some of your peers now have unsecured bonds trading sub-2%. Can you just remind us how attractive that market is for you and the potential timing of going that route?

You bet, John. Thank you for the question. This is Paul. When we announced the separation of AIR from Aimco, one item we commented on was about diversifying our sources of debt capital, and unsecured bonds are certainly an option. So it's better to have more options than less and the executions that I have seen some of our peers achieve over the past recent months only increase that attractiveness. And you'll note that as part of the separation, we did receive a BBB flat rating from S&P. And so to the extent that pricing is attractive, that's an option we'll explore. But I'll also call out that property debt also continues to price quite attractively in today's market as well. So it's always good to have choices.

And what about timing?

If we have something to announce, John, you'll be one of the first to know.

And our next question today comes from Zachary Silverberg with Mizuho.

Can you talk about Philadelphia a bit? You sort of mentioned in the same vein as San Francisco. Can you provide any more color on the submarket there? And maybe quantify some of the prepared remarks about the university students returning to help the facility in '21?

Sure, Zach. So in Philadelphia, really Center City and University City are the 2 places that we really have our business. I'll start with what we're seeing in the universities between Drexel and Penn. Now of course, it's early, but we've seen Drexel brought their freshmen and seniors back to class for the spring. And we also saw that Penn had 3,000 students coming back. And so what we have is we have relationships with many of the folks that work in those schools. And while there hasn't been public announcements, what we're hearing from all those folks is that they are working hard and diligently to get their schools back reopened. And so we're expecting that in the second half as we get into 2021. And -- but of course, that's yet to be seen. When we get into the Center City, what we really see there is the Comcast impact of the towers. And so Comcast is really -- they've indicated that the middle of the year is what their expectations are. And so we talked to their local administrators and folks that work inside those buildings who have told us that they are driving to get their employees back in those offices by the middle of the year. Those are areas that are still open items, obviously, and they'll have to deliver on them. And we all know there's lots of uncertainties. But we're encouraged to see that those are folks that are really pushing to get the schools reopen and get people back into the offices. So that's really the backdrop to our Philly portfolio.

Okay. Got you. And I guess sort of a follow-up. I guess, just on some of the other more urban or denser locations, can you talk about migration trends a bit? Are you still in touch with people who have sort of moved out of the city? Are you seeing these people trickle back into your apartment buildings? Just any color there would be great.

Sure, Zach. On the migration, we're not seeing a lot of variability there. We have 2 places I would point out that maybe that would be a little bit different. And that is, first, the Bay Area, and second Miami. So in the Bay Area, we've seen a little bit slower new jobs coming in from outside of the states. And traditionally, the tech companies hired a lot of folks that come in. We think it's just a pause that we're seeing as the tech companies have been working from home and the hiring has been a little bit slower, but we believe it will return. And then on the flip side of that, in Miami, we've seen a significant uptick of folks that have been moving there. And so when we go through our applications and people that have moved in, there's been some migration from the Northeast and other places in which, obviously, a lot of positive things going on in South Florida.

And our next question today comes from Sumit Sharma with Scotiabank.

Congratulations on the first quarter as a new REIT. I'm sure there's a lot of work that goes into this. So I guess, what I really wanted to understand, focusing on a couple of expense items. On the expense growth Q-over-Q, I saw L.A. was probably the highest across your portfolio, it was about 8% sequential increase versus a 1% sequential decline -- sorry, versus 1% across the portfolio. So was this special -- was there something special about L.A.? I mean, could this be because you're not getting utility reimbursements there. And so besides the bad debts that you took of people who did not pay since June, there are people who are paying partial that is rent, but not utilities? Any color you could provide on that 8% spike would be great.

Sumit, this is Paul. I'll start, and Keith, if you have anything to add, please jump in. But what I would say is that the driving factors in L.A., if you look at it quarter-over-quarter, one is, increase in bad debt, as you called out. And the second factor is on the expense side around property taxes, where we've had a long-standing appeal that has been in place in one of our properties there, and we've had some costs associated with that appeal that are in our fourth quarter numbers.

Understood. I was thinking there was something onetime or controllable, so you addressed that. Now in terms of the Bay Area in California, in general, this is kind of fun. I think you mentioned that at one point -- actually, it even shows up in this quarter's release, you guys have the highest average rental rate per unit than any other Bay Area REIT, right, [indiscernible] EQR, AvalonBay. So at the same point in time, you also have the lowest average rental rate decline. You guys are down 2% versus an average of 7% for the peers and an [indiscernible] revenue decline of 8% versus 11% for peers. So the only difference here is that you guys are 90% occupied, while your competition peers, whatever you call it, are generally around 94% to 97%. So there's -- the hypothesis that you're not dropping price as much as peers, what's driving that strategy? And is it case that you are larger than usual rental rate? Is that a function of unit mix by any chance?

Sumit, it's Keith. I'll take it and walk you through some ideas on it. And then if you need further clarification, we can go there. What I would say about the Bay Area is that a couple of things. One is, think about it in 2 different portfolios. The first is our San Jose and our Marin County portfolio that has been very stable and highly occupied, running at 97% or better occupied essentially through this period of time. So there's been a real stability that has come with that portion of our portfolio. When you go to the second half of it, which is really the -- in the Peninsula and San Mateo County, that's the one that has had the greater stresses on it. And so think Redwood City and think San Bruno, that particular area. And so really, those are the ones that have had more stresses. Those are the properties that actually have the higher price points. So our brand-new buildings that are out there at Indigo, in Pacific Bay Vistas and others have had high price points. And we've been -- had a steady hand on those. We know that there's been a lot of pressure around rates, and lots of folks have taken an aggressive approach. What we have focused on is retaining our current customers. And so having folks stay with us longer, paying higher rates, we believe, ultimately, those renewals traded about a 25% premium when they stay with us versus having them go out. So we've really been focused on how do we retain our residents, keep the rent and then also have a steady hand on the those folks that are coming in. With that all being said, there's a lot of rate pressure in the peninsula. And it still exists. And while we've seen a stabilization of occupancy there, the rates continue to have pressure.

Got it. So let me just ask you a really quick one and then I'll sort of thank you, everybody, for indulging me. With you 90% occupied, is that a level that at this stage in the cycle you are comfortable with when market is around 94, peers are somewhere around there too. So is that a conscious decision and one that signifies to you that you will say it's less concession pressure?

So Sumit, I -- we don't solve the occupancy. We solve the total revenue. So many times, what will happen is there's this belief that if you just get to a certain occupancy, that somehow or another that's going to change things. So what we really focus on is the combination of occupancy, also rental rates. But mostly, how do we retain current residents even longer. And so listen, certainly, we would like to be better than 90% occupied without a doubt. But we also aren't going to sacrifice that somehow or another we're going to move rents just so that we can get full we get somehow or another get the wrong customer in the community or also be more deteriorating against our current in-place rent. So it's a delicate balance, and it's something that we work on every single day.

And the next question comes from Richard Anderson at SMBC.

So you have this new company, to keep it simple, stupid sort of thing, and that's great, it's great for risk off environment as well. But what happens when we move to risk on and your peers are doing more value-add type of acquisitions and things that produce growth a little bit more? Will you have a hesitancy to go after stuff like that now because you've created this new kind of low-risk platform?

Richard, this is -- first of all, it's always good to hear your voice. I hope you're well. It's Terry. Secondly, I would say that we're not likely to be hesitant. That doesn't describe us. And when we see opportunity for value-add acquisitions, we'll tackle them with enthusiasm.

Okay. And then, Paul, you said no dispositions explicitly in guidance. But obviously, this -- again, this company has been created in part to make dispositions and easier undertakings. When you look at what's potentially available for sale, do you kind of go with this 10% of the portfolio type of concept? Or do you have assets that are obvious for sale candidates that didn't get left in Aimco that you still own that are kind of a source for capital that you're perhaps just not identifying explicitly right now?

Richard, if you might, I'll take that too. I think that we have -- I wouldn't say we crushed a goal of errors to make dispositions easier. But having said that, we're going to be comfortable making dispositions that make our portfolio better. And we see opportunities in -- exiting from New York City and we see opportunities in perhaps lightening our allocation to California. And in the latter case, probably through joint ventures. And both of those would be very low cap executions, which is why Paul pointed out in his remarks that it would address leverage, but not likely be dilutive to FFO.

Right. I was referring to the step-up in basis that allowed for more portfolio management, which was a bigger part of this...

You correct me and you're right. You're exactly right, but our tax basis is much improved.

And our next question today comes from Alex Kalmus with Zelman Associates.

Just talking about the time line of the New York City dispositions potential, what would you need to see in the market to feel comfortable disposing of those assets?

Alex, again, it's Terry. I think what we focus -- or Conor, you want to speak to that. But I think in general, what we'd be looking for is the right price, understanding that today's prices can be -- can overly discount future expected results. But that's your ball, I actually didn't mean to jump into it.

Nothing much to add to that. As we could see the market improve, optimism around the vaccine, people returning into the office, that would generally help a buyer underwrite, but we're going to be judicious. We're going to get the prices that we need, and we're not going to act in a rash manner.

Got it. And presplit, the market became aware of some unsolicited offers for the company. Post -- but have those conversations really died down given the new operation in the platform?

We haven't had any of that noise that I can think of.

And our final question today comes from John Pawlowski with Green Street.

Maybe continuing the disposition conversation. Paul, it sounded like your opening remarks where there is something imminent where you had a batch of dispositions teed up to delever. So is the -- are New York City properties or California properties currently in process? Are they teed up? Or is this more of a longer-term 2- to 3-year type deal?

John, if I implied that something was kind of just ready to be announced, but not quite ready for prime time, I apologize. That wasn't my intent. I was wanting to portray the fact that we are above our leverage levels. We want to be within those leverage targets. And as Conor mentioned, we'll act judiciously to allow us to get there and get there in a manner where FFO is not diluted by a significant amount.

Okay. And then, Keith, your comments about occupancy returning to pre-COVID levels by year-end, am I interpreting that right, that would imply kind of a low 97% occupancy figure by year-end? Is that an accurate read?

Well, John, it is -- we are optimistic that there is -- if things continue to improve, that there is a path that we could find our way there now. There's a lot to happen between now and then, and it's obviously early days. But what gives us encouragement is that when we look at sort of how the pandemic impacted going back to almost a year ago and the stark drop off and how it has steadily been improving since particularly September through January and now even in February, we're just optimistic that there -- if we keep seeing these types of improvements, the economy starts to come back that there is a way for us to get back there, and it's -- there will be a lot of work to make that happen. But there's a way that we could see it.

Okay. And then last one for me because I can't resist. Conor, if the Aimco portfolio was -- you had your risk board ahead of you and outside of shrinking California, shrinking New York? Are there any other big portfolio repositioning you would do?

Well, we make those decisions as a team. And so we publicly discussed our desire to increase our allocation to the Sun Belt. The underlying principle is that we like to be diversified by geography -- within geography and by price point. And so we continue to look into the Sun Belt. But again, like dispositions, we're going to address that judiciously and in the best interest of shareholders.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Well, thank you all for your interest in AIR. It's fun for us to our first earnings call as a new company. And if you have questions, please do call Conor or Paul or me, and we'll do our best to answer them. Be well. Thank you.

Thank you, sir. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.