AIR Reports Third Quarter 2022 Results Ahead of Plan; Operating Fundamentals Across All Markets Remain Strong, On Track For Full Year Record Same Store NOI Growth

Announces $460 Million of Accretive Investments: Southgate Towers ($298M) and Share Repurchases ($162M)

DENVER–(BUSINESS WIRE)–Apartment Income REIT Corp. (“AIR”) (NYSE: AIRC) announced today third quarter results for 2022.

Chief Executive Officer Terry Considine comments: “Business is good! In 3Q:

• Keith and his Ops team are on track to deliver peer leading margins and record NOI growth in our Same Store portfolio. NOI in our 2021 Acquisition portfolio is growing even faster.
• John and his investment team continue to make accretive acquisitions that improve the quality and profitability of our real estate portfolio. During the quarter, we committed to purchase Southgate Towers in Miami Beach for $298 million, and we bought back (through November 2, 2022) 4.3 million shares of AIR common stock.
• AIR’s business is well prepared for the key macro risks of the day: soaring interest rates, high inflation, and possible recession.
  • With Paul’s good work, Pro forma Net Leverage: EBITDAre is 5.9:1, and AIR has only minor refunding and re-pricing exposure until 2025.
  • Inflation provided a boost to AIR’s top-line, but was no match for Keith’s continuing productivity gains: controllable operating expenses are down.
  • A future recession will find AIR with stable cash flows due to its disciplined customer selection. For example, new customers during 3Q had average household income of $250,000 and median household income of $170,000…together with FICO scores averaging 90 points higher than the national average for renters.”

“AIR’s prospects for 2023 are excellent. A 5% earn-in from 2022 leases provides a baseline for growth in Same Store Revenue. Current loss-to-lease is 5%. Rents continue to increase. NOI from our 2021 acquisitions is increasing at more than twice the Same Store NOI growth rate. 2022 acquisitions are performing in line with expectations.”

“AIR enjoys peer leading margins and peer leading conversion of rent to free cash flow. These advantages are considerable, and durable.”

Commenting further, Chief Financial Officer Paul Beldin added: “We are pleased with our third quarter results, and continue to see strong momentum through year-end 2022, and into 2023. The transformation of AIR’s balance sheet was completed in the quarter. With the Aimco note fully repaid, and approximately $500 million of property sales expected later this month, third quarter Pro forma leverage to EBITDAre is 5.9:1, consistent with our targeted 5.0x to 6.0x leverage ratio range. EBITDAre at projected 2022 levels is sufficient to repay annual average debt service plus fund maturities through 2031, with a 30% cushion.”

“Third quarter Pro forma FFO was $0.58 per share, $0.02 above the midpoint of guidance, due primarily to the timing of favorable litigation outcomes and real estate tax appeals, all of which were previously anticipated to occur in the fourth quarter. During the third quarter, Same Store revenue increased by 9.6%. During a period of inflationary pressure, property level expenses were almost flat and controllable operating expenses were down 400 bps, resulting in a 13.3% increase in year-over-year NOI.”

“Looking forward, we are maintaining our Same Store revenue growth expectations of 10.25% at the midpoint and reducing expense growth expectations by 125 basis points to 1%, at the midpoint. The result is a 40 basis point increase in expected NOI growth.”

“Full year, Pro forma FFO is expected to be between $2.39 and $2.43 per share, unchanged the midpoint of $2.41, as incremental Same Store NOI is offset by higher general and administrative expenses. Similarly, our expectations for Pro forma Run Rate FFO are unchanged at $2.19 per share at the midpoint.”

Financial Results: Third Quarter Pro Forma FFO Per Share

		THIRD QUARTER												YEAR-TO-DATE
(all items per common share – diluted)		2022				2021				Variance				2022				2021				Variance
Net income		$	0.01			$	0.06				(83.3	%)		$	3.68			$	0.48			nm
NAREIT Funds From Operations (FFO)		$	0.53			$	0.47				12.8	%		$	1.59			$	1.22				30.3	%
Pro forma adjustments *			0.05				0.09				(44.4	%)			0.22				0.36				(38.9	%)
Pro forma Funds From Operations (Pro forma FFO)		$	0.58			$	0.56				3.6	%		$	1.81			$	1.58				14.6	%

* Third quarter and year-to-date 2022 includes adjustments related to casualty losses due to Hurricane Ian-related wind damage, primarily at one of our communities in South Florida, currently estimated to be $2.3 million, and flooding at one of our communities in Boston, currently estimated at $1.7 million.

Operating Results: Third Quarter Same Store NOI Up 13.3% Year-Over-Year, 4.6% Sequentially, and 14.1% Year-to-Date

The table below includes the operating results of the 58 AIR properties that meet our definition of Same Store. During the third quarter, six properties were removed from our Same Store portfolio due to their expected sale in November. Same Store properties generated approximately 88% of AIR’s year-to-date 2022 rental revenue.

	THIRD QUARTER																				YEAR-TO-DATE
	Year-over-Year												Sequential								Year-over-Year
($ in millions) *	2022				2021				Variance				2nd Qtr.				Variance				2022				2021				Variance
Revenue, before utility reimbursements	$	138.9			$	126.8				9.6	%		$	133.8				3.8	%		$	402.8			$	365.6				10.2	%
Expenses, net of utility reimbursements		35.7				35.6				0.1	%			35.2				1.4	%			105.8				105.2				0.6	%
Net operating income (NOI)	$	103.3			$	91.1				13.3	%		$	98.7				4.6	%		$	297.1			$	260.4				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.

Third quarter 2022 NOI margins were 74.3%, up 240 basis points from the third quarter of 2021. NOI margins benefited from Residential Rental Income growth of 9.8% and a decrease of 400 basis points in controllable operating expenses.

Components of Same Store Revenue Growth – The table below summarizes the change in the components of our Same Store Revenue growth.

		THIRD QUARTER								YEAR-TO-DATE
Same Store Revenue Components		Year-over-Year				Sequential				Year-over-Year
Residential Rents			10.4	%			5.0	%			7.6	%
Average Daily Occupancy			(0.6	%)			(0.8	%)			1.2	%
Residential Rental Income			9.8	%			4.2	%			8.8	%
Bad Debt, net of recoveries			0.3	%			(0.9	%)			1.0	%
Late Fees and Other			0.5	%			0.4	%			0.5	%
Residential Revenue			10.6	%			3.7	%			10.3	%
Commercial Revenue			(1.0	%)			0.1	%			(0.1	%)
Same Store Revenue Growth			9.6	%			3.8	%			10.2	%

Same Store Rental Rates – Changes in rental rates are measured 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 depicts 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.

	THIRD QUARTER				YEAR-TO-DATE				2022
	2022	2021*	Variance		2022	2021*	Variance		July	Aug	Sept	Oct
Transacted Leases*
Renewal rent changes	11.1%	7.3%	3.8%		11.0%	4.7%	6.3%		10.4%	11.0%	12.9%	11.7%
New lease rent changes	17.1%	8.5%	8.6%		17.5%	1.8%	15.7%		17.8%	17.3%	15.8%	13.2%
Weighted-average rent changes	14.0%	7.9%	6.1%		14.0%	3.2%	10.8%		13.9%	13.9%	14.4%	12.9%
Signed Leases*
Renewal rent changes	11.8%	9.3%	2.5%		11.0%	5.5%	5.5%		11.5%	11.9%	12.9%	10.4%
New lease rent changes	17.0%	11.0%	6.0%		17.4%	3.0%	14.4%		19.4%	16.6%	13.8%	12.1%
Weighted-average rent changes	14.5%	10.3%	4.2%		14.0%	4.1%	9.9%		15.3%	14.1%	13.6%	11.8%
Average Daily Occupancy	95.9%	96.5%	(0.6%)		96.9%	95.7%	1.2%		95.5%	96.0%	96.3%	96.7%

*Amounts are based on our current Same Store population and represent AIR’s share, whereas prior to 2022 these were reported on a non-ownership adjusted basis. Amounts may differ from those previously reported.

Same Store Markets – Consumer demand remained strong through the quarter, with signed new lease rates up 17.0% from the prior leases and renewals up 11.8%, resulting in a weighted-average increase of 14.5%. We saw a sequential decline in ADO of 90 basis points to 95.9%, reflecting the frictional vacancy consistent with the higher move out volume that is typical during the summer leasing season. Year-to-date ADO of 96.9% was 120 bps higher than in the prior year. We anticipate continued occupancy gains throughout the fourth quarter.

Acquisition Portfolio – The acquisition portfolio is currently comprised of five properties acquired in 2021, four acquired in 2022, and represents 14% of AIR GAV. At those properties acquired in 2021, leasing continues to exceed expectations. Signed new lease rates were up 25.1% in the third quarter, with renewals up 23.2%, resulting in a weighted-average increase of 24.1%. Fourth quarter revenue growth for the 2021 acquisitions, the first reporting period with a year-over-year comparison, is anticipated to be 50% above the Same Store portfolio. At properties we acquired in 2022, performance is consistent with our expectations, and rental rate achievement is ahead of our initial projections. We will provide year-over-year comparable data as it 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 third quarter, residents paid, on a current basis, 98.1% of all residential revenue billed during the quarter. The remaining 1.9% of revenue was treated as bad debt. Offsetting this bad debt was $1.1 million of government assistance payments, reducing our bad debt percentage by 80 basis points. The result was net bad debt expense of 1.1% of third quarter residential revenues.

Outside of California, 99.1% of our residents are current, leaving approximately 100 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 third quarter bad debt by approximately 100 basis points.

In California, our ability to pursue remedies for unpaid rent now has fewer restrictions, though protections and moratoriums continue to prevent normal pursuit of delinquent balances. This has allowed approximately 300 California residents, about 3.5% of the total, to become delinquent by two or more months. Of the 300 California residents with multiple months of past due balances, approximately 175 are currently in the eviction process. The remaining 125 residents have continuing protections, that for now are scheduled to expire in February 2023.

As of September 30, 2022, our proportionate share of gross residential accounts receivable was $8.6 million. After consideration of tenant security deposits and reserves for uncollectible amounts, our net exposure is $0.2 million, an amount expected to be collected during the fourth 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. In the past two years, AIR has recycled approximately $5.4 billion, or 40%, of its gross asset value as part of and since the Separation, property sales, and joint ventures, all during a period of attractive pricing for multi-family properties, using the proceeds to simplify its business, reduce leverage, and improve the quality and expected profitability of its real estate portfolio.

We have improved AIR’s portfolio through reducing our allocation to New York City and Chicago markets with regulatory risk, and reallocating capital into higher growth submarkets, such as Miami-Dade and Broward counties, now 19% of AIR GAV, in markets with limited REIT competition.

	Aimco	AIR
	Q4 2019 or 2019A	Q3 2022	Change
Residents
Average Household Income	$165,000	$251,000	52%
Median Household Income	$116,000	$170,000	47%
CSAT Score (out of 5)	4.30	4.33 (2021)	0.03
Kingsley Index*	4.09	4.05	(0.04)
Portfolio
Properties	124	80	(35%)
Apartment Homes	32,598	23,499	(28%)
Average Revenue per Apartment Home	2,272	$2,711	19%
Redevelopment and Development ($M)	$230	$–	($230)
Mezzanine Investments ($M)	$280	$–	($280)
Low G&A
Net G&A as % of GAV	36 bps (per GSA)	<15 bps (at AIR Target)	-21 bps
Balance Sheet
Net Leverage / EBITDAre	7.6x	5.9x	(1.7x)
Refunding: Next 3-Years (% Total Debt)	23%	10%	(13%)
Repricing: Next 3-Years (% Total Debt)	23%	10%	(13%)
Unencumbered Properties ($B)	$2.4	$8.3	$5.9

* AIR named Kingsley Elite Five in 2022, #2 among all operators and #1 for public REITs.

AIR uses “paired trades” to fund acquisitions, basing our cost of capital on the anticipated unlevered internal rates of return (“IRR”) of the communities or joint venture interests sold. We require a “spread” or accretion of an unlevered IRR at least 200 basis points higher on the communities purchased. This excess return is driven in part by what we call the AIR Edge, the cumulative result of our focus on resident selection, satisfaction, and retention, as well as relentless innovation in delivering best-in-class property management.

In the past two years, we have acquired $1.4 billion, or 14% of GAV, of properties new to the AIR operating platform. New purchases will increase to 17% of GAV with the anticipated acquisition in early next year of Southgate Towers in Miami Beach. (Please see below for further information regarding this acquisition.)

We estimate real estate values declined by approximately 10% during 2022, the result of approximately 85 basis points of NOI cap rate expansion, about half offset by strong NOI growth. As a paired trade investor, AIR is agnostic as to market changes insofar as it buys and sells properties in the same market conditions, and is focused on gaining an accretive “spread”. As market conditions change, AIR adjusts its target returns and spreads to reflect its new cost of capital. Our “paired trade” approach is intended to ensure that new acquisitions are accretive to earnings in the near-term, and will generate attractive spreads to IRRs in the long-term.

Transactions

Acquisitions

As previously announced, we acquired The District at Flagler Village in Fort Lauderdale, FL for $173 million in the third quarter. The property has 350 apartment homes and was newly constructed in 2021. It sits in the affluent and growing Flagler Village neighborhood with access to the Brightline train station. Year-to-date, we have acquired $640 million of properties new to the AIR platform.

Additionally, and as previously announced, we canceled existing master leases at four properties owned by AIR and previously leased to Aimco for purpose of their development. As part of the cancellation, AIR paid $200 million to Aimco for the added improvements. The four properties include 865 apartment homes with average revenue per apartment home of $3,669 and are located in the South Beach neighborhood of Miami Beach, FL, Kendall Square in Cambridge, MA, the Anschutz Medical Campus in Aurora, CO, and Redwood City, CA.

In aggregate, we expect a NOI yield in 2023 of mid 4%s and a long-term unlevered IRR of approximately 9%.

During the quarter, we also went under contract with a non-refundable deposit to acquire Southgate Towers, located in the South Beach neighborhood of Miami Beach with 495 apartment homes for $298 million. The acquisition is expected to close in early January 2023. We expect unlevered IRRs greater than 10% and at a spread of more than 200 basis points to the properties sold to fund its acquisition.

Dispositions

We had no dispositions in the third quarter. We anticipate selling six properties located in the New England area in November for a gross sales price of approximately $500 million, representing a trailing twelve-month NOI cap rate of 4.4%. These have been classified as held for sale as of September 30, 2022.

Capital Allocation – Share Repurchases

During the third quarter, AIR repurchased 1.2 million shares for $47 million, at an average price of $39.07 per share. Subsequent to quarter end and through November 2, 2022 we have purchased an additional 3.1 million shares for $115 million. In aggregate, we have repurchased 7.2 million shares during 2022 at an average price of $39.96. We are authorized by the AIR Board of Directors to repurchase an additional $213 million of shares. We consider share buybacks as part of a balanced investment program.

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 Net Leverage to EBITDAre ratio between 5.0x and 6.0x 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. We seek to minimize refunding and repricing 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.

		SEPTEMBER 30, 2022
($ in millions)*		Amount				Weighted-Avg. Maturity (Yrs.)				Weighted-Avg. Term Before Repricing (Yrs.)
Fixed rate loans payable		$	1,499				8.7				9.2
Floating rate loans payable**			138				3.3				4.0
AIR share of long-term, non-recourse property debt			1,637				8.2				8.6
Term loans			800				3.3				4.7
Unsecured notes payable			400				7.7				7.7
Outstanding borrowings on revolving credit facility			479				3.5				3.5
Preferred equity***			81				9.8				9.8
Total Leverage		$	3,397				6.4				6.9
Cash and restricted cash			(100	)
Net Leverage		$	3,298
Leverage reduction funded by anticipated November 2022 property sales			(460	)
Net Leverage, Pro forma for anticipated November 2022 sales		$	2,838
Floating rate leverage not subject to interest rate caps and excluding borrowings on the revolving credit facility		3%
Net Leverage to Adjusted EBITDAre, Pro forma for anticipated November sales		5.9x

* Amounts are presented on a rounded basis and the sum of the individual amounts may not foot; please refer to Supplemental Schedule 5.

** Includes one loan with an interest rate cap at 5.35% and a second floating rate loan that is expected to be refinanced during the fourth quarter.

*** 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 of our preferred stock assuming it is called at the expiration of its no-call period.

As of September 30, 2022, about $170 million of AIR’s debt matures before 2025 and it is expected to be refunded before year end with $55 million at 4.9%, $14 million repaid and the remainder at a fixed rate to be determined. Once completed, AIR will have no debt maturing before the second quarter of 2025.

AIR anticipates using the net proceeds from the November property sales discussed above to reduce borrowings on its revolving credit facility.

Pro forma the completion of these refinancing activities, and exclusive of any remaining borrowings under its revolving credit facility, AIR’s floating rate debt exposure is anticipated to be $79 million. This debt has is subject to an interest rate cap at an effective rate of 5.35%.

Liquidity

We use our revolving credit facility for working capital, other short-term purposes, and to secure letters of credit. At September 30, 2022, our share of cash and restricted cash, excluding amounts related to tenant security deposits, was $100 million and we had the capacity to borrow up to $510 million on our revolving credit facility, bringing total liquidity to $610 million. Liquidity is expected to increase by approximately $460 million with the closing of the November property sales.

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 September 30, 2022, we held unencumbered apartment communities with an estimated fair market value of approximately $8.3 billion, almost triple the amount as of December 31, 2020.

As previously announced, AIR is seeking an investment-grade Issuer Credit Rating from Moody’s and we anticipate receiving our rating during the fourth quarter.

Dividend and Equity Capital Markets

On November 1, 2022, our Board of Directors declared a quarterly cash dividend of $0.45 per share of Common Stock. This amount is payable on November 30, 2022, to stockholders of record on November 18, 2022. On an annualized basis, the dividend represents $1.80 per share, reflecting a dividend yield of approximately 4.7% based on AIR’s closing share price on Tuesday, November 1, 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 taxable at capital gain rates, with the remainder taxable 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. For example, if AIR’s 2022 dividend is characterized as 50% capital gains and 50% as ordinary income and peer 2022 dividends are characterized consistently with 2021, AIR’s estimated after tax dividend would be approximately 35% higher than peer average.

Corporate Governance and Responsibility Update

During the quarter, AIR engaged with holders of approximately 70% of outstanding common shares, which included the participation of multiple Board members alongside senior management, in a series of lunches, dinners, video meetings, and calls. Numerous topics were discussed such as governance, investment strategy, operations, and corporate responsibility, including CEO succession planning and matters related to Environmental, Social, and Governance (“ESG”). Board members have also participated in several industry conferences and private meetings throughout the year. AIR’s Board is highly proactive and welcomes investor feedback to ensure stockholder perspectives are well heard in Board deliberations.

AIR launched new corporate responsibility webpages during the quarter to highlight our commitments to ESG, and published corporate responsibility goals consistent with the United Nations Sustainable Development Goals.

Contacts

Matthew O’Grady

Senior Vice President, Capital Markets

(303) 691-4566

Mary Jensen

Head of Investor Relations

(303) 691-4349

[email protected]

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