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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Aimco Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lisa Cohn. Please go ahead, ma'am.
Thank you, and good day. During this conference call, forward-looking statements we make are based on management's judgment, including projections related to 2020 and 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 will also discuss certain non-GAAP financial measures, such as AFFO and FFO. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on Aimco's website.
On today's call, we will provide information during our prepared remarks related to our prepared -- or excuse me, to our planned business separation. Given the focus of this call, our ongoing shareholder outreach and our anticipated public filing expected next week, we are not going to hold -- not going to comment on and not respond to questions related to the planned separation or the shareholder solicitation.
Prepared remarks today come from Terry Considine, our Chairman and CEO; Keith Kimmel, our Executive Vice President in charge of Property Operations; Wes Powell, our Executive Vice President in charge of Redevelopment; and Paul Beldin, our Chief Financial Officer. I will now turn the call to Terry Considine. Terry?
Thank you, Lisa, and thanks to all of you on this call to your interest in Aimco. We have a lot to talk about. Third quarter was filled with unusual challenges and a great many successes. Here are 3 headlines: Aimco operations does well in difficult times; Aimco reduces leverage by $1 billion; and Aimco unlocks shareholder value, reducing risk, leverage and costs by separating into 2 entities.
Here is the rest of the story. The challenges were the continued effects of the pandemic. Following the second quarter collapse of the economy, third quarter GDP rebounded strong, but uneven. Many sectors remain at historic lows. For example, many universities are now virtual and many office buildings stand empty as workers now work from home.
For apartments, we are now subject to unprecedented government regulation of rent setting and rent collection. In many of our markets, we've experienced rioting, violence and camps for the homeless, targeting of the police and a general challenge to public order. And the public health outlook continues uncertain with COVID-19 cases spiking across the country, including several of the markets in which we operate.
Through it all, Keith and his team worked hard and successfully to provide homes for the individuals and families who live in Aimco apartment homes. They provide safety, a refuge from the virus, good neighbors, respectful treatment for all and a helping hand to those in need.
As Keith and Paul will discuss later in detail, the economy took its toll. As in previous recessions, some residents can no longer afford their rent. With their departures, occupancy dropped and bad debt increased. In other instances, and this is unprecedented, local ordinances gave residents the option to live rent-free. 2/3 of Aimco bad debt in the third quarter is owed by residents who've lived rent-free for the past 6 months.
While cautious about a second spike in the pandemic, it seems that the worst is behind for Aimco. Our forward-looking metrics have been steadily improving since mid-summer. For example, lease space is up and available to let is dramatically down. Occupancy has bottomed. The rate of new delinquencies has been steadily declining. Some important properties in urban settings remain impacted, with the largest portion of our portfolio is returning to its normal performance and steady improvement.
As we move forward, we will benefit from Keith's disciplined adherence to providing world-class customer service as graded by our customers and maintaining its customary high standards for selecting customers who will be good neighbors and stay longer.
Notwithstanding the turbulence, Wes and his team advanced our long-cycle redevelopments and found a few new opportunities for future growth, including acquisition of a Bayfront community in Miami and formation of an interesting venture with IQHQ, a dynamic life science campus developer.
Patti Fielding sold a minority joint venture stake in a portfolio of 12 California properties to a passive institutional investor. The $2.4 billion joint venture was priced in September at a 4.2% cap rate equal to 97% of Aimco's pre-COVID estimated value, validating Aimco's published net asset value and taking an important step to rebalance the Aimco portfolio. The same JV was also the source of funds to reduce leverage by $1 billion, significantly improving Aimco's strong and flexible balance sheet.
With personal and family concerns from the pandemic in school closings, and with the business challenge of difficult markets and changing regulations, the Aimco team maintained their focus and did excellent work. I'm proud of their successes and grateful for a chance to work together.
The Aimco Board of Directors was, as always, highly engaged. While total shareholder returns for the past 1, 3 and 5 years have been competitive with coastal peers, the Board would like them to be better and sees the share price discount to net asset value is offering the opportunity for outperformance. The Board goal is to create a simple, transparent and low-cost public vehicle to invest in stabilized multifamily properties.
The Board plan is to simplify the business and reduce execution risk, allocate to a second entity roughly 10% of total capital for development, redevelopment and nontraditional assets and hold 90% of Aimco capital in a high-quality, diversified portfolio of stabilized apartment communities; to reduce financial risk by lowering leverage by $2 billion, sourced from the joint venture and from the separation; to increase FFO and dividends per share by substantial reductions in vacancy loss and G&A costs related to redevelopment; and to replenish the tax basis to reduce the need for future stock dividends and enhance our flexibility in capital allocation.
After the separation, shareholders will own the same asset before and after, but shareholders will then have the ability to make individual allocations to the entity owning only stabilized apartment communities, to be known as AIR, and to the entity with more complicated longer-cycle development and redevelopment and nontraditional assets, to be known as Aimco or New Aimco. Full SEC descriptions of these plans are expected in Form 10 filings expected to be public in the next few days. Until then, I'll not be able to add much on this subject beyond what I've already said.
With that, I'll turn the call to Keith Kimmel, Head of Property Operations. Keith?
Thanks, Terry. The third quarter brought a mix of challenge, uncertainty and promise. Encouraging signs make us highly optimistic about recovery and the long-term outlook for our business. New leasing base rebounded and was up 20% year-over-year. As a result, lease percentage, our best forward indicator of occupancy, increased by more than 6% from July 1 to today and our units to lease have been cut in half.
Our high standards for resident selections are paying dividends as collections have been consistently high since April. Our customer service remains world-class with residents giving us 4.3 stars on 19,000 surveys. Thanks to that level of satisfaction, turnover was 280 basis points better than 2019 at 41.9%. And at the same time, we achieved 2.6% rate growth on renewals. This all despite an environment with constant changes in employment, schools, courts and regulations.
One measure of the health of our core business is residential net rental income. Simply put, this is our occupancy and average rate of apartment homes, which was down 2.5% in the third quarter. Average daily occupancy was 93.9%, down 280 basis points from last year. Blended lease rates were down 3% with new lease rates down 7.6% and renewals up 2.6%.
Bad debt expense was 190 basis points, including 130 basis points attributable to court closures and recent Los Angeles regulations. Same-store revenues declined 4.9% in the third quarter, while expenses were down 1.3% due to increased efficiencies from our team and lower net utility costs as our energy initiatives drive value. As a result, same-store third quarter net operating income decreased 6.3% year-over-year.
With that said, results in the quarter depended on geography. In our stable suburban markets, operations were largely business as usual. These communities distributed across the country totaled 19,100 units. Our occupancy was 95.7%. Turnover was 39.6%. Blended rates were nearly flat and residential net rental income was up 60 basis points.
In our 8,500 units located in urban areas, demand was down and lease rates were more frequent, leading to turnover of 47%, occupancy of 89.5% and blended lease rates were negative 6.7%, and residential net rental income was down 7.1%. In each urban neighborhood, cumulative local conditions led to this performance and the reversal of those conditions will fuel growth next year.
In Philadelphia, University City felt the impact when UPenn and Drexel announced the fall semester was virtual. In Center City, many offices are empty, including both Comcast towers. We expect Philadelphia to turn around shortly when students return to class and employees return to their office.
In Mid-Wilshire in West Los Angeles, the interruptions to the entertainment industry and shutdown of the city nearly eliminated demand in the spring. While rate remains pressured, and losses were compounded by local laws allowing residents to live rent-free, we see blue skies coming, with leasing up 44% year-over-year in the third quarter and up 150% in October. Occupancy is anticipated to fully recover by year-end.
On the Peninsula, Northern California work-from-home policies at tech companies changed the demand for apartments. The Pacific neighborhood weakened and has since stabilized, while San Mateo and Redwood City continue to face challenges with demand and rate and will likely remain tough in 2021. Our exposure to these submarkets is limited. And our diversified portfolio in Northern California includes solid performances in San Jose, Marin and the East Bay.
In October, business continues to improve. Leasing base is still running ahead of last year. Average daily occupancy for the month is 94.2%, and we expect further increases through the end of the year and into 2021. Pricing remains challenged with new lease rates down 10%, renewals up 1.4% and blended lease rates down 6.7%.
For some context on new lease rates. We've signed 95% of our leases for the year, and our in suburban market, rates are healthier and improving. In our urban markets, rates have been tough, but we've also seen them stabilize. And with our suburban markets full, urban leasing has made up an increasing share of the transaction dollars each month since July. We anticipate that these 3 trends will hold through the winter months as we believe we've reached the bottom.
Lastly, October collections were consistent with recent months. New delinquencies are slowing with more of our accounts receivable growth coming from residents who have been delinquent since the beginning of the pandemic. We anticipate an improvement in bad debt once local emergency ordinances and closures unwind sometime next year. In a moment, Paul will provide more details on our collections and bad debt.
We continue to focus on the long game, keeping a steady hand on the wheel and building sustainable revenue growth for the coming year. We have a strong operational architecture in place today with smart home technology in every unit. Artificial intelligence is delivering productivity and improved results; a centralized team driving consistent execution; relentless innovation, enabling us to hold our expenses flat; in-depth analytics guiding our decision-making and; most importantly, our field team members that consistently deliver exceptional service and outstanding results.
My thanks to each of you and your continued energy, innovation and dedication to serving our residents. And with that, I'll now turn the call over to Wes Powell, our Executive Vice President of Redevelopment. Wes?
Thank you, Keith. Amid this year's challenges, the Aimco team has sourced new investment opportunities, advanced construction on our major projects and worked hard to fill newly delivered apartment homes with high-quality residents. First, I'll touch on new investments made during the quarter and will then turn to our redevelopment and development activities.
In August, Aimco acquired Hamilton on the Bay, located in Miami's Edgewater neighborhood for a price of $90 million. The acquisition included a waterfront apartment building containing 271 units, averaging over 1,400 square feet, plus an adjacent development site. Combining the parcels will allow for more than 380 additional residential units under the current zoning. We are planning to invest as much as $50 million in a substantial redevelopment of the existing building and the second phase focused on unlocking the value of the available development rights is being explored.
Also during the quarter, Aimco made a $50 million commitment to invest in IQHQ, a premier life sciences and real estate development company. In addition to our investment in the company, Aimco secured the right to collaborate on the multifamily portions of future IQHQ development sites. Post separation, we expect these new investments will be strong contributors to the growth of Aimco's development business, and we are actively pursuing additional opportunities with plans to further grow our pipeline.
Now turning to our ongoing redevelopment and development projects. Here are some highlights as of the end of October. At Park Mosaic in Boulder, Colorado, where construction was completed earlier in the year, Keith and his team have leased 97% of the apartment homes. Our townhouse project in Elmhurst, Illinois is now substantially complete, with all 58 homes delivered and 57 of those being leased.
At 707 Leahy in Redwood City, we've delivered 60 homes. Over 80% have been leased and the remaining 50 are scheduled to complete before year-end. At the Fremont on the Anschutz Medical Campus, just over 100 homes have been delivered. Tier 2, 80% have been leased and the remainder will be completed in the coming months. Our final 2 long-cycle projects, Prism in Cambridge and the North Tower at Flamingo in Miami Beach remain on track for initial delivery in early and mid-2021, respectively.
Initial rental rate performance on those projects currently in lease-up has averaged 98% of our original expectations. However, we believe that NOI yields will meet or exceed our underwriting as the impacts of continuing on-site construction and strained local market conditions lift.
With that, I would like to offer a special thanks to my Aimco teammates for their continued dedication and positive results over these past few months. I will now turn the call over to Paul Beldin, our Chief Financial Officer. Paul?
Thank you, Wes. Today, I will discuss Aimco's balance sheet, third quarter financial results, rent collections and bad debt, and then wrap up with a brief discussion of Aimco's previously announced special dividend.
As Terry mentioned, in 2020, we expect to reduce leverage by $2 billion, $1 billion from the September closing of the California joint venture and $1 billion from the separation transaction. The $1 billion leverage reduction reduced third quarter leverage to EBITDA on a trailing 12-month basis to 7.0x.
Now on to Aimco financial results. Third quarter pro forma FFO of $0.61 per share was down $0.03 or 5% year-over-year. We estimate lower occupancy and other COVID-related impacts reduced third quarter FFO by $0.09 year-over-year. Offsetting the COVID-related impacts was $0.04 of increased interest income associated with the Parkmerced mezzanine loan and $0.03 of lower offsite costs. The one -- the remaining $0.01 decline is attributable to the net impact of property sales and lower interest expense.
Next, I'd like to spend a minute discussing Aimco rent collections and bad debt. Residential revenue includes apartment rents and also such items as storage rent, parking rent and related fees owed by residents.
In the third quarter, Aimco recognized 98.1% of all residential revenue. Of the 98.1%, 96.7% was paid in cash, 30 basis points better than the second quarter's collection percentage as of the same date. 60 basis points is subject to recovery by offset against security deposits and $1.6 million or 80 basis points is considered collectible based on Aimco review of individual customers' credit.
Aimco does not expect to collect and, therefore, did not recognize revenue on 190 basis points of third quarter billings. These amounts are reflected as bad debt in our quarterly financial statements. The majority of this amount, approximately 130 basis points, is attributed to residents who have not paid April and subsequent rents.
Prior to the enactment of restrictive city ordinances in closed courthouses, these residents would have been evicted in ordinary course, and therefore, the bad debt would not have continued for the past 6 months. The remaining amount, approximately 60 basis points, reflects residents whose initial delinquency occurred during the third quarter. This is elevated, reflecting stress in the economy for the rate of initial delinquencies has been steadily declining since July. We expect the decline to continue until reaching a more normal 30 basis points in 2021.
As we look forward, we also expect the emergency ordinances that allow residents to live rent-free to unwind providing us with the opportunity to re-rent these apartments to rent-paying residents.
Lastly, as previously announced, the Aimco Board of Directors declared a special dividend on October 21 to distribute the taxable gains resulting from the partial sale of assets in the California joint venture and other 2020 dispositions. The $8.20 per share dividend consists of 10% cash or $0.82 per share, which covers Aimco's regular scheduled quarterly dividend and the acceleration of the next dividend typically paid in February.
The remaining 90% will be paid in common stock. Shareholders of record on November 4 will have the option to elect to receive either cash or shares of common stock. If either option is oversubscribed, the shareholder will receive a prorated amount of cash and common stock. Special dividend will be payable on November 30, concurrent with a reverse stock split, effectively neutralizing the per share impact of the additional common shares issued in the dividend.
Post separation, it is expected that the need for special dividends to distribute taxable gain on sales at AIR will be reduced or eliminated due to the refreshed tax basis.
With that, we will now open up the call for questions. [Operator Instructions] Rocco, I'll turn it over to you for the first question.
[Operator Instructions] Today's first question comes from Rich Anderson of SMBC.
Can you hear me?
You bet. Yes.
So Terry, I think I met you in 1997, and the first thing you said to me was -- and I went up to him where he said, "Don't judge so much on other multifamily companies, but judge on GE." And I don't think you're going to buy or sell refrigerators, but the point was well taken that you were going to look outside the box to create out tax credit redevelopment asset management, property management, portal housing, all that stuff and it all made sense back then.
What has changed over the course of time to make you do at a complete bouncies? Has it been the public markets not valued? Or did those businesses just no longer work? Like what has given you such a change in perspective as it relates to the multifamily industry?
Rich, that is a -- an excellent question, and it does reflect a change in the public markets, that, increasingly, the public market just seems to be the marginal price setter values FFO. And it -- many of those more complicated transactions are better measured by net asset value.
And so as we pursue alpha, as you called it, in those -- that -- in that category, we would be in competition with and undermine our FFO business. And so I think the separation allows the market to see the benefits of both or each.
Okay. So what happens when we get past this pandemic and we're past the recession, and the time is now to be a developer and to develop under one roof, under one umbrella?
Is there a risk now that although I recognize the motivation behind the separation that you could be a step behind everyone because the time will be right to be a developer in a manner that is sort of, again, under one umbrella?
I think the -- my opinion is that there will be a long-term demand for stable, predictable cash dividends and that, if you will, vanilla business will always be in demand. And it will have opportunities from growth by just the superb management of Keith and his team and buying stabilized properties with FFO in place. And adding to the mess he did, for example, at Bent Tree would be a recipe for the future.
And our next question today comes from Alexander Kalmus with Zelman & Associates.
So you provided the urban versus suburban breakout there. But I'm just curious, how are you coming to the demarcation of those properties that you classified?
Okay. This is Keith. I'll take it. The way that we're getting there is sort of where the geography is and where they're physically located. So I emphasized Philadelphia, Northern California and Los Angeles in my prepared remarks. But I'd give you a couple of one-off examples that would be different.
So in Washington, D.C., as an example, we have a lot of -- most of our portfolio there is in suburb -- in our suburban markets, but we have Latrobe that's in the district. So it's a one-off that we would categorize that as an urban location. Similarly in San Diego, we have lots of suburban locations that are in North San Diego, but we have a -- our Broadway loss property that's in the Gaslamp district in the middle of the city. So really, the way that we've separated these is physically where they're located and how they're performing.
Got it. Got it. And after post, then you'll have your fresh tax basis there. But when you think about the potential of 1031s getting eliminated, your transaction partners won't have that basis. What do you think that will do to the transaction market overall for multifamily?
Yes. If -- Alex, if I could take this. It's Terry. I think that the tax -- increased taxes reduce activity. It's as simple as that, that the profitability of exchanges or transactions will be reduced.
The next question is from Alua Askarbek with BoA.
So I was just wondering if you guys can talk a little bit about the -- your New York City properties. I believe this time you guys put it under other markets. I just want to see how those assets are performing. Those are, I believe, mostly urban and how occupancy is there.
This is Paul. Thank you for your question. Just on your comment about the combination of the New York City properties, we did move those into other markets this quarter. And the rationale for that was that we have our River Club property, which is -- it's in Edgewater, New Jersey, but it's been classified in New York from day 1.
That is under contract to sell, and that contributed over 30% of our New York operations. And so with that being gone, we didn't think it made sense to separately present New York. But in response to your question, Keith, do you have some additional color you'd like to add on New York?
Well, Alua, the main thing I would say is we have less than 500 units that's in that other markets in New York City and they're walk-ups. They've definitely been impacted by what's going on in the city, but it's really a small fraction of the contribution here.
And our next question today comes from Haendel St. Juste with Mizuho.
Terry, a question for you. I know it's not a lot of money mostly, but maybe you could help us understand the decision behind making the $50 million investment in the life sciences development company, especially given the prior Aimco march towards simplification.
How did you -- how do you weigh the pros versus perhaps the skepticism or pushback from investors who may not want you to go down that path? And then maybe you could talk a bit more about the expected returns, the potential scope of the opportunity. What specifically makes you excited enough here to make you -- to withstand any skepticism or pushback here?
Well Haendel, as to the first, I would say that this is an investment in the future of the development -- redevelopment company and that as we discussed with Rich earlier on the call, we have really these 2 different businesses. You're exactly right, that they're in conflict with each other in many ways.
The stabilized department communities are best measured by FFO and predictability. And the development business is best measured by net asset value creation and is lumpier and riskier. And so this is an investment in that second business and that the issue for shareholders is that they'll soon be able to choose which business best suits them or what their allocations might be. So that's how I would address the question of how to serve our shareholders.
The second question is the $50 million was a -- an expression of commitment to Alan Gold, a very talented entrepreneur, whom you must know, who has had great success with Alexandria and Biomed and other such and is going to do again. And we think the opportunity to invest in a collaborative way with him will bring with it opportunities that we cannot quantify today, but that we would expect to be really quite substantial.
Got it. Got it. It certainly sounds like that's going over on the pro forma Aimco side then. And maybe you could talk a bit more about the acquisition in -- I think it was Miami here, talking about perhaps, not only asset pricing there, potential IRRs, but what you're seeing more broadly in the market today in terms of competition in a market like Miami or, just broadly, as you look across perhaps parts of the portfolio where you would be inclined to add some exposure?
I have heard one of your peers earlier today talking about cap rates in some of these markets maybe into the high 3s. So just curious on, not only what you paid for this asset, what intrigued you about it, but broadly, what you're -- what else you're seeing out there.
Well, Haendel, I'll start, and then I'll turn it over to Wes, whose deal it is, and it's a wonderful deal. But I'd make 2 points. First of all, that this deal was under contract for, I think, 7 or 8 or 9 months or a year maybe. So it is a long transaction in closing.
And second, that in the market today, the most important fact is volumes have collapsed, that there's much, much less liquidity today than there would have been a year or 2 or 3 ago. So I don't know that we can take an example of something that traded a year ago and use it as representative of what you'd find today. But it's a terrific deal, and Wes, do you want to speak to that?
Sure. Thanks, Terry. You're exactly right. This is an opportunity that we've been engaged in since late 2019. We had the opportunity to work with the seller through the events of the spring and come to a price that made sense, given all that was going on in the world in August and closed on the transaction.
Haendel, we've talked before about why we like South Florida, a number of factors, but they all translate into increased population growth and long-term demand for housing. Of course, waterfront land is scarce and so we like that. And the location is one we know pretty well. It's about a mile north of a property, Bay Parc, that we own and operate today. It's just north of a successful condominium development that we later did and has sold out at high prices.
The existing asset itself has great zones, large apartments that we plan to renovate. The views are terrific. So that one's right for redevelopment. And then as you also know, we like the optionality to have future investment in ground-up development. And so it comes with a -- an adjacent waterfront parcel and the ability to add almost 400 apartment homes on that site when the timing makes sense. So overall, it kind of fit the playbook well and we think it's going to be a good opportunity over the long haul.
Got it. And one follow-up, if I may. Anything you could share perhaps on how the pricing here ultimately concluded versus perhaps where you started 9 months ago?
Yes. Haendel, I think the pricing was better than it was when we first engaged, but I'd say that's also as much a reflection on the seller circumstances as it is on the general market conditions. As Terry mentioned, transaction volume is down significantly, especially in locations like in urban Miami. So it's hard to have a real good feel for what an asset like that would trade at.
But again, we feel like we bought it at a good basis again, just keeping in mind that it's 270 apartments, but they're about twice the size of what a normal building might have. So when you think about it on that way, we think it was a pretty good buy.
I do appreciate that, Wes. But any way you can quantify that maybe on a cap rate or any other quantifiable measure? Just curious what type of asset value repricing has occurred in the market today.
We saw pricing come off about 10% or 15% from when we first engaged in the deal.
Got it.
But Haendel, that is also typical of many negotiations and that isn't all in the market, I would add.
Yes. And Haendel, that's exactly right. And the point I was making is that I wouldn't read through that to the values in the market. But again, this particular transaction and the particular seller and their circumstances as we went through the events in the spring.
And your next question [indiscernible] is from John Kim with BMO.
Earlier today, ISS announced its support for the special shareholder vote. And I just want to ask what your thoughts are as far as timing of when this may occur and also the timing of any next hurdles that we should be looking for as far as you move forward with your split.
John, I think it's an important question. I haven't had a chance to read it. We did have a meeting with ISS. They were completely helpful and thoughtful, and we enjoyed a chance to discuss it with them, but we're not prepared to discuss it today.
This will all be part of the public filing that is being reviewed by the SEC. It will be public, I think, sometime next week. And perhaps we'll invite all of you to come back or we'll be in touch one way or another to discuss it at that time.
As far as -- are you still on target to complete the split this year?
John, I really do want to be both courteous, but also clear. We really want to have this conversation focused around the third quarter. This is a very important issue. You're really right to raise the question, but I think it's going to be better addressed next week when we have all the facts transparent to everyone.
Okay. That's fair. Given cap rate compression that had been occurring and some of those issues that you've have been talking about, are there any additional dispositions that you're contemplating, including potentially the separate portfolio that's going to the New Aimco?
John, again, this is Terry. I think the cap rate compression is something that you have to look through carefully. One is, of course, the transaction volumes are down, so you have to see what's being sold and what's relevant. Second of all, incomes are down. And so that gives you a lower cap rate if values are steady and you have to kind of filter through that.
But I think the biggest fact is the market's relatively illiquid right now. For us, we are interested to sell more and that the timing of the liquidation of the separate portfolio will be a function of the separation of the companies, which is a conversation we're going to have later.
But independent of that, that at Aimco, we're probably more interested to pursue joint ventures and that the something along the lines of what we've -- where -- Pepper, Patti Fielding was very successful in California would be a wonderful second act.
And your next question is from John Pawlowski with Green Street.
Terry, maybe following up on your point there. Did I hear you right that the plan is to still liquidate the separate portfolio post spin?
John, I really want to talk about the company's post-spin and so forth at another time, perhaps next week. But that is -- the intent of that is to have a portfolio -- to complete the liquidation and the delevering of AIR. But let's talk about that next week.
Okay. I would like to talk about things involving the spin that you've talked about before. One is what I struggle with on just independents. In my mind, if the same CEO and Chairman is at the helm and the -- your colleagues in the same shared office space. And it's -- maybe it's skeptical analyst, but I think in no world where it will Aimco and AIR be truly independent.
I think if Green Street got split into two, and my boss was the boss of the new entity, I'd be partial to that new entity and the colleagues, my former colleagues in that new entity. So how are you going to make sure that this is not a convoluted non-arm's length period these coming years between Aimco and AIR?
John, I'm going to talk about it next week, but I hope -- I think you'll be satisfied. We've been out talking to shareholders. We recognize that many of them have concerns in this area. The Board is focused on it at great length, and we hope to report next week something that I hope will be satisfactory to you.
And the next question today is from Austin Wurschmidt with KeyBanc.
Yes. So with -- you've talked a lot about leverage coming down post-spin by another $1 billion. Obviously, AIR will no longer be focusing on development or complicated redevelopment.
So that acquisition piece becomes an important leg of the external investment opportunity heading into the next cycle. So I guess, given the greater aversion to markets with high regulation, I mean, what markets are attractive to you, including any potential new markets?
Austin, you're exactly right. Our analysis is to reallocate capital and including new capital, yes, to markets that are faster-growing and have freer economies.
Wes has already spoken about our appetite for Florida, not just South Florida, but Florida in general. But that will be true in Georgia, Tennessee, North Carolina, markets such as that and perhaps additionally in the Rocky Mountain West.
That's helpful. And then switching over. On the capital commitment to IQHQ, just curious. How big of a pipeline is it that you foresee there? And what are sort of the funding options, I guess, for New Aimco to build out that -- those multifamily properties associated with the life science development?
I think, Austin, again, that's something that we'll be prepared to discuss at length next week. But again, just for clarity, I think the pipeline will be -- we've won, that will be many multiples of the investment because the scale of activities inside IQHQ or the expected activities is quite substantial.
And so if a typical apartment building in that context was $100 million or $200 million to $300 million, it'll -- and there are multiple buildings, then you can see it's a levered investment. The secondly thing would be that, that company is more likely to be funded with project financing and private equity.
Got it. Are any of these assets or locations ones that AIR would be interested in owning over time?
My dear friend, I really do want to talk about that next week. But again, let's talk about it next week. I think that it just -- it's a road that's going to lead down, and eventually, we're going to be ahead of ourself.
And ladies and gentlemen, the next question is a follow-up from John Pawlowski with Green Street.
Just maybe you could talk operations then, Keith. In terms of the positive inflection points and the bottoming and the blue skies you referred to, curious what gives you confidence today on that stability and bottom because yourselves and a lot of peers have used the term bottoming before.
And I'm not trying to hold you to a prior comment because we've been wrong on plenty of forecasts internally. Nobody can predict the future right now. But I'm just curious on-the-ground trends, what gives you a little bit more confidence today that these markets have bottomed versus 3 months ago?
John, thanks for the question, and thanks for the caveat because there's obviously a lot of unknowns still in front of us. But let me give you some insights of what we're seeing and what makes us think that. So when we look at our third quarter and we're -- we -- looking at suburban and urban type of situations, our suburban portfolio was running in the mid 95s. And now as we finish up October, we're seeing it in the mid- to high 96s.
We also see the rates in that same portfolio that have increased and had gotten stronger. When we look at our urban areas, while occupancy has held relatively flat in the 90s, what we've seen is, is it started to tick up. And I'll use a very specific example in Los Angeles. And so when we look at Los Angeles, in the third quarter, we were running in the 92s. And now we're going to finish in the mid- to high 94s, and we see a path that we -- starts getting us in 95% and 96% by year-end.
So there's a series of things that we start seeing across the country that are starting to show us that there are some blue skies coming. Now I'd point out that Philadelphia is one that will be -- it will be on a switch that says, does UPenn come back and Drexel come back? Does Comcast and the Citis come back?
And in Penn, in Philadelphia, we have administrators that live with us that work at some of those institutions who have given us an indication they are working hard to find a way that could they open in January and they would like to open in January. Whether that happens or not, I don't know. There's not any public statements around that, but it gives us optimism.
And another thing that we know is just that I'll give you an example at Evanston, Illinois, we have a property there right next to Northwestern University. When they came back, we went from struggling in occupancy to nearly 100% in a matter of a week. And so we know that if these come back, there will be an opportunity, particularly in Philadelphia, for a switch type of opportunity, not a dial, but we think it will come back strong.
That's what we're looking for, too, but there's plenty of other things that are shoot -- green shoots that are coming up in other markets to give us an indication that we've hit the bottom. It's market-by-market. There's plenty of different variables, but we're optimistic that we'll start seeing some benefits of those things.
Got it. Did that -- on the nonbinary, nonuniversity markets, has that improved in occupancy come through pulling the concession lever harder than you did 3 months ago?
John, it's been -- well first of all, when we think about concessions, we think about them as it's a marketing tool and we saw to total revenue. And so it's been a combination of both retention of customers. It's been a combination of when appropriate, what's happening in the markets around us that there has been some concessions. But it's also ultimately that we think that we are making a long-term decision-making around things that will play and paying dividends in 2021.
There's a lot of ways to make decisions that you would lower your resident quality as an example or you would give more concessions to somebody who maybe isn't the first that will pay in the future. And we've tried to have a steady hand. Our occupancy has been lower than others, but we're building it in a very steady way in which we believe will pay dividends in 2021 and beyond.
Yes. John, what I -- if I might add to what Keith so -- said so well. At Aimco, because we have residents that live with us for a longer period of time, it's particularly important to select consistent residents so that you have a contribution, not just today, but for the next 2 or 3 years.
And so I think one of the great things I think Keith has done that I tried to cite in my remarks is to be disciplined about picking neighbors for our existing customers, but also residents who will be contributors over the next several years.
Our next question today is a follow-up from John Kim of BMO.
Keith, you just mentioned the weakness in Center City being at least partially driven by Penn and Drexel going virtual. Can you just remind us how many of your residents in Philly are students? And if there are any -- are any other markets that you have that have a pretty sizable university student population?
So thanks for the question, John. We have about -- I would call it about 1,000 residents that would be direct students. And we have one particular building, Chestnut Hall, that is a student building, and then we have some influence that goes to our Park Towne community. But really more importantly, what happens is it creates life and vibrance that comes to the city with those folks being in place. And so think about businesses, think about restaurants, think about all kinds of other things that are happening.
Those things also will be impacted by the -- in Center City, the Comcast Towers and the other buildings there. And so a -- we know that there's -- the heart and soul of that city comes through those wonderful universities and, ultimately, feed the vibrance to the rest of the business.
Would you say Philly is your only market where you have such a strong dynamic like this?
In which context, John?
We have student -- I mean, students are an important part of demand across the country. And because all markets are interrelated, it's going to be very hard, John, to say whether the -- it's limited to one area or another. But it's certainly true that just top of mind North Andover where you have Merrimack College.
In Chicago or Evanston, Illinois, Keith has already mentioned Northwestern University. In Philadelphia, we've talked about Drexel and Penn. In Miami, you're going to have an influence from University of Miami and so forth. So it will show up throughout the portfolio as it does through apartment demand across the country.
Your next question today is a follow-up of Austin Wurschmidt with KeyBanc.
Terry, you referenced how lower cap rates may reflect the lower income streams and perhaps values are stable versus pre-COVID levels. And I recognize there hasn't been a tremendous amount of transactions, but you just completed a sizable JV in a coastal market. And you mentioned you're pursuing additional sales. So just curious what your view is towards values for multifamily properties.
Austin, thank you for the follow-up. I think that values are affected by alternatives. And the price of one thing is the cost of the alternative forgone. And so if we look at apartments as a relatively predictable, it's hard to say that during 2020, but over time, a relatively predictable cash flowing asset class that if it can be simplified as we're seeking to do with low leverage and measured by current return, in a world of very low interest rates, that that's a positive in terms of demand for pricing.
But as I say, there are many other competing factors, including most -- in an unprecedented way, government intrusion. So those are the factors that are being worked out. They -- I don't think they've been worked out, which is why you see this reduction in valuation. And I think that it would be logical to think that there probably has been some reduction in value. But I think that that's probably as much due to the -- as I say, to the regulatory intrusions being -- and the recession, which I think seems to be recovering and offset by low interest rates.
Got it. And then just one last one. You also referenced the attractiveness of a second act on a potential joint venture, and clearly, that seemed well received by the market during the first act. But I'm curious how you balance your focus on simplicity going forward and then adding on another joint venture, along with sort of the ongoing relationship that you're planning to have with New Aimco over time.
Well, I think you're right. Life is all balanced. And we would have to ask ourselves and ask shareholders whether they would be interested to see an incremental $1 billion, let's say, raised, if we are talking about a second act at that kind of pricing.
And their natural question might be, well, what would be the use of the proceeds. And if that were to be applied to repurchase stock and scale, they might like that. But you're right, it's all a question of balance.
And our next question today is from Nick Yulico with Scotia.
This is Sumit in for Nick. Terry, a question about one of the things we saw earlier this quarter on one of your properties -- or actually, quite a few of your properties around paying no rent for -- or rent does not increase for a long time to come. So it seemed to imply that there were certain leases that you were ready to sign with tenants who are going to be longer term with no rent increases.
Just, one, trying to figure of -- what sort of tenant profile are you trying to attract there? And what's the sort of market vacancy profile that's driving this kind of a concession or as in your words, Terry, a promotion?
And second, whether these assets or these programs are part of the entity that remains or the entity that is going to be the development-focused entity. Now you can defer the second part to the next week. That's totally fine. I would just include them [indiscernible].
Thank you. Thank you. This is Keith. I'll take it. And I'm not sure it's exactly what you're looking at, but I'm guessing it's something that's on one of our websites or some sort of promotion. What you're likely seeing there is that we will do long-term leases in certain circumstances.
And so -- but what it is, is it's a tag line for an inquiry about how we will sign 24-month leases, things like that, in which we will have a -- an agreed-upon rental rate over a longer period of time than what maybe traditionally the way that some people do, write leases that being only 12 months.
Correct. And any color on the -- on how that program has been received and whether we should see more of it across other assets of your portfolio?
So this is -- without getting into a lot of our secret sauce, it is something that is not a reflection of the pandemic. Let's put it that way. And it's part of our toolkit and how we think about unit types, market conditions and a variety of other things in which we will offer different lease terms.
All right. Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
Well, thank you, Rocco, and thank you, everyone, on the call. I know many of you had very long weeks with so much reporting, both in the apartment sector and in the other companies you follow. And I appreciate your endurance in making it through to Friday.
I wish you a happy weekend. And I look forward to chatting with you next week as we talk about this very interesting opportunity of the separation that we've had proposed. So thanks again, and have a great weekend.
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.