Apartment Income REIT Corp. ("AIR") (NYSE: AIRC) was formed to
provide investors the most efficient and effective way to allocate
capital to multi-family real estate. In only 18 months, or one-half
the expected time, the establishment of AIR is complete. The
balance sheet has been transformed with leverage reduced by $850
million, or 23%. The relationship with Apartment Investment &
Management Company ("Aimco"), approximately 14% of AIR’s net asset
value ("NAV") at year-end 2020, is now approximately 34 basis
points.
What AIR was designed to be is now visible through its:
- Market-leading operating platform. The AIR Edge reflects the
cumulative results of our focus on resident selection,
satisfaction, and retention, as well as relentless innovation in
delivering best-in-class property management. The AIR Edge has
delivered peer-leading NOI margins over 26 consecutive quarters,
while maintaining flat onsite controllable operating expenses for
over 12 years.
- High-quality, diversified portfolio. AIR’s portfolio has been
materially enhanced through recycling approximately $1.4 billion of
its gross asset value ("GAV"). The sale of lower rated properties
and capital sourced through joint ventures allowed AIR to (i)
enhance portfolio quality with pro forma average monthly rent per
unit of $2,590, third among our peer group, up 16% in 18 months
(ii) exit markets with greater regulatory risks such as New York
and Chicago, and (iii) reallocate capital to higher growth
submarkets, such as Miami-Dade County and Broward County, now 18%
of AIR's portfolio based on GAV and where there is limited REIT
competition.
- High-growth acquisition portfolio. Since the separation, AIR
has used paired trades to fund $1.4 billion of new acquisitions,
11% of AIR's GAV. We expect the properties acquired will benefit
from the AIR Edge and earn returns, on an unlevered IRR basis, that
are at least 200 basis points higher than the properties sold.
- Efficiency. AIR has capped G&A expense at 15 basis points
of GAV. In 2021, our CEO voluntarily returned $2.5 million of
compensation for AIR to meet this target. In combination with peer
leading NOI margins, low G&A expense results in AIR converting
a higher percentage of Same Store Revenue into Free Cash Flow
compared to any of our peers, a durable advantage expected to
compound over time.
- Low leverage. AIR has low financial risk after $850 million of
leverage reduction. AIR also has well laddered refunding and
repricing schedules, and $925 million of available liquidity.
- Deep and talented team. AIR values respect for each teammate,
collaboration among teammates, and pay-for-performance. These
policies have created a strong culture, a stable team, and
best-in-class engagement. AIR generally promotes from within its
deep talent pool, and will also recruit from outside when doing so
strengthens our team.
Chief Executive Officer Terry Considine comments: "With a clear
strategy focused on efficient operations, low leverage, a capable
team, and an engaged Board, AIR has achieved substantially all of
the goals set out by the Board at the separation. AIR is now well
positioned to use its platform for growth and so fulfill the
potential the Board saw in the separation of AIR's business from
Aimco."
"AIR has low financial risk with leverage at 22% of GAV, low
execution risk with no development, and lower regulatory risk after
exiting markets with an appetite for rent control."
"AIR is insulated from inflation, not exposed to higher interest
rates, and prepared for recession."
Chief Financial Officer Paul Beldin adds: "AIR enjoys
accelerating growth. Organic growth in the quarter was strong with
signed blended leases rates up 14.1% and Same Store NOI up 16.4%.
At the expected levels of year-end loss-to-lease, we see the
potential for Same Store Revenue to grow next year at rates in the
mid- to high-single digits. We expect operating results for the
acquisition portfolio will improve at an even faster pace. For
example, market cap rates were in the high 3%s at the times we made
our 2021 acquisitions and we now expect an annualized 5% NOI yield
by the end of this year."
"AIR's balance sheet is strong with increased flexibility. We
expanded our access to debt markets when we issued $400 million of
senior unsecured notes. Our floating rate exposure is 2% of total
leverage. Only 7% of our debt reprices through the end of 2024. We
remain on track to achieve year-end Leverage EBITDAre of
5.5:1."
"Second quarter Pro forma FFO was $0.66 per share; $0.01 above
the midpoint of guidance, pro forma for the timing of the repayment
of the Aimco note. We had anticipated that the Aimco note would be
fully repaid in the second quarter. Instead, the last $147 million
was paid in July, shifting $0.03 of prepayment penalty income from
June into July. The aggregate prepayment penalty was approximately
$0.035 lower than originally anticipated due to higher than
forecasted interest rates on short-term treasury notes. This was
offset in our second quarter results by the $5.4 million sale, net
of tax, of AIR’s 2% cost basis investment in the portfolio that
served as collateral for the Aimco note."
"Looking forward, we are narrowing our expectations for full
year Pro forma FFO to between $2.38 and $2.44 per share, while
maintaining the midpoint of $2.41. Similarly, our expectations for
run-rate FFO are unchanged at $2.19 per share. Relative to our
prior guidance, we now expect:
- $0.03 per share of increased contribution from operations;
offset by
- ($0.02) per share of dilution from the Aimco lease cancellation
which we expect to recover through future NOI growth; and
- ($0.01) per share of lower contribution from a combination of
other factors."
Financial Results: Second Quarter Pro
forma FFO Per Share
SECOND QUARTER
YEAR-TO-DATE
(all items per common share – diluted)
2022
2021
Variance
2022
2021
Variance
Net income (loss)
$
1.26
$
(0.12
)
nm
$
3.66
$
0.43
nm
NAREIT Funds From Operations
(FFO)
$
0.64
$
0.28
128.6
%
$
1.06
$
0.75
41.3
%
Pro forma adjustments
0.02
0.24
nm
0.17
0.27
nm
Pro forma Funds From
Operations (Pro forma FFO)
$
0.66
$
0.52
26.9
%
$
1.23
$
1.02
20.6
%
AIR Operating Results: Second Quarter
Same Store NOI Up 3.9% Sequentially and 16.4%
Year-Over-Year
The table below includes the operating results of the 64 AIR
properties that meet our definition of Same Store. Same Store
properties generated approximately 91% of AIR’s year to date 2022
rental revenue.
SECOND QUARTER
YEAR-TO-DATE
Year-over-Year
Sequential
Year-over-Year
($ in millions) *
2022
2021
Variance
1st Qtr.
Variance
2022
2021
Variance
Revenue, before utility reimbursements
$
142.1
$
127.3
11.6
%
$
138.1
2.9
%
$
280.2
$
253.7
10.4
%
Expenses, net of utility
reimbursements
37.6
37.5
0.1
%
37.5
0.1
%
75.1
73.9
1.6
%
Net operating income (NOI)
$
104.5
$
89.8
16.4
%
$
100.6
3.9
%
$
205.1
$
179.8
14.1
%
*
Amounts are presented on a rounded basis
and the sum of the individual amounts may not foot; please refer to
Supplemental Schedule 6.
Second quarter 2022 NOI margins were 73.6%, up 304 basis points
from the second quarter of 2021. NOI margins benefited from
Residential Rental Income growth of 9.1% and operating expenses
that were up only 10 basis points compared to the prior year.
Components of Same Store Revenue Growth – Second quarter
year-over-year Same Store revenue growth was impacted by increased
residential rental rates, higher average daily occupancy ("ADO"),
and lower net bad debt expense. The table below summarizes the
change in the components of our Same Store revenue growth.
SECOND QUARTER
YEAR-TO-DATE
Same Store Revenue Components
Year-over-Year
Sequential
Year-over-Year
Residential Rents
7.5
%
2.5
%
6.2
%
Average Daily Occupancy
1.6
%
(1.3
%)
2.1
%
Residential Rental
Income
9.1
%
1.2
%
8.3
%
Bad Debt, net of recoveries
2.0
%
1.1
%
1.3
%
Late Fees and Other
0.3
%
0.6
%
0.4
%
Residential Revenue
11.4
%
2.9
%
10.0
%
Commercial Revenue
0.2
%
—
%
0.4
%
Same Store Revenue
Growth
11.6
%
2.9
%
10.4
%
Same Store Rental Rates – We measure changes in rental
rates by comparing, on a lease-by-lease basis, the effective rate
on a newly executed lease to the effective rate on the expiring
lease for the same apartment. A newly executed lease is classified
either as a new lease, where a vacant apartment is leased to a new
customer, or as a renewal.
The table below details changes in lease rates, as well as the
weighted-average blended lease rates for leases executed in the
respective period. Transacted leases are those that became
effective during a reporting period and are therefore the best
measure of immediate effect on current revenues. Signed leases are
those executed during a reporting period and are therefore the best
measure of current pricing.
SECOND QUARTER
YEAR-TO-DATE
2022
2022
2021*
Variance
2022
2021*
Variance
April
May
June
July**
Transacted Leases*
Renewal rent changes
11.1
%
3.2
%
7.9
%
11.2
%
2.5
%
8.7
%
11.8
%
10.7
%
10.9
%
10.6
%
New lease rent changes
18.9
%
(0.5
%)
19.4
%
18.1
%
(3.2
%)
21.3
%
20.4
%
19.2
%
17.9
%
18.2
%
Weighted-average rent changes
14.3
%
1.3
%
13.0
%
14.2
%
(0.6
%)
14.8
%
15.5
%
14.5
%
13.5
%
14.2
%
Signed Leases*
Renewal rent changes
10.6
%
5.3
%
5.3
%
10.9
%
4.2
%
6.7
%
10.3
%
10.7
%
10.7
%
11.7
%
New lease rent changes
18.4
%
2.5
%
15.9
%
18.0
%
(0.4
%)
18.4
%
16.5
%
18.4
%
20.1
%
20.4
%
Weighted-average rent changes
14.1
%
3.8
%
10.3
%
14.2
%
1.8
%
12.4
%
13.8
%
13.5
%
14.9
%
16.0
%
Average Daily Occupancy
96.8
%
95.2
%
1.6
%
97.4
%
95.3
%
2.1
%
97.3
%
96.8
%
96.1
%
95.6
%
*
Amounts are based on our current Same
Store population and represent AIR's share, whereas previously
these were reported on a non-ownership adjusted basis. Amounts may
differ from those previously reported.
**
July leasing results are preliminary and
as of July 25, 2022. May, June, and July ADO are lower than full
year ADO due to the vacancy associated with the increased turnover
during the leasing season.
Same Store Markets – In the second quarter, AIR enjoyed
stronger than typical consumer demand across all markets. Signed
new lease rates were up 18.4% from the prior lease, with renewals
up 10.6%, resulting in a weighted-average increase of 14.1%. We saw
sequential declines in ADO, associated with higher move out volume
during the summer leasing season. Second quarter ADO of 96.8% was
160 bps higher than the prior year.
2021 Acquisition Performance – Included in AIR's
acquisition portfolio are five properties acquired in 2021. Leasing
at these properties has exceeded our expectations. Transacted new
lease rates were up 28%, with renewals up 25%, resulting in a
weighted-average increase of 26%. Fourth quarter revenue growth in
this portfolio, the first reporting period with a year-over-year
comparison, is anticipated to be 600 basis points above the Same
Store portfolio. We anticipate our 2022 acquisitions will also grow
faster than the Same Store portfolio. We will report their results
as comparative data becomes available.
Rent Collection Update
We measure residential rent collection as the dollar value of
payments received as a percentage of all residential amounts owed.
In the second quarter, we collected 97.9% of all residential
revenue billed during the quarter, treating the balance of 2.1% as
bad debt. We also received $3 million of government payments on
behalf of eligible residents with past due accounts. These payments
reduced accounts receivable previously reserved and so reduced
second quarter bad debt expense by 190 basis points of revenues,
resulting in net bad debt expense of approximately 20 basis
points.
Outside of California, 98.7% of our residents are current,
leaving approximately 150 residents where eviction notices have
been filed, but the eviction process is not complete due to a
slowed cycle time. Previously, in these locales, an eviction took
between 45 and 90 days to complete. Today, the eviction timeline is
extended and less predictable, resulting in greater amounts of
unpaid rent and increased bad debt. We estimate that the prolonged
timeline increased our second quarter bad debt from our historic
experience of approximately 20 basis points to 100 basis
points.
In California, we continue to be subject to government
limitations on our ability to enforce our contractual remedies for
nonpayment of rent. This has allowed approximately 400 California
residents, about 5% of the total, to become delinquent by two or
more months. As a result, gross bad debt expense in California was
approximately 3% of second quarter residential revenues. After
consideration of government payments reducing accounts receivable
previously reserved, net bad debt was a $0.3 million
contra-expense.
As of June 30, 2022, our proportionate share of gross
residential accounts receivable was $9.9 million. After
consideration of tenant security deposits and reserves for
uncollectible amounts, our net exposure is $1.1 million, an amount
expected to be collected during the third 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 also across eight core markets in the United States. Since
separation, we have reduced our allocation to New York City and
Chicago and increased our investment in Miami-Dade and Broward
counties to 18% of GAV.
AIR uses "paired trades" to fund acquisitions, basing our cost
of capital on the anticipated unlevered internal rates of return
("IRR") of the communities sold. We require an unlevered IRR at
least 200 basis points higher on the communities purchased. As our
cost of capital has increased, we have raised our required
returns.
Since separation, we have acquired $1.4 billion of properties
new to the AIR operating platform. This represents approximately
11% of our portfolio; our target is 30%. In a typical AIR Edge
acquisition, the acquired property will experience NOI growth at
market rates for six to 12 months, as the property is integrated
onto AIR’s platform. During the following two to four years, NOI
growth is expected to exceed the market growth rate by two or three
times.
For example, AIR acquired five properties in 2021, at a cost of
approximately $730 million. At the time, market cap rates were in
the high 3% range. With confidence in the AIR Edge, we underwrote a
first year yield of 4.3% and a long-term unlevered IRR of
approximately 9%. We now expect these acquisitions will outperform
their first-year underwriting by $2.6 million, or 9%, increasing
the annualized fourth quarter 2022 yield to 5.0% and the expected
long-term unlevered IRRs to over 11%.
When market conditions change, AIR adjusts its target returns
and spreads to reflect the new environment. AIR seeks acquisitions
that are accretive to earnings in the near term and that generate
unlevered IRRs at least 200 basis points higher than the expected
returns of the properties sold in the paired trade.
Transactions
Acquisitions
During the second quarter and through July, we acquired four
apartment communities, one located in the Washington, D.C. area and
three located in South Florida, with 1,351 apartment homes for a
total purchase price of $640.1 million.
We also reached an agreement with Aimco to cancel existing
master leases at four properties owned by AIR and leased to Aimco
for the purpose of their development. With the developments largely
completed, we agreed to terminate the leases for a payment of $200
million. The four properties include 865 apartment homes with
average monthly rents of approximately $3,400 per home.
In aggregate, we anticipate a first year NOI yield of 4.0%. The
yield is anticipated to grow to 5.0%, annualized, by the third
quarter of next year. The expected unlevered IRR is approximately
9%.
Dispositions
During the second quarter, we sold four apartment communities,
three located in California and one in Virginia, with 718 apartment
homes, for gross proceeds of $203.1 million at a trailing
twelve-month NOI cap rate of 4.7%, reflecting AIR’s low property
tax basis. Adjusting for market rate real estate taxes, the NOI cap
rate is 4.0%. Net sales proceeds, after transaction costs and
repayment of debt at the sold properties, were $186.6 million.
During the balance of 2022, we anticipate selling approximately
$550 million of communities in suburban Boston and New York City,
at expected trailing twelve-month NOI cap rates of approximately
4%. The proceeds are expected to be used to fund the Aimco lease
cancellation, the four apartment communities acquired in 2022, and
the completed share repurchases.
Capital Allocation – Share Repurchases
During the second quarter, AIR repurchased 2.9 million shares
for $125 million, an average price of $42.93 per share. We are
authorized to purchase an additional $375 million of shares. We
regularly consider buybacks relative to alternative uses of
capital.
Balance Sheet
We seek to increase financial returns by using leverage with
appropriate caution. We limit risk through our balance sheet
structure, employing low leverage and primarily long-dated debt. We
target a leverage to EBITDAre ratio of approximately 5:5:1, and
anticipate the actual ratio will vary based on the timing of
transactions. We maintain financial flexibility through ample
unused and available credit, holding properties with substantial
value unencumbered by property debt, maintaining an investment
grade rating, and using partners’ capital when it enhances
financial returns or reduces investment risk.
Components of Leverage
Our leverage includes our share of long-term, non-recourse
property debt encumbering our apartment communities, together with
outstanding borrowings under our revolving credit facility, our
term loans, unsecured notes payable, and preferred equity.
JUNE 30, 2022
($ in millions)*
Amount
Weighted-Avg. Maturity
(Yrs.)
Weighted-Avg. Term Before
Repricing (Yrs.)
Fixed rate loans payable
$
1,505
8.9
9.2
Floating rate loans payable
138
3.6
4.2
AIR share of long-term,
non-recourse property debt
1,643
8.5
8.7
Term loans
800
3.5
5.0
Unsecured notes payable
400
8.0
8.0
Outstanding borrowings on revolving credit
facility
148
3.8
3.8
Preferred equity**
81
9.8
9.8
Total Leverage
$
3,072
6.9
7.4
Cash and restricted cash
(84
)
Note receivable from Aimco***
(147
)
Net Leverage
$
2,841
Floating rate net leverage %
2
%
Fixed rate net leverage %
98
%
Total
100
%
Net Leverage to Adjusted
EBITDAre
6.1x
*
Amounts are presented on a rounded basis
and the sum of the individual amounts may not foot; please refer to
Supplemental Schedule 5.
**
AIR’s Preferred equity is perpetual in
nature; however, for illustrative purposes, we have computed the
weighted-average maturity of our preferred OP Units assuming a
10-year maturity and preferred stock assuming it is called at the
expiration of the no-call period.
***
In July, Aimco repaid the remaining $147
million outstanding note. We consider the note a reduction of
leverage, as proceeds were used to repay outstanding borrowings on
our term loans and revolving credit facility.
During the second quarter, we issued three tranches of
guaranteed, senior unsecured notes, totaling $400 million at a
weighted-average effective interest rate of 4.3%, inclusive of the
previously placed treasury lock, and a weighted-average maturity of
eight years.
Proceeds from the offering were used to repay borrowings on our
revolving credit facility. The private placement of unsecured notes
is an important step in the transition of AIR from a secured
borrower to a primarily unsecured borrower.
During the second quarter, we received $400 million from Aimco
in payment on its note to AIR, inclusive of a $12.9 million
prepayment penalty. The $147 million balance and a $4.5 million
prepayment penalty were repaid in July. Proceeds were used to repay
$350 million in term loans and to reduce borrowings on our
revolving credit facility.
Liquidity
We use our revolving credit facility for working capital, other
short-term purposes, and to secure letters of credit. At June 30,
2022, our share of cash and restricted cash, excluding amounts
related to tenant security deposits, was $84 million and we had the
capacity to borrow up to $841 million on our revolving credit
facility, bringing total liquidity to $925 million.
We manage our financial flexibility by maintaining an investment
grade rating from S&P and holding communities that are
unencumbered by property debt. As of June 30, 2022, we held
unencumbered apartment communities with an estimated fair market
value of approximately $7.8 billion, more than double the amount
from December 31, 2020.
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 a percentage of the
undepreciated book value of a borrower’s assets. We have lowered
the amount of non-recourse property debt by $1.5 billion since
December 31, 2020. At June 30, 2022, the AIR share of non-recourse
property debt represented 19% of undepreciated book value.
Dividend and Equity Capital Markets
On July 26, 2022, our Board of Directors declared a quarterly
cash dividend of $0.45 per share of AIR Common Stock. This amount
is payable on August 30, 2022, to stockholders of record on August
19, 2022.
In setting AIR's 2022 dividend, our Board of Directors targeted
a dividend level of approximately 75% of full year FFO per
share.
The after-tax dividend will benefit from AIR's refreshed tax
basis. Two-thirds of the 2021 dividend was a tax- free return of
capital while the remaining one-third was taxable at capital gain
rates. In the same year, approximately 60% of peer dividends were
taxed at ordinary income rates, with the remaining 40% taxed at
capital gain rates.
In 2022, we currently project a majority of our dividend will be
taxed at capital gain rates, with the remainder taxed at ordinary
income rates. We believe the tax characteristics of our dividend
makes our stock more attractive to taxable investors, such as
foreign investors, taxable individuals, and corporations by
comparison to peer shares whose dividends are taxed at higher
rates.
Corporate Responsibility Update
Corporate responsibility is a longstanding AIR priority and a
key part of our culture. We are committed to transparency, and
continuous improvement...as measured by GRESB. Based on UN
Sustainable Development Goals, we have set targets for energy,
water, and greenhouse gas reductions. We contracted for expert
review of the environmental impacts of our properties, and we are
considering various ways to improve portfolio resilience.
During the quarter, AIR was honored as a Kingsley Elite Five,
ranking first among public multi-family companies and second among
all multi-family companies in customer satisfaction.
In partnership with the National Leased Housing Association, we
continue our longstanding commitment to offer AIR Gives Opportunity
Scholarship to students living in affordable housing. During the
quarter, we awarded 14 scholarships to students living in
affordable housing.
Our team is a critical part of our success. In 2022, AIR was
named a National Top Workplaces winner and also for a third year a
2022 Healthiest Employer by the Denver Business Journal.
2022 Outlook
AIR expects full year Pro forma FFO between $2.38 and $2.44 per
share. Our midpoint of $2.41 per share remains unchanged.
Similarly, our expectations for run-rate FFO are unchanged at $2.19
per share. Relative to our prior guidance, we now expect:
- $0.03 per share of increased contribution from operations:
$0.02 per share attributable to Same Store and $0.01 per share
attributable to 2021 acquisitions; offset by
- ($0.02) per share of lower contribution from the lease
cancellation with Aimco in 2022, net of funding costs; and
- ($0.01) per share of lower contribution, net, due to higher
offsite costs reflecting greater than planned compensation
increases due to the higher than expected inflation. Higher
casualty losses are offset by the accretive second quarter share
repurchases.
The following tables compare our previous FFO expectations, at
the midpoint, to today, reflecting the impact of the above:
Previous Expectation
Variance
Updated Expectation
2021 FFO per share
$
2.14
$
—
$
2.14
Growth in Same Store NOI
0.30
0.02
0.32
Contribution from lower leverage and
acquisitions, net of related sales dilution
(0.03
)
0.01
(0.02
)
Change in interest rates
(0.03
)
—
(0.03
)
Change in contribution from Aimco note and
gain on sale of cost basis investment
0.05
—
0.05
Reacquisition of properties currently
leased to Aimco
—
(0.02
)
(0.02
)
Other*
(0.02
)
(0.01
)
(0.03
)
2022 FFO per share at the
midpoint
$
2.41
$
—
$
2.41
Previous Expectation of Pro
forma Run Rate
Variance
Updated Expectation of Pro
forma Run Rate
2021 FFO per share
$
2.14
$
—
$
2.14
Less: Interest income on Aimco note, net
of borrowing costs
(0.12
)
—
(0.12
)
2021 FFO per share before
Aimco note contribution
$
2.02
$
—
$
2.02
Growth in Same Store NOI
0.30
0.02
0.32
Net change in leverage, acquisitions and
gain on sale of cost basis investment
(0.06
)
0.01
(0.05
)
Change in interest rates
(0.05
)
—
(0.05
)
Reacquisition of properties currently
leased to Aimco
—
(0.02
)
(0.02
)
Other*
(0.02
)
(0.01
)
(0.03
)
2022 FFO per share at the
midpoint
$
2.19
$
—
$
2.19
*
Increase in "other" is due to higher
offsite costs as a result of increasing teammate compensation at a
time of high inflation. The contribution from the second quarter
share repurchases is offset by higher than anticipated casualty
losses.
Our guidance ranges are based on the following components:
YEAR-TO-DATE June 30,
2022
FULL YEAR 2022
PREVIOUS FULL YEAR
2022
($ Amounts represent AIR Share)
Net Income (loss) per share (1)
$3.66
$3.42 to $3.49
$(0.33) to $(0.20)
Pro forma FFO per share
$1.23
$2.38 to $2.44
$2.37 to $2.45
Run rate Pro forma FFO per
share
$2.19
$2.19
Pro forma FFO per share at the
midpoint
$2.41
$2.41
Same Store Operating Components
Revenue change compared to
prior year
10.4%
10.0% to 10.5%
9.3% to 10.3%
Expense change compared to
prior year
1.6%
2.0% to 2.5%
3.0% to 2.0%
NOI change compared to prior
year
14.1%
13.0% to 14.0%
11.5% to 13.5%
Offsite Costs
General and administrative
expenses, as defined below (2)
$9M
$16M to $18M
$15M to $17M
Other Earnings
Lease income
$13M
~$18M
~$30M
Value of property acquisitions
and cost of lease cancellation
$467M
~$840M
~$500M
Proceeds from dispositions of
real estate, net
$774M
~$1.3B
~$809M
AIR Share of Capital
Enhancements
Capital Enhancements
$41M
$90M to $110M
$90M to $110M
Balance Sheet
Net Leverage to Adjusted
EBITDAre (3)
6.1x
~5.5x
~5.5x
(1)
Includes gains on sales completed year-to-date and excludes
gains from anticipated property sales.
(2)
For the purposes of this presentation, General and
Administrative expenses are defined as follows:
- All costs that are reported as G&A expenses in our
consolidated statements of operations,
- Less: Asset management fees paid by joint venture partners in
reimbursement of G&A-type services provided by AIR. AIR earned
$1.7 million of such fees during the quarter.
- Effective in 2022, G&A in our consolidated statements of
operations includes the depreciation of capitalized costs of
non-real estate assets applicable to corporate activities.
Previously, these costs were presented separately as "depreciation
and amortization related to non-real estate assets" in Supplemental
Schedule 2a.
- Our policy is to limit G&A expenses, as defined, to 15
basis points of GAV. In 2021, our CEO waived his cash compensation
to meet this metric.
(3)
Presented net of FFO and Pro forma FFO adjustments.
In the third quarter of 2022, AIR anticipates Pro forma FFO
between $0.54 and $0.58 per share, inclusive of $0.03 of prepayment
penalty income received in July from the final payment of the Aimco
note.
AIR Strategic Objectives
We created AIR to be the most efficient and effective way to
invest in U.S. multi-family real estate, due to our simplified
business model, diversified portfolio of stabilized apartment
communities, and low leverage. The Board of Directors has set the
following strategic objectives:
- Pursue a simple, efficient, and predictable business model with
a low-risk premium
- Maintain a high quality and diversified portfolio of stabilized
multi-family properties
- Improve our best-in-class property operations platform to
generate above-market organic growth
- Maintain an efficient cost structure with G&A less than or
equal to 15 basis points of Gross Asset Value
- Maintain a flexible, low levered balance sheet with access to
public debt markets
- Enhance portfolio quality through a disciplined approach to
capital allocation, targeting accretive opportunities on a leverage
neutral basis
- Develop private capital partnerships as a source of equity
capital for accretive growth
- Continue our commitment to corporate responsibility with
transparent and measurable goals
Earnings Conference Call
Information
Live Conference Call:
Conference Call Replay:
Friday, July 29, 2022 at 1:00 p.m. ET
Replay available until October 28,
2022
Domestic Dial-In Number:
1-844-200-6205
Domestic Dial-In Number:
1-866-813-9403
International Dial-In Number:
1-929-526-1599
International Dial-In Number:
+44-204-525-0658
Passcode: 725302
Passcode: 519599
Live webcast and replay:
investors.aircommunities.com
Supplemental Information
The full text of this Earnings Release and the Supplemental
Information referenced in this release is available on AIR’s
website at investors.aircommunities.com.
Glossary & Reconciliations of
Non-GAAP Financial and Operating Measures
Financial and operating measures found in this Earnings Release
and the Supplemental Information include certain financial measures
used by AIR management that are measures not defined under
accounting principles generally accepted in the United States
("GAAP"). Certain AIR terms and Non-GAAP measures are defined in
the Glossary in the Supplemental Information and Non-GAAP measures
reconciled to the most comparable GAAP measures.
About AIR
AIR is a real estate investment trust focused on the ownership
and management of quality apartment communities located in the
largest markets in the United States. AIR is one of the country’s
largest owners and operators of apartments, with 76 communities in
11 states and the District of Columbia. AIR common shares are
traded on the New York Stock Exchange under the ticker symbol AIRC,
and are included in the S&P 400. For more information about
AIR, please visit our website at www.aircommunities.com.
Forward-looking
Statements
This Earnings Release and Supplemental Information contain
forward-looking statements within the meaning of the federal
securities laws, including, without limitation, statements
regarding projected results and specifically forecasts of 2022
results, including but not limited to: NAREIT FFO, Pro forma FFO
and selected components thereof; expectations regarding consumer
demand, growth in revenue and strength of other performance metrics
and models; expectations regarding acquisitions as well as sales
and joint ventures and the use of proceeds thereof; and AIR
liquidity and leverage metrics. We caution investors not to place
undue reliance on any such forward-looking statements.
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 COVID-19 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 inflation, 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 business
separation; the ability and willingness of the parties to the
business 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 business separation.
Other risks and uncertainties are described in filings by AIR with
the Securities and Exchange Commission ("SEC"), including the
section entitled "Risk Factors" in Item 1A of AIR’s Annual Report
on Form 10-K for the year ended December 31, 2021, and subsequent
filings with the SEC.
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.
These forward-looking statements reflect management’s judgment
as of this date, and we assume no obligation to revise or update
them to reflect future events or circumstances. This earnings
release does not constitute an offer of securities for sale.
Consolidated Statements of Operations
(in thousands, except per share data) (unaudited)
Three Months Ended
Six Months Ended
June 30,
June 30,
2022
2021
2022
2021
REVENUES
Rental and other property revenues (1)
$
181,012
$
176,721
$
360,273
$
351,451
Other revenues
2,488
1,612
4,705
3,295
Total revenues
183,500
178,333
364,978
354,746
OPERATING EXPENSES
Property operating expenses (1)
63,787
64,758
127,023
129,375
Depreciation and amortization
78,656
75,791
163,205
151,071
General and administrative expenses
(2)
5,333
5,221
11,930
9,635
Other (income) expenses, net
(3,076
)
2,515
942
5,391
Total operating expenses
144,700
148,285
303,100
295,472
Interest income (3)
25,652
15,684
39,133
31,656
Interest expense
(26,027
)
(33,657
)
(48,134
)
(69,682
)
Loss on extinguishment of debt
—
(37,150
)
(23,636
)
(38,160
)
Gain on dispositions of real estate and
derecognition of leased properties
175,606
3,353
587,609
87,385
Loss from unconsolidated real estate
partnerships
(873
)
—
(2,887
)
—
Income (loss) before income tax
(expense) benefit
213,158
(21,722
)
613,963
70,473
Income tax (expense) benefit
(1,499
)
2,035
(920
)
(1,045
)
Net income (loss)
211,659
(19,687
)
613,043
69,428
Noncontrolling interests:
Net (income) loss attributable
to noncontrolling interests in consolidated real estate
partnerships
(381
)
2,397
183
2,632
Net income attributable to
preferred noncontrolling interests in AIR OP
(1,602
)
(1,603
)
(3,205
)
(3,207
)
Net (income) loss attributable
to common noncontrolling interests in AIR OP
(12,749
)
945
(36,916
)
(3,491
)
Net (income) loss attributable
to noncontrolling interests
(14,732
)
1,739
(39,938
)
(4,066
)
Net income (loss) attributable
to AIR
196,927
(17,948
)
573,105
65,362
Net income attributable to AIR
preferred stockholders
(43
)
(43
)
(85
)
(93
)
Net income attributable to
participating securities
(162
)
(39
)
(417
)
(103
)
Net income (loss)
attributable to AIR common stockholders
$
196,722
$
(18,030
)
$
572,603
$
65,166
Net income (loss)
attributable to AIR common stockholders per share – basic and
diluted
$
1.26
$
(0.12
)
$
3.66
$
0.43
Weighted-average common shares
outstanding – basic
155,927
154,608
156,327
151,609
Weighted-average common shares
outstanding – diluted
156,136
154,608
156,607
152,083
(1)
Rental and other property revenues for the
three and six months ended June 30, 2022, are inclusive of $1.6
million and $8.2 million, respectively, of revenues related to sold
properties. Rental and other property revenues for the three and
six months ended June 30, 2021, are inclusive of $21.0 million and
$41.8 million, respectively, of revenues related to sold
properties. Property operating expenses for the three and six
months ended June 30, 2022, are inclusive of $0.6 million and $3.2
million, respectively, of expenses related to sold properties.
Property operating expenses for the three and six months ended June
30, 2021, are inclusive of $7.0 million and $13.9 million,
respectively, of expenses related to sold properties.
Rental and other property revenues for the
three and six months ended June 30, 2021, are inclusive of $7.2
million and $14.3 million, respectively, of revenues related to the
third-party share of properties included in the Washington, D.C.
joint venture. Property operating expenses for the three and six
months ended June 30, 2021, are inclusive of $1.9 million and $3.7
million, respectively, of expenses related to the third-party share
of properties included in the Washington, D.C. joint venture.
(2)
In setting our G&A benchmark of 15 bps
of Gross Asset Value, we consider asset management fees earned in
our joint ventures as a reduction of general and administrative
expenses. In accordance with GAAP, general and administrative
expenses are shown gross of these asset management fees. The
California joint venture is consolidated on our balance sheet and
accordingly fees earned in this venture are included in the
determination of net (income) loss attributable to noncontrolling
interests in consolidated real estate partnerships. The Washington
D.C. area joint venture is not consolidated on our balance sheet
and accordingly fees earned in this venture are included in loss
from unconsolidated real estate partnerships.
(3)
Interest income for the three and six
months ended June 30, 2022 includes $6.4 million and $13.3 million,
respectively, of income associated with our note receivable from
Aimco, and $6.5 million and $13.1 million, respectively, of
interest income associated with properties leased. In addition,
interest income for the three and six months ended June 30, 2022,
includes a $12.9 million prepayment penalty from the partial note
repayment from Aimco.
Interest income for the three and six
months ended June 30, 2021, includes $6.9 million and $13.9
million, respectively, of income associated with our note
receivable from Aimco, and $6.5 million and $12.9 million,
respectively, of interest income associated with properties
leased.
Consolidated Balance Sheets (in
thousands) (unaudited)
June 30,
December 31,
2022
2021
Assets
Real estate
$
7,379,865
$
6,885,081
Accumulated depreciation
(2,400,722
)
(2,284,793
)
Net real estate
4,979,143
4,600,288
Cash and cash equivalents
74,949
67,320
Restricted cash
25,942
25,441
Note receivable from Aimco
147,039
534,127
Leased real estate assets
466,013
466,355
Goodwill
32,286
32,286
Other assets (1)
707,913
568,051
Assets held for sale
—
146,492
Total Assets
$
6,433,285
$
6,440,360
Liabilities and Equity
Non-recourse property debt
$
2,036,027
$
2,305,756
Debt issue costs
(9,514
)
(11,017
)
Non-recourse property debt,
net
2,026,513
2,294,739
Term loans, net
795,905
1,144,547
Revolving credit facility borrowings
148,000
304,000
Unsecured notes payable, net
398,039
—
Accrued liabilities and other (1)
696,673
592,774
Liabilities related to assets held for
sale
—
85,775
Total Liabilities
4,065,130
4,421,835
Preferred noncontrolling interests in AIR
OP
79,330
79,370
Equity:
Perpetual preferred stock
2,000
2,129
Class A Common Stock
1,542
1,570
Additional paid-in capital
3,636,906
3,763,105
Accumulated other comprehensive
income
13,750
—
Distributions in excess of
earnings
(1,521,749
)
(1,953,779
)
Total AIR equity
2,132,449
1,813,025
Noncontrolling interests in consolidated
real estate partnerships
(70,609
)
(70,883
)
Common noncontrolling interests in AIR
OP
226,985
197,013
Total Equity
2,288,825
1,939,155
Total Liabilities and
Equity
$
6,433,285
$
6,440,360
(1)
Other assets includes the Parkmerced
mezzanine investment and the fair value of an associated interest
rate swap option, and accrued liabilities and other includes the
offsetting liabilities, both of which equal $406 million. The
benefits and risks of ownership of both the Parkmerced mezzanine
investment and the interest rate swap option have been transferred
to Aimco, but legal transfer has not occurred.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220728006056/en/
Matthew O’Grady Senior Vice President, Capital Markets
investors@aircommunities.com (303) 691-4566
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