ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. This Quarterly Report on Form 10-Q contains information that is forward-looking within the meaning of the federal securities laws, including, without limitation, statements regarding: the ongoing relationship between AIR and Aimco following the Separation; the payment of dividends and distributions in the future; the impact of the COVID-19 pandemic, including our ability to maintain current or meet projected occupancy, rental rate and property operating results; expectations regarding consumer demand, growth in revenue and strength of other performance metrics and models; the effect of acquisitions and dispositions; expectations regarding sales of our apartment communities and the use of proceeds thereof; the availability and cost of corporate debt; our ability to comply with debt covenants; risks related to the provision of property management services to Aimco and our ability to collect property management related fees; and risks related to the inability to fully collect the notes receivable due from Aimco.
These forward-looking statements are based on management’s current expectations, estimates and assumptions and subject to risks and uncertainties, that could cause actual results to differ materially from such forward-looking statements, including, but not limited to: the effects of the coronavirus pandemic on AIR’s business and on the global and U.S. economies generally, and the ongoing, dynamic and uncertain nature and duration of the pandemic, all of which heightens the impact of the other risks and factors described herein; real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing and effects of acquisitions and dispositions; changes in operating costs, including energy costs; negative economic conditions in our geographies of operation; loss of key personnel; AIR’s ability to maintain current or meet projected occupancy, rental rate and property operating results; expectations regarding sales of apartment communities and the use of proceeds thereof; insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; financing risks, including the availability and cost of financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; the risk that earnings may not be sufficient to maintain compliance with debt covenants, including financial coverage ratios; legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of laws and governmental regulations that affect us and interpretations of those laws and regulations; possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by AIR; our relationship with AIMCO after the Separation; the ability and willingness of the parties to the Separation to meet and/or perform their obligations under the related contractual arrangements and any of their obligations to indemnify, defend and hold the other party harmless from and against various claims, litigation and liabilities; and the ability to achieve the expected benefits from the Separation. Other risks and uncertainties are described in this Quarterly Report on Form 10-Q, as well as “Risk Factors” in Item 1A of AIR’s and AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2020, and subsequent filings with the SEC. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and depends on our ability to meet the various requirements imposed by the Code, through actual operating results, distribution levels and diversity of stock ownership.
Certain financial and operating measures found herein and used by management are not defined under accounting principles generally accepted in the United States (“GAAP”). These measures are defined and reconciled to the most comparable GAAP measures under the Non-GAAP Measures heading and include: NAREIT Funds from Operations, Pro forma Funds from Operations, and the measures used to compute our leverage ratios.
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Executive Overview
AIR provides investors with a simple and transparent way to invest in the multi-family sector with public market liquidity.
AIR is distinctive in five important respects:
Efficient: AIR was designed to be the most efficient way to invest in multi-family real estate, as measured by revenue conversion to cash flow, the percent of every revenue dollar available for reinvestment or return to shareholders. AIR has peer leading operating margins and the lowest relative general and administrative expenses.
Low Risk: AIR was designed to be low risk relative to peers. Investment risk is mitigated by a portfolio that is diversified by market and price point. Execution risk is mitigated by investing in only stabilized properties. AIR has no entitlement risk, construction risk, lease-up risk, or exposure to supply-chain disruption. Financial risk is mitigated by low leverage, expected to be 5.3x by year-end 2021, as measured by Leverage to EBITDAre.
Growth: AIR was designed to have superior growth, achieved organically through superior revenue conversion and externally through implementing our operating platform at acquired communities.
Shareholder friendly: AIR was designed to be shareholder friendly, with peer leading general and administrative expenses.
ESG: AIR has been named a Top Workplace in Colorado for nine consecutive years. Assuming the election of the three new nominees, AIR’s Board of Directors will be refreshed and diverse. The eight independent directors will have an average tenure of three years.
Our principal financial objective is to be a low-cost and efficient way to invest in U.S. multi-family real estate. Many of our investors focus on multiples of Funds From Operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), referred to herein as “NAREIT FFO.” These investors also focus on NAREIT FFO, as adjusted for non-cash, unusual or non-recurring items. We refer to this metric as Pro forma Funds From Operations (“Pro forma FFO”) and use it as a secondary measure of operational performance.
Our business is organized around four areas of strategic focus: operational excellence; portfolio management; balance sheet; and team and culture. The results from the execution of our business plan are further described in the sections that follow.
The Separation
For financial reporting purposes, GAAP requires that Aimco is presented as the predecessor (“AIR’s Predecessor”) for AIR’s financial statements. As a result, unless otherwise stated, financial results prior to the Separation on December 15, 2020 include the financial results of AIR’s Predecessor. The financial results prior to the Separation attributable to the apartment communities retained by Aimco are presented as discontinued operations and are excluded from our property net operating income (“NOI”).
Operational Excellence
We own and operate a portfolio of stabilized apartment communities, diversified by both geography and price point. As of September 30, 2021, our portfolio included 95 apartment communities with 26,364 apartment homes in which we held an average ownership of approximately 93%.
Same Store highlights for the third quarter include:
Recognition of 98.6% of all residential revenue billed during the quarter;
Average daily occupancy (“ADO”) of 96.6%, a year-over-year increase of approximately 330 basis points due primarily to AIR’s recovery efforts since the onset of COVID-19;
For leases signed during the quarter (“signed leases”), renewal rents increased by 8.8% and new lease rents increased by 11.0%, for a weighted-average increase of 10.0%; and
For leases becoming effective during the quarter (“transacted leases”), renewal rents increased by 7.1% and signed new lease rents increased by 8.0%, for a weighted-average increase of 7.6%.
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Same Store Markets
Market conditions continued to be strong in the third quarter, exceeding our expectations from the beginning of the year, and our revised expectations after a strong second quarter. The trend of strengthening lease growth rates continued through the third quarter, as weighted-average signed lease changes have trended upwards for 12 consecutive months.
As anticipated, occupancy increased sharply as we completed peak leasing season, with average daily occupancy increasing from 95.4% in the second quarter to 96.6% in the third quarter, including 97.4% in September.
In addition to average daily occupancy, we also use “leased percentage” as a metric predictive of future occupancy. “Leased percentage” is defined as occupied apartments plus apartments leased but not yet occupied and less apartments occupied where the resident has given notice of intent to vacate the apartment. During the quarter, the percentage of apartment homes currently leased increased from 93.1% to 97.5%. Our leased percentage is now 600 basis points ahead of 2020 and 300 basis points ahead of the third quarter of 2019. As a result, we see occupancy remaining at or above current levels through the first quarter of 2022.
Portfolio Management
Our portfolio of apartment communities is diversified across primarily “A” and “B” price points, averaging “B/B+” in quality, and is also diversified across several of the largest markets in the United States. After the properties being sold and the properties acquired this year, our portfolio will be higher quality, require lower recurring capital replacement spending, and have a greater allocation to states with greater economic growth and a more reliable rule of law. We measure the quality of apartment communities in our portfolio based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance data and analysis. Under this rating system, we classify as “A” quality apartment communities those earning rents greater than 125% of local market average; and as “B” quality apartment communities those earning rents between 90% and 125% of local market average. We classify as “B/B+” quality a portfolio that on average earns rents between 100% and 125% of local market average rents. Although some companies and analysts within the multi-family real estate industry use apartment community quality ratings of “A” and “B, some of which are tied to local market rent averages, the metrics used to classify apartment community quality as well as the period for which local market rents are calculated may vary from company to company. Accordingly, our rating system for measuring apartment community quality is neither broadly nor consistently used in the multi-family real estate industry.
We expect to improve the quality of our portfolio by allocating investment capital to enhance rent growth and increase long-term capital values through routine investments in property upgrades (such as upgrading kitchens, bathrooms and other interior design aspects) and through portfolio design, emphasizing land value as well as location and submarket.
As part of our portfolio strategy, we seek to sell communities with lower expected free cash flow internal rates of return and reinvest the proceeds from such sales in accretive uses such as capital enhancements, share repurchases, and selective acquisitions of stabilized communities with projected free cash flow internal rates of return higher than expected from the communities being sold. When the cost of capital is favorable, we will look to grow through the acquisition of stabilized apartment communities that we believe we can operate better than their previous owners. Through this disciplined approach to capital allocation, we expect to increase the quality and expected growth rate of our portfolio.
Transactions
Dispositions
During the three months ended September 30, 2021, we sold one apartment community located in Elmhurst, Illinois, with 58 apartment homes at a price of $40 million. Net sales proceeds from this transaction were $39.9 million.
AIR is under contract to sell four Washington, D.C. area communities with 976 apartment homes and 11 properties in New York City for total consideration of approximately $470 million, all of which are expected to close in the fourth quarter.
Subsequent to quarter end, we entered into a joint venture with an affiliate of Blackstone to sell, for approximately $408 million, an expected 80% interest in three multi-family properties with 1,748 units located in Virginia. AIR is the general partner with an expected 20% ownership, and earns various fees for providing property management and corporate services.
Additionally, we are in contract negotiations on an additional $800 million of properties located primarily in select markets in California.
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In aggregate, the completed and under contract sales are expected to generate gross proceeds of approximately $1.7 billion and are valued at an implied NOI cap rate of 4.36%, based on forecasted 2021 NOI and inclusive of fees expected to be earned from the joint venture. The communities are being sold at a 15% premium to their estimated 2020 fair market value, pre-COVID.
Acquisitions
Subsequent to quarter end, we acquired a portfolio of four properties located in the Washington, D.C. area, with 1,400 apartment homes and 84,000 square feet of office and commercial space, for an expected purchase price of approximately $510 million. The communities acquired are:
Vaughan Place, located in Washington, D.C., with 389 apartment homes and 52,000 square feet of office and commercial space. Sixteen of these homes remain subject to the Tenant Opportunity to Purchase Act ("TOPA"); if not ultimately acquired, our purchase price will be reduced by approximately $6.4 million;
Residences at Capital Crescent Trail, located in Bethesda, MD, with 258 apartment homes;
North Park, located in Chevy Chase, MD, with 310 apartment homes;
Huntington Gateway, located in Alexandria, VA, with 443 apartment homes and 32,000 square feet of office and commercial space; and
Two vacant land parcels adjacent to the Residences at Capital Crescent Trail, suitable for development of 498 additional apartment homes, and valued at approximately $20 million. AIR does not expect to undertake the development of these parcels but rather expects to sell or lease the land to a third-party developer.
The acquisition was initially funded with $259 million of existing property debt, an expected issuance of $128 million in OP Units, and $122 million borrowed on the AIR revolving credit facility. On a permanent basis, AIR expects to fund the acquisition with approximately 75% equity and 25% debt.
The paired trade of selling communities in New York and locations in the suburban Washington, D.C. area to acquire these four communities is expected to be somewhat accretive to FFO per share in 2022.
Balance Sheet
Components of Leverage
We seek to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage, primarily long-dated debt; and we build financial flexibility by maintaining ample unused and available credit; holding properties with substantial value unencumbered by property debt; maintaining an investment grade rating; and using partners’ capital when it enhances financial returns or reduces investment risk.
Our leverage includes our share of long-term, non-recourse property debt encumbering our apartment communities, together with outstanding borrowings under our revolving credit facility, our term loans, and our preferred equity. We have notes receivable from Aimco with an aggregate principal amount of $534 million. The notes will mature on January 31, 2024, and are secured by a pool of properties owned by Aimco. We consider the notes a reduction of leverage as we expect proceeds to be used to repay loan amounts currently outstanding.
Please see the Liquidity and Capital Resources section for additional information regarding our leverage.
On Track Leverage Reduction
We target Net Leverage to Adjusted EBITDAre at 5.5x, with a range between 5.0x and 6.0x.
Our leverage ratios for the three months ended September 30, 2021 are presented below:
|
|
|
|
|
Annualized Current Quarter
|
Proportionate Debt to Adjusted EBITDAre
|
|
6.9x
|
Net Leverage to Adjusted EBITDAre
|
|
7.1x
|
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Please see the Leverage Ratios subsection of the Non-GAAP Measures section for further information about the calculation of our leverage ratios.
The net proceeds from the sales activity and property acquisitions described above, and our debt refinancing is expected to result in the following:
|
|
|
|
|
|
|
|
|
|
|
Sources & Uses
|
|
|
Estimated Yield
|
|
FFO Impact
|
|
Estimated gross proceeds
|
$
|
1,715,000
|
|
|
4.36%
|
|
$
|
(74,774
|
)
|
Transaction costs (~2% of gross proceeds) and transfer taxes (~0.5%) of gross proceeds
|
|
(43,500
|
)
|
|
|
|
|
—
|
|
Prepayment penalties on debt repaid to facilitate sales
|
|
(31,500
|
)
|
|
|
|
|
—
|
|
Prepayment penalties on other debt prepaid (1)
|
|
(148,408
|
)
|
|
|
|
|
—
|
|
Net Proceeds
|
|
1,491,592
|
|
|
|
|
|
(74,774
|
)
|
|
|
|
|
|
|
|
|
Acquisition equity funded through paired trades (2)
|
|
434,500
|
|
|
5.20%
|
|
|
22,594
|
|
Property debt repaid
|
|
1,057,091
|
|
|
3.72%
|
|
|
39,324
|
|
Property debt refinancing (3)
|
|
—
|
|
|
|
|
|
3,648
|
|
Uses of Net Proceeds
|
|
1,491,591
|
|
|
|
|
|
65,566
|
|
|
|
|
|
|
|
|
|
Net FFO impact before investment of incremental proceeds
|
|
|
|
|
|
|
(9,208
|
)
|
Investment of incremental proceeds (4)
|
|
|
|
|
|
|
7,220
|
|
Net FFO impact after investment of incremental proceeds
|
|
|
|
|
|
|
(1,988
|
)
|
|
|
|
|
|
|
|
|
Net FFO impact per share before investment of incremental proceeds
|
|
|
|
|
|
$
|
(0.05
|
)
|
Net FFO impact per share after investment of incremental proceeds
|
|
|
|
|
|
$
|
(0.01
|
)
|
(1)
Of the $148 million of estimated prepayment penalties approximately $66 million relates to the mark to market on the debt and the remaining $82 million is an investment in higher future earnings; a $1.8 billion increase in our pool of unencumbered properties; increased financial flexibility; and enhanced access to public debt markets.
(2)
The unlevered yield of the 2021 property acquisitions is expected to be ~4.3%, resulting in an expected levered yield of ~5.2%.
(3)
As part of our deleveraging activities, we are refinancing approximately $275 million of high cost property debt. The effective spread on this refinancing is 130 basis points.
(4)
Assumes the investment of $380 million of incremental proceeds at 4.3%; with a debt cost of 2.4%.
Pro forma expected sales activity, year-end Net Leverage to EBITDAre is expected to be ~5.3x, 0.2x of a turn better than target, providing ~$380 million of capacity to fund future acquisitions.
Liquidity
We use our revolving credit facility for working capital and other short-term purposes and to secure letters of credit. As of September 30, 2021, our share of cash and restricted cash was $80.0 million and we had the capacity to borrow up to $517.8 million under our revolving credit facility, bringing total liquidity to $597.8 million.
We manage our financial flexibility by maintaining an investment grade rating and holding communities that are unencumbered by property debt. AIR has been rated BBB by Standard & Poor’s. As of September 30, 2021, we held unencumbered communities with property debt with an estimated fair market value of approximately $4.2 billion; an increase of 50% from December 31, 2020; pro forma expected sales activity, the value of properties unencumbered by property debt is anticipated to increase to approximately $6.0 billion.
We anticipate seeking an investment grade credit rating from Moody’s. In assigning ratings, Moody’s places significant emphasis on the amount of non-recourse property debt as percentage of the undepreciated book value of a company’s assets. To achieve Moody’s required thresholds, we estimate that a Moody’s investment grade rating will require property debt to approximate $1.8 billion. Pro forma the leverage activities described above; we anticipate that our share of property debt will approximate this target level.
Dividend
On October 26, 2021, our Board of Directors declared a quarterly cash dividend of $0.44 per share of AIR Common Stock. This amount is payable on November 30, 2021, to stockholders of record on November 12, 2021.
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Table of Contents
Team and Culture
Our team and culture are keys to our success. Our intentional focus on a collaborative and productive culture based on respect for others and personal responsibility is reinforced by a preference for promotion from within. We focus on succession planning and talent development to produce a strong, stable team that is the enduring foundation of our success. We offer benefits reinforcing our value of caring for each other, including an opportunity to manage one’s life through flexible work schedules and “dress for your day,” paid time for parental leave, profit sharing, retirement plans for all, financial support for our teammates who are becoming United States citizens, and a bonus structure at all levels of the organization. Consistent with the duration of our other leave policies, we also pay full compensation and benefits for teammates who are actively deployed by the United States military.
A critical element of our culture is a relentless focus on efficiency. We continuously seek to reduce costs through the use of additional automation and continued technological investment. We expect this focus will enable our general and administrative expenses to be lower, as a percentage of gross asset value, than our peers.
Our focus on our team and our culture is recognized externally, as well. Out of hundreds of participating companies in 2021, AIR was one of only six recognized as a “Top Workplace” in Colorado for each of the past nine years, and was one of only two real estate companies to receive a BEST award from the Association for Talent Development in recognition of our company-wide success in talent development, marking its third consecutive year receiving this award, and received for the first time the “Top Workplaces 2021” honor from the Washington Post.
Results of Operations
Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we acquire and dispose of our apartment communities affects our operating results.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements included in Item 1.
Financial Highlights
Net income (loss) from continuing operations attributable to common stockholders per common share, on a dilutive basis, increased $0.29 for the three months ended September 30, 2021, due primarily to an increase in interest income, including income earned from leased properties. Net income (loss) from continuing operations attributable to common stockholders per common share, on a dilutive basis, increased $0.40 for the nine months ended September 30, 2021, due primarily to a gain on derecognition of leased properties and higher interest income, offset partially by increased prepayment penalties.
Pro forma FFO per share was $0.56 and $1.58, respectively, for the three and nine months ended September 30, 2021.
Residential Rent Collection Update
We measure residential rent collection as the amount of payments received as a percentage of all residential amounts owed. In the third quarter, we recognized 98.6% of all residential revenue owed during the quarter, treating the balance of 1.4% as bad debt. 2.8% of our residents have extended delinquencies, much of which we expect to collect from the residents based on their high credit scores or to be reimbursed by the State of California. 97.2% of our residents pay rent timely with bad debt under 30 basis points of revenue, a level still somewhat elevated from our historic experience.
As of September 30, 2021, our proportionate share of gross residential accounts receivable was $13.3 million. After consideration of tenant security deposits and reserves for uncollectible amounts, our net exposure is $1.3 million, an amount expected to be collected during the fourth quarter.
73% of the $13.3 million of uncollected accounts receivable relate to California residents. During the quarter, we received $2.7 million from California’s rent relief program. We await the state’s response to an additional $5.2 million of rent relief requests made. We are working with residents to file an additional $3.6 million of claims.
We remain cautiously optimistic that this program will allow us to recover rents uncollected in 2020 or 2021. We expect bad debt expense to decline with the end of emergency ordinances that suspend contractual remedies for non-payment of rent.
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Table of Contents
Detailed Results of Operations for the Three and Nine Months Ended September 30, 2021, Compared to 2020
Net income (loss) from continuing operations increased by $38.1 million and increased by $62.5 million during the three and nine months ended September 30, 2021, respectively, compared to 2020, as more fully described below.
Property Operations
We have two segments: Same Store and Other Real Estate. Our Same Store segment includes communities that: (i) are owned and managed by AIR and (ii) had reached a stabilized level of operations. Our Other Real Estate segment includes communities that do not meet the criteria to be classified as Same Store.
As of September 30, 2021, our Same Store segment included 92 apartment communities with 25,427 apartment homes and our Other Real Estate segment included three apartment communities with 937 apartment homes.
Proportionate Property Net Operating Income (Non-GAAP)
Our proportionate share of financial information includes our share of unconsolidated real estate partnerships and excludes the noncontrolling interest partners’ share of consolidated real estate partnerships. We believe proportionate information benefits the users of our financial information by providing the amount of revenues, expenses, assets, liabilities, and other items attributable to our stockholders. Other companies may calculate their proportionate information differently than we do, limiting the usefulness as a comparative measure. Because of these limitations, the non-GAAP proportionate financial information should not be considered in isolation or as a substitute for information included in our financial statements as reported under GAAP.
We use proportionate property NOI to assess the operating performance of our communities, which excludes the results of properties retained by Aimco in connection with the Separation, which are included in discontinued operations. Proportionate property NOI is a non-GAAP measure that reflects our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements, for consolidated communities. Accordingly, the results of operations of our segments discussed below are presented on a proportionate (“Ownership-Effected”) basis. In our condensed consolidated statements of operations, utility reimbursements are included in rental and other property revenues in accordance with GAAP. In September 2020, we formed a joint venture with a passive institutional investor to own a portfolio of 12 multi-family communities in California. In order for both periods to be comparable, we have presented, in addition to the actual historical changes in results of operations of our segments, the property operating results as if the California joint venture had closed at the beginning of the earliest period presented.
We do not include offsite costs associated with property management, casualty gains or losses, or the results of apartment communities sold, held for sale, or retained by Aimco in the Separation, which are included in discontinued operations, reported in consolidated amounts, in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below.
Please see Note 8 to the condensed consolidated financial statements in Item 1 for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Historical Change
|
|
|
Ownership-Effected
Change (1)
|
|
(in thousands)
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Rental and other property revenues, before utility reimbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
$
|
162,535
|
|
|
$
|
163,003
|
|
|
$
|
(468
|
)
|
|
|
(0.3
|
%)
|
|
$
|
9,178
|
|
|
|
6.0
|
%
|
Other Real Estate
|
|
5,456
|
|
|
|
1,106
|
|
|
|
4,350
|
|
|
|
393.3
|
%
|
|
|
4,350
|
|
|
|
393.3
|
%
|
Total
|
|
167,991
|
|
|
|
164,109
|
|
|
|
3,882
|
|
|
|
2.4
|
%
|
|
|
13,528
|
|
|
|
8.8
|
%
|
Property operating expenses, net of utility reimbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
|
44,901
|
|
|
|
47,732
|
|
|
|
(2,831
|
)
|
|
|
(5.9
|
%)
|
|
|
(184
|
)
|
|
|
(0.4
|
%)
|
Other Real Estate
|
|
2,920
|
|
|
|
1,242
|
|
|
|
1,678
|
|
|
|
135.1
|
%
|
|
|
1,678
|
|
|
|
135.1
|
%
|
Total
|
|
47,821
|
|
|
|
48,974
|
|
|
|
(1,153
|
)
|
|
|
(2.4
|
%)
|
|
|
1,494
|
|
|
|
3.2
|
%
|
Proportionate property net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
|
117,634
|
|
|
|
115,271
|
|
|
|
2,363
|
|
|
|
2.0
|
%
|
|
|
9,362
|
|
|
|
8.6
|
%
|
Other Real Estate
|
|
2,536
|
|
|
|
(136
|
)
|
|
|
2,672
|
|
|
|
(1,964.7
|
%)
|
|
|
2,672
|
|
|
|
(1,964.7
|
%)
|
Total
|
$
|
120,170
|
|
|
$
|
115,135
|
|
|
$
|
5,035
|
|
|
|
4.4
|
%
|
|
$
|
12,034
|
|
|
|
11.1
|
%
|
(1)
Reflects the change for the three months ended September 30, 2021 and 2020, as if the California joint venture had closed on July 1, 2020.
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Table of Contents
For the three months ended September 30, 2021, compared to 2020, after giving effect to the sale of partial interest in certain Same Store communities in the California joint venture, our Same Store proportionate property NOI increased by $9.4 million, or 8.6%. This increase was attributable primarily to a $9.2 million, or 6.0%, increase in rental and other property revenues due to a 330 basis point increase in average daily occupancy and a 40 basis point increase in residential rental rates.
The increase in proportionate property NOI was partially offset by an increase of $0.2 million, or 0.4%, in Same Store property operating expenses.
Other Real Estate proportionate property NOI for the three months ended September 30, 2021, compared to 2020, increased by $2.7 million, due primarily to the June acquisition of City Center on 7th.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Historical Change
|
|
|
Ownership-Effected
Change (1)
|
|
(in thousands)
|
2021
|
|
|
2020
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Rental and other property revenues, before utility reimbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
$
|
469,686
|
|
|
$
|
510,151
|
|
|
$
|
(40,465
|
)
|
|
|
(7.9
|
%)
|
|
$
|
(3,692
|
)
|
|
|
(0.8
|
%)
|
Other Real Estate
|
|
8,255
|
|
|
|
4,274
|
|
|
|
3,981
|
|
|
|
93.1
|
%
|
|
|
3,981
|
|
|
|
93.1
|
%
|
Total
|
|
477,941
|
|
|
|
514,425
|
|
|
|
(36,484
|
)
|
|
|
(7.1
|
%)
|
|
|
289
|
|
|
|
0.1
|
%
|
Property operating expenses, net of utility reimbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
|
133,983
|
|
|
|
140,115
|
|
|
|
(6,132
|
)
|
|
|
(4.4
|
%)
|
|
|
3,229
|
|
|
|
2.5
|
%
|
Other Real Estate
|
|
5,191
|
|
|
|
3,400
|
|
|
|
1,791
|
|
|
|
52.7
|
%
|
|
|
1,791
|
|
|
|
52.7
|
%
|
Total
|
|
139,174
|
|
|
|
143,515
|
|
|
|
(4,341
|
)
|
|
|
(3.0
|
%)
|
|
|
5,020
|
|
|
|
3.7
|
%
|
Proportionate property net operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store
|
|
335,703
|
|
|
|
370,036
|
|
|
|
(34,333
|
)
|
|
|
(9.3
|
%)
|
|
|
(6,921
|
)
|
|
|
(2.0
|
%)
|
Other Real Estate
|
|
3,064
|
|
|
|
874
|
|
|
|
2,190
|
|
|
|
250.6
|
%
|
|
|
2,190
|
|
|
|
250.6
|
%
|
Total
|
$
|
338,767
|
|
|
$
|
370,910
|
|
|
$
|
(32,143
|
)
|
|
|
(8.7
|
%)
|
|
$
|
(4,731
|
)
|
|
|
(1.4
|
%)
|
(1)
Reflects the change for the nine months ended September 30, 2021 and 2020, as if the California joint venture had closed on January 1, 2020.
For the nine months ended September 30, 2021, compared to 2020, after giving effect to the sale of partial interest in certain Same Store communities in the California joint venture, our Same Store proportionate property NOI decreased by $6.9 million, or 2.0%. This decrease was attributable primarily to a $3.7 million, or 0.8%, decrease in rental and other property revenues due to a 90 basis point decrease in residential rental rates and a 60 basis point increase in bad debt.
The decrease in proportionate property NOI was also attributable to an increase of $3.2 million, or 2.5%, in Same Store property operating expenses. Controllable operating expenses were up $0.4 million, or 0.6%, compared to the nine months ended September 30, 2020, while real estate taxes and insurance costs increased by $1.4 million and $1.3 million, respectively.
Other Real Estate proportionate property NOI for the nine months ended September 30, 2021, compared to 2020, increased by $2.2 million, due primarily to the June acquisition of City Center on 7th.
Non-Segment Real Estate Operations
Operating income amounts not attributed to our segments include revenues and offsite costs associated with property management, casualty losses, write-off of straight-line rent receivables, and the results of apartment communities sold or held for sale, reported in consolidated amounts, which we do not allocate to our segments for purposes of evaluating segment performance.
For the three months ended September 30, 2021, compared to 2020, non-segment real estate operations decreased by $7.2 million, due primarily to:
$6.5 million of higher casualty losses primarily due to hurricane related flooding in Philadelphia;
$1.4 million of lower NOI attributable to sold properties and properties leased to Aimco; and
$1.0 million of lower property management expenses; offset partially by
$1.7 million of property management revenues recognized during the third quarter related to the management of Aimco communities as a result of the Separation.
For the nine months ended September 30, 2021, compared to 2020, non-segment real estate operations were relatively flat.
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Table of Contents
Depreciation and Amortization
For the three and nine months ended September 30, 2021, compared to 2020, depreciation and amortization expense was relatively flat.
General and Administrative Expenses
For the three and nine months ended September 30, 2021, compared to 2020, general and administrative expenses decreased by $1.8 million, or 23.5%, and $7.2 million, or 31.8%, respectively, due primarily to lower personnel costs and structural changes made to reflect AIR’s more focused business model.
Other Expenses, Net
Other expenses, net, includes costs associated with our risk management activities, partnership administration expenses, and certain non-recurring items. For the three and nine months ended September 30, 2021, compared to 2020, other expenses, net decreased $13.7 million, or 78.2%, and $13.9 million, or 60.2%, respectively, due primarily to costs associated with the Separation included in the prior year and unrealized losses on an interest rate derivative recognized in the prior year.
Interest Income
For the three and nine months ended September 30, 2021, compared to 2020, interest income increased by $10.9 million and $36.3 million, respectively. Interest income for the three and nine months ended September 30, 2021 includes $6.9 million and $20.8 million, respectively, of income associated with our notes receivable from Aimco, and $6.5 million and $19.4 million, respectively, of interest income associated with properties leased to Aimco.
Interest Expense
For the three months ended September 30, 2021, compared to 2020, interest expense decreased by $7.4 million, or 16.6%, due primarily to lower interest expense on property-level debt following refinancing and debt payoff activity.
For the nine months ended September 30, 2021, compared to 2020, interest expense increased by $19.4 million, or 15.4%, primarily due to $44.9 million of prepayment penalties from the early payment of property debt and the write-off of deferred financing costs. This was partially offset by $24.4 million of annual interest savings related to lower debt balances and interest rates.
Through September 30, 2021, we repaid $573.1 million of property debt with a weighted-average interest rate of 4.26%.
Gain on Derecognition of Leased Properties and Dispositions of Real Estate
During the three months ended September 30, 2021, we sold one apartment community with 58 apartment homes for a gain on disposition of $7.1 million and net proceeds of $39.9 million. During the three months ended September 30, 2020, we sold no apartment communities.
During the nine months ended September 30, 2021, we recognized $87.1 million of gain associated with the derecognition of the net book value of the properties leased to Aimco for redevelopment and development and $7.1 million of gain associated with the sale of one apartment community. During the nine months ended September 30, 2020, we sold one apartment community with 219 apartment homes for a gain on disposition of $47.2 million and net proceeds of $36.9 million.
Mezzanine Investment Income, Net
In connection with the Separation, Aimco was allocated economic ownership of the mezzanine loan investment and option to acquire a 30% equity interest in the partnership. Subsequent to the Separation, all risks and rewards of ownership are Aimco’s, but legal transfer is not complete. During the three and nine months ended September 30, 2020, we recognized $6.9 million and $20.6 million, respectively, of income in connection with the mezzanine loan. For the three and nine months ended September 30, 2021, the mezzanine investment income was offset by an expense to recognize the requirement that this income be contributed to Aimco.
Income Tax (Expense) Benefit
Certain of our operations, including property management, are conducted through taxable REIT subsidiaries (“TRS entities”).
Our income tax (expense) benefit calculated in accordance with GAAP includes income taxes associated with the income or loss of our TRS entities for which the tax consequences have been realized or will be realized in future periods. Income taxes related to these
37
Table of Contents
items, as well as changes in valuation allowance, are included in income tax (expense) benefit in our condensed consolidated statements of operations.
For the three months ended September 30, 2021, compared to 2020, we recognized income tax benefit of $0.3 million, compared to an income tax provision of $0.4 million during the same period in 2020.
For the nine months ended September 30, 2021, we recognized income tax expense of $0.8 million, compared to an income tax benefit of $1.7 million during the same period in 2020.
Income from Discontinued Operations, Net
For the three and nine months ended September 30, 2020, apartment communities that were included in discontinued operations generated net income of $2.6 million and $9.8 million, respectively.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements relate to capitalized costs and the impairment of long-lived assets.
Our critical accounting policies are described in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of AIR’s and the AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2020.
In addition to the Critical Accounting Policies and Estimates described in the Annual Report on Form 10-K, we believe the sales-type lease arrangements entered into in 2021 require significant judgment.
We have entered into leases of existing properties with Aimco for redevelopment and development, which are generally accounted for as sales-type leases in accordance with ASC 842. The terms of such leases range from 10 to 25 years. We are required to estimate the fair value of the leased property for the purposes of lease classification and, for sales-type leases, the rate implicit in the lease. We estimate the fair value of our properties using various estimates and assumptions, the most significant being the capitalization rate. As of September 30, 2021, we have assets recorded reflecting our net investment in such leased properties totaling $466 million. Our net investment includes the present value of lease payments not yet received, the present value of the guaranteed amount of the underlying asset’s residual value at the end of the lease term, and the present value of the unguaranteed amount of the underlying asset’s residual value at the end of the lease term. The present value is determined based on the rate implicit in the lease. The residual value is based on the current estimated fair value of the leased property, adjusted for annual depreciation and cost of inflation. Over the respective lease term, we expect our net investment to be recovered as lease payments are made by Aimco.
Other than stated above, there have been no other significant changes in our critical accounting policies from those reported in our Form 10-K and we believe that the related judgments and assessments have been consistently applied and produce financial information that fairly depicts the financial condition, results of operations, and cash flows for all periods presented.
Non-GAAP Measures
Certain key financial indicators we use in managing our business and in evaluating our financial condition and operating performance are non-GAAP measures. Key non-GAAP measures we use are defined and described below, and for those non-GAAP measures used or disclosed within this quarterly report, we provide reconciliations of the non-GAAP measures to the most comparable financial measure computed in accordance with GAAP.
NAREIT Funds From Operations and Pro forma Funds From Operations
NAREIT FFO is a non-GAAP measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate assets generally appreciate over time or maintain residual value to a much greater extent than do other depreciable assets such as machinery, computers, or other personal property. NAREIT defines FFO as net income (loss) computed in accordance with GAAP, excluding: (i) depreciation and amortization related to real estate; (ii) gains and losses from sales and impairment of depreciable assets and land used in our primary business; and (iii) income taxes directly associated with a gain or loss on the sale of real estate, and including (iv) our share of the FFO of unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine NAREIT FFO. We calculate NAREIT FFO
38
Table of Contents
attributable to AIR common stockholders (diluted) by subtracting dividends on preferred stock and preferred units and amounts allocated from NAREIT FFO to participating securities.
In addition to NAREIT FFO, we use Pro forma FFO to measure short-term performance. Pro forma FFO represents NAREIT FFO as defined above, excluding the results of operations of properties retained by Aimco in the Separation and certain amounts that are unique or occur infrequently.
In computing Pro forma FFO, we made the following adjustments to NAREIT FFO:
Prepayment penalties: as a result of refinancing activities in 2021, we incurred debt extinguishment costs and wrote-off capitalized deferred financing costs related to our previous credit facility and the prepayment of debt during the quarter. We excluded such costs from Pro forma FFO because we believe these costs are not representative of future cash flows.
Casualty losses: during 2021, we incurred casualty losses due to Hurricane Ida induced flooding in downtown Philadelphia causing damage to our Park Towne Place apartment community. We excluded these costs from Pro forma FFO because of the unusual nature of the weather event that caused the loss. We anticipate this loss will be covered by our third party insurance coverage.
Separation and transition related costs: during 2021, we incurred tax, legal and other transition related costs incurred as a result of the separation. We excluded these costs from Pro forma FFO because we believe they are not representative of ongoing operating performance.
Non-cash straight-line rent: in 2018, we assumed a 99-year ground lease with scheduled rent increases. Due to the terms of the lease, GAAP rent expense will exceed cash rent payments until 2076. We include the cash rent payments for this ground lease in Pro forma FFO but exclude the incremental straight-line non-cash rent expense. The rent expense for this lease is included in other expenses, net, on our consolidated statements of operations.
Incremental cash received from leased properties: during 2021, we leased properties to Aimco for redevelopment and development. Due to the terms of these leases, during 2021 cash received exceeded GAAP income. We include the cash lease income in Pro forma FFO.
NAREIT FFO and Pro forma FFO should not be considered alternatives to net income determined in accordance with GAAP, as indications of our performance. Although we use these non-GAAP measures for comparability in assessing our performance compared to other REITs, not all REITs compute these same measures and those who do may not compute them in the same manner. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs.
39
Table of Contents
NAREIT FFO and Pro forma FFO are calculated as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2021
|
|
Net income (loss) attributable to AIR common stockholders
|
|
$
|
9,289
|
|
|
$
|
74,455
|
|
Adjustments:
|
|
|
|
|
|
|
Real estate depreciation and amortization, net of noncontrolling partners’ interest
|
|
|
74,864
|
|
|
|
213,947
|
|
Gain on derecognition of leased properties and dispositions of real estate
|
|
|
(7,127
|
)
|
|
|
(94,512
|
)
|
Income tax adjustments related to gain on dispositions and other tax-related items
|
|
|
(122
|
)
|
|
|
150
|
|
Common noncontrolling interests in AIR OP’s share of above Adjustments
|
|
|
(3,269
|
)
|
|
|
(5,842
|
)
|
NAREIT FFO attributable to AIR common stockholders
|
|
$
|
73,635
|
|
|
$
|
188,198
|
|
Adjustments, all net of common noncontrolling interests in AIR Operating Partnership and participating securities:
|
|
|
|
|
|
|
Prepayment penalties
|
|
|
6,365
|
|
|
|
43,355
|
|
Casualty losses
|
|
|
4,891
|
|
|
|
4,891
|
|
Separation and transition related costs
|
|
|
1,324
|
|
|
|
3,666
|
|
Non-cash straight-line rent
|
|
|
611
|
|
|
|
1,881
|
|
Incremental cash received from leased properties
|
|
|
179
|
|
|
|
473
|
|
Other
|
|
|
190
|
|
|
|
190
|
|
Pro forma FFO
|
|
$
|
87,195
|
|
|
$
|
242,654
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding – basic
|
|
|
156,646
|
|
|
|
153,289
|
|
Dilutive common share equivalents
|
|
|
396
|
|
|
|
361
|
|
Pro forma shares and dilutive share equivalents used to calculate Pro forma FFO per share
|
|
|
157,042
|
|
|
|
153,650
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to AIR per common share – diluted
|
|
$
|
0.06
|
|
|
$
|
0.48
|
|
NAREIT FFO per share – diluted
|
|
$
|
0.47
|
|
|
$
|
1.22
|
|
Pro forma FFO per share – diluted
|
|
$
|
0.56
|
|
|
$
|
1.58
|
|
Please see the Results of Operations section for discussion of the factors affecting our Pro forma FFO for 2021.
The AIR Operating Partnership does not separately compute or report NAREIT FFO or Pro forma FFO. However, based on AIR’s method for allocation of such amounts to noncontrolling interests in the AIR Operating Partnership, as well as limited differences between the amounts of net income attributable to AIR’s common stockholders and the AIR Operating Partnership’s unitholders during the periods presented, NAREIT FFO and Pro forma FFO amounts on a per unit basis for the AIR Operating Partnership would be expected to be substantially the same as the corresponding per share amounts for AIR.
Leverage Ratios
As discussed under the Balance Sheet heading, we target Net Leverage to Adjusted EBITDAre below 6.0x. We also focus on Proportionate Debt to Adjusted EBITDAre. We believe these ratios, which are based in part on non-GAAP financial information, are commonly used by investors and analysts to assess the relative financial risk associated with balance sheets of companies within the same industry, and they are believed to be similar to measures used by rating agencies to assess entity credit quality.
Proportionate Debt, as used in our leverage ratios, is a non-GAAP measure and includes our share of the long-term, non-recourse property debt, outstanding borrowings under our revolving credit facility, and our term loans. Proportionate Debt excludes unamortized debt issuance costs because these amounts represent cash expended in earlier periods and do not reduce our contractual obligations. We reduce our recorded debt by the amounts of cash and restricted cash on-hand (which are primarily restricted under the terms of our property debt agreements), excluding tenant security deposits included in restricted cash, assuming the remaining amounts of cash and restricted cash would be used to reduce our outstanding leverage. We further reduce our recorded debt by our notes receivable from Aimco, the proceeds from which we expect will be used to pay down property debt.
We believe Proportionate Debt is useful to investors as it is a measure of our net exposure to debt obligations. Proportionate Debt, as used in our leverage ratios, is calculated as set forth in the table below.
Preferred equity represents the redemption amounts for AIR’s Preferred Stock and the AIR Operating Partnership’s Preferred Partnership Units and, although perpetual in nature, are another component of our overall leverage.
40
Table of Contents
The reconciliation of total indebtedness to Proportionate Debt and Preferred Equity, as used in our leverage ratios, is as follows (in thousands):
|
|
|
|
|
|
|
September 30, 2021
|
|
Total indebtedness
|
|
$
|
4,235,980
|
|
Adjustments:
|
|
|
|
Debt issuance costs related to non-recourse property debt and term loans
|
|
|
20,211
|
|
Proportionate share adjustments related to debt obligations
|
|
|
(476,772
|
)
|
Cash and restricted cash
|
|
|
(97,127
|
)
|
Tenant security deposits included in restricted cash
|
|
|
9,754
|
|
Proportionate share adjustments related to cash and restricted cash
|
|
|
7,338
|
|
Notes receivable from Aimco
|
|
|
(534,127
|
)
|
Proportionate Debt
|
|
$
|
3,165,257
|
|
Perpetual preferred stock
|
|
|
2,000
|
|
Preferred noncontrolling interests in AIR Operating Partnership
|
|
|
79,377
|
|
Net Leverage
|
|
$
|
3,246,634
|
|
We calculated Adjusted EBITDAre used in our leverage ratios based on annualized current quarter amounts. EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and facilitate comparison of credit strength between AIR and other companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. NAREIT defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, depreciation and amortization expense, which we have further adjusted for:
gains and losses on the derecognition of leased properties and dispositions of depreciated property;
impairment write-downs of depreciated property; and
adjustments to reflect our share of EBITDAre of investments in unconsolidated entities.
EBITDAre is defined by NAREIT and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted for the effect of the following items:
net income attributable to noncontrolling interests in consolidated real estate partnerships and EBITDAre adjustments attributable to noncontrolling interests is excluded to allow investors to compare a measure of our earnings before the effects of our capital structure and indebtedness with that of other companies in the real estate industry;
the income recognized related to our notes receivable from Aimco is excluded as their proceeds are expected to be used to repay current amounts outstanding;
the amount by which GAAP rent expense exceeds cash rents for a long-term ground lease for which expense exceeds cash payments until 2076 is excluded. The excess of GAAP rent expense over the cash payments for this lease does not reflect a current obligation that affects our ability to service debt; and
the amount by which cash received exceeds GAAP lease income for the properties leased to Aimco for redevelopment and development is included.
41
Table of Contents
The reconciliation of net income to EBITDAre and Adjusted EBITDAre, as used in our leverage ratios, is as follows (in thousands):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2021
|
|
Net income
|
|
$
|
10,671
|
|
Adjustments:
|
|
|
|
Interest expense
|
|
|
37,203
|
|
Income tax benefit
|
|
|
(275
|
)
|
Depreciation and amortization
|
|
|
81,121
|
|
Gain on derecognition of leased properties and dispositions of real estate
|
|
|
(7,127
|
)
|
EBITDAre
|
|
$
|
121,593
|
|
Net loss from continuing operations attributable to noncontrolling interests in consolidated real estate partnerships
|
|
|
785
|
|
EBITDAre adjustments attributable to noncontrolling interests
|
|
|
(9,257
|
)
|
Interest income on notes receivable from Aimco
|
|
|
(6,944
|
)
|
Pro forma FFO adjustments, net (1)
|
|
|
8,246
|
|
Adjusted EBITDAre
|
|
$
|
114,423
|
|
Annualized Adjusted EBITDAre
|
|
$
|
457,692
|
|
(1)
Pro forma adjustments, net, includes pro forma adjustments to NAREIT FFO under the heading NAREIT Funds From Operations and Pro forma Funds From Operations, excluding items that are not included in EBITDAre such as prepayment penalties, net and amounts attributable to noncontrolling interest share, a $1.0 million adjustment to normalize heightened short-term incentive compensation, and a $0.3 million adjustment to reflect the disposition of one apartment community during the period as if the transaction closed on July 1, 2021.
Liquidity and Capital Resources
Liquidity
Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flows from operations. Additional sources are proceeds from dispositions of apartment communities, proceeds from refinancing existing property debt, borrowings under new property debt, borrowings under our $1.4 billion credit facility, proceeds from our notes receivable from Aimco, and proceeds from equity offerings.
As of September 30, 2021, our available liquidity was $605.2 million, which consisted of:
$73.7 million in cash and cash equivalents;
$13.7 million of restricted cash, excluding amounts related to tenant security deposits, which consists primarily of escrows held by lenders for capital additions, property taxes, and insurance; and
$517.8 million of available capacity to borrow under our revolving credit facility after consideration of letters of credit.
Additional liquidity may also be provided through property debt financing at properties unencumbered by debt and proceeds from our notes receivable from Aimco. As of September 30, 2021, we held unencumbered communities with property debt with an estimated fair market value of approximately $4.2 billion, an increase of 50% from December 31, 2020.
Uses for liquidity include normal operating activities, payments of principal and interest on outstanding property debt, capital expenditures, dividends paid to stockholders, distributions paid to noncontrolling interest partners, and acquisitions of apartment communities. We use our cash and cash equivalents and our cash provided by operating activities to meet short-term liquidity needs. In the event that our cash and cash equivalents and cash provided by operating activities are not sufficient to meet our short-term liquidity needs, we have additional means, such as short-term borrowing availability and proceeds from apartment community sales and refinancings. We may use our revolving credit facility for working capital and other short-term purposes, such as funding investments on an interim basis. We expect to meet our long-term liquidity requirements, including apartment community acquisitions, through primarily non-recourse, long-term borrowings, the issuance of equity securities (including OP Units), the sale of apartment communities, and cash generated from operations. Additionally, we expect to meet our liquidity requirements associated with our debt maturities.
Leverage and Capital Resources
The availability of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to historical levels and financing is
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readily available. Any adverse changes in the lending environment could negatively affect our liquidity. We believe we have mitigated much of this exposure by reducing our short and intermediate-term maturity risk through refinancing such loans with long-dated debt. However, if financing options become unavailable for our future debt needs, we may consider alternative sources of liquidity, such as reductions in capital spending or proceeds from apartment community dispositions.
Historically, our primary source of leverage is property-level, non-recourse, long-dated, fixed-rate, amortizing debt. As of September 30, 2021, approximately 66.1% of our total leverage consisted of property-level, non-recourse, long-dated, amortizing debt. As of September 30, 2021, approximately 99.4% of our property-level debt is fixed-rate, which provides a hedge against increases in interest rates, capitalization rates, and inflation. The weighted-average remaining term to maturity of our property-level debt was 8.7 years. On average, 1.8% of our unpaid principal balances will mature each year from 2021 through 2023.
The following table summarizes the payments due under our debt commitments, excluding debt issuance costs, as of September 30, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Remaining 2021
|
|
|
1-3 Years
(2022-2023)
|
|
|
3-5 Years
(2024-2025)
|
|
|
More than Five
Years (2026 and
Thereafter)
|
|
Non-recourse property debt (1)
|
|
$
|
3,027,991
|
|
|
$
|
12,910
|
|
|
$
|
268,165
|
|
|
$
|
463,278
|
|
|
$
|
2,283,638
|
|
Revolving credit facility borrowings (2)
|
|
|
78,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
78,200
|
|
|
|
—
|
|
Term loans (3)
|
|
|
1,150,000
|
|
|
|
—
|
|
|
|
350,000
|
|
|
|
600,000
|
|
|
|
200,000
|
|
Total
|
|
$
|
4,256,191
|
|
|
$
|
12,910
|
|
|
$
|
618,165
|
|
|
$
|
1,141,478
|
|
|
$
|
2,483,638
|
|
(1)
Includes scheduled principal amortization and maturity payments.
(2)
Includes outstanding borrowings on our revolving credit facility assuming repayment at the contractual maturity date.
(3)
Includes outstanding borrowings on our term loans assuming exercise of extension options.
As of September 30, 2021, our preferred equity, which includes outstanding preferred OP Units and outstanding perpetual preferred stock, represented approximately 2.1% of our total leverage. Preferred OP Units are redeemable at the holder’s option and our preferred stock is redeemable by AIR on or after December 15, 2025. For illustrative purposes, we compute the weighted-average maturity of our preferred OP Units assuming a 10-year maturity and our preferred stock assuming it is called at the expiration of the no-call period.
The combination of non-recourse property-level debt, borrowings under our revolving credit facility, our term loans, our preferred OP Units, and our redeemable noncontrolling interests in a consolidated real estate partnership comprise our total leverage. The weighted-average remaining term to maturity for our total leverage was 7.1 years as of September 30, 2021.
Under our revolving credit facility we have agreed to maintain certain financial covenants, as well as other covenants customary for similar credit arrangements. The financial covenants we are required to maintain include a Maximum Leverage ratio of no greater than 0.60 to 1.00; a Fixed Charge Coverage Ratio of greater than 1.5x, a Maximum Secured Indebtedness to Total Assets ratio of no greater than 0.45 to 1.00 through March 31, 2023, and 0.40 to 1.00 thereafter, and a Maximum Unsecured Leverage ratio no greater than 0.60 to 1.00. We were in compliance with these covenants as of September 30, 2021 and expect to remain in compliance during the next 12 months.
We like the discipline of financing a portion of our real estate investments through the use of fixed-rate, amortizing, non-recourse property debt, as the amortization gradually reduces our leverage and reduces our refunding risk, and the fixed-rate provides a hedge against increases in interest rates, and the non-recourse feature avoids entity risk.
Changes in Cash, Cash Equivalents, and Restricted Cash
The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash due to operating, investing and financing activities, which are presented in our condensed consolidated statements of cash flows in Item 1 of this report.
Operating Activities
For the nine months ended September 30, 2021, net cash provided by operating activities was $232.7 million. Our operating cash flow is affected primarily by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment communities. Cash provided by operating activities for the nine months ended September 30, 2021, decreased by $33.1 million compared to the same period in 2020. The decrease was due primarily to lower contribution from our apartment communities, which were negatively impacted by lower residential rental rates and increased bad debt expense, offset partially by higher ADO and a recovery in commercial rents.
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Investing Activities
For the nine months ended September 30, 2021, our net cash used in investing activities of $250.6 million consisted primarily of purchases of real estate and capital expenditures, offset partially by the maturation of debt investments.
Capital additions totaled $126.3 million and $226.2 million during the nine months ended September 30, 2021 and 2020, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.
We categorize capital spending for communities in our portfolio broadly into four primary categories:
capital replacements, which do not increase the useful life of an asset from its original purchase condition. Capital replacements represent capital additions made to replace the portion of our investment in acquired apartment communities consumed during our period of ownership;
capital improvements, which represent capital additions made to replace the portion of acquired apartment communities consumed prior to our period of ownership;
capital enhancements, which may include kitchen and bath remodeling, energy conservation projects, and investments in more durable, longer-lived materials designed to reduce costs, and do not significantly disrupt property operations; and
other additions, which represent capital additions: (i) contemplated in the underwriting of our recently acquired communities; (ii) prior to the Separation, costs intended to enhance the value of the apartment community through the ability to generate higher average rental rates, and may include costs related to entitlement, which enhance the value of a community through increased density, and costs related to renovation of exteriors, common areas, or apartment homes; (iii) construction and related capitalized costs associated with the ground-up development of apartment communities prior to the Separation; and (iv) capitalized costs incurred in connection with the restoration of an apartment community after a casualty event. We expect these amounts to be significantly reduced under our business model. After the Separation, certain properties are leased to Aimco for redevelopment and development.
We exclude the amounts of capital spending related to apartment communities sold or classified as held for sale at the end of the period from the foregoing measures. We have also excluded from these measures indirect capitalized costs, which are not yet allocated to communities with capital additions, and their related capital spending categories.
A summary of the capital spending for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying condensed consolidated statements of cash flows, are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Capital replacements
|
|
$
|
23,980
|
|
|
$
|
23,173
|
|
Capital improvements
|
|
|
6,717
|
|
|
|
7,816
|
|
Capital enhancements
|
|
|
82,586
|
|
|
|
19,163
|
|
Other capital expenditures
|
|
|
13,045
|
|
|
|
176,075
|
|
Total capital additions
|
|
$
|
126,328
|
|
|
$
|
226,227
|
|
Plus: additions related to apartment communities sold
|
|
|
2,036
|
|
|
|
20,144
|
|
Consolidated capital additions
|
|
$
|
128,364
|
|
|
$
|
246,371
|
|
Plus: net change in accrued capital spending from continuing operations
|
|
|
2,513
|
|
|
|
10,581
|
|
Total capital expenditures from continuing operations per
condensed consolidated statement of cash flows
|
|
$
|
130,877
|
|
|
$
|
256,952
|
|
For the nine months ended September 30, 2021 and 2020, we capitalized $1.8 million and $8.6 million of interest costs, respectively, and $12.3 million and $24.4 million of other direct and indirect costs, respectively.
Other capital expenditures decreased by $163.0 million for the nine months ended September 30, 2021, compared to 2020, due primarily to increased spend incurred in 2020 related to the redevelopment and development of properties that have subsequently been leased to Aimco effective January 1, 2021.
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Financing Activities
For the nine months ended September 30, 2021, net cash provided by financing activities was $41.5 million. Our financing cash flow is affected primarily by principal repayments on non-recourse property debt, proceeds from and repayments of our term loans, and the payment of dividends. Cash provided by financing activities for the nine months ended September 30, 2021 decreased by $139.4 million compared to the same period in 2020. The decrease was due primarily to higher principal repayments on non-recourse debt, the repayment of our previous term loan, and repayments on our credit facility, offset partially by proceeds from the April closing of the credit facility and the issuance of Common Stock in a private placement for $342.2 million, net of fees.
Future Capital Needs
We expect to fund any future acquisitions and other capital spending principally with proceeds from apartment community sales, short-term borrowings, debt and equity financing, and operating cash flows. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for 2021 and beyond.