APARTMENT INCOME REIT CORP. 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 acquisitions as well as sales and joint ventures 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 note 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 COVID-19 pandemic on AIR's business and on the global andU.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, which may be impacted by global supply chain disruptions; 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 interest rate changes and 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 ofAIR's and AIR Operating Partnership's combined Annual Report on Form 10-K for the year endedDecember 31, 2021 , and subsequent filings with theSEC . 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 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. 21
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Table of Contents Executive Overview
We created AIR to be the most efficient and effective way to invest in
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Pursue a simple, efficient, and predictable business model.
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Maintain a high quality and diversified portfolio of stabilized multi-family properties.
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Continuously improve our best in class property operations platform to generate above-market organic growth.
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Maintain an efficient cost structure with general and administrative expenses less than or equal to 15 basis points of gross asset value.
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Maintain a flexible, low levered balance sheet so that AIR is positioned to access the public bond market when doing so makes sense.
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Enhance portfolio quality through a disciplined approach to capital allocation; targeting accretive opportunities on a leverage neutral basis.
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Develop private capital partnerships as an alternative source of equity capital for accretive growth.
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Continued our commitment to corporate responsibility with transparent and measurable goals.
We own and operate a portfolio of stabilized apartment communities, diversified by both geography and price point. As ofMarch 31, 2022 , our portfolio included 76 apartment communities with 25,078 apartment homes in which we held an average ownership of approximately 88%.
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.
Operational Excellence
Same Store highlights for the first quarter include:
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Revenue increased by 9.2% and NOI increased by 11.7%, respectively, compared to the first quarter of 2021;
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NOI margins were 72.8%, up 162 basis points from the first quarter of 2021. NOI margins benefited from year-over-year rental rate growth of 5% and a 270 basis point increase in average daily occupancy to 98.1%;
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For leases becoming effective during the quarter, renewal rents increased by 11.8% and signed new lease rents increased by 16.1%, for a weighted-average increase of 14.2%; and
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Recognition of 98.8% of all residential revenue billed during the quarter, with the balance of 1.2% treated as bad debt.
Same Store Markets
AIR enjoyed stronger than typical consumer demand across all markets in the first quarter. Signed new lease rates were up 17.8% from the prior lease, with renewals up 11.3%, resulting in a weighted-average increase of 14.1%. Occupancy was high throughout the quarter, averaging 98.1%. With limited availability, demand remained strong with volume above 2020's pre-COVID levels.
Consistent with our expectations, average daily occupancy declined sequentially in March and April as we began to experience higher frictional vacancy associated with the increased turnover of peak leasing season.
2021 Acquisition Performance
In sourcing acquisitions, AIR seeks to identify properties that will benefit
from AIR's operating acumen, or the "AIR Edge." These acquisitions are typically
expected to deliver unlevered internal rates of return ("IRR") of 200 basis
points or more than AIR's stabilized Same Store portfolio. In today's market, we
target IRRs greater than 8%. In a typical acquisition, the acquired property
will experience NOI growth at market rates for 6 to 12 months, as the property
is integrated onto AIR's platform with AIR customer selection, satisfaction, and
retention, cost control, capital enhancements, and good neighbor policies.
During the following two to four years, NOI growth is expected to exceed the
market growth rate by two or three times.
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AIR acquired five properties in 2021, at a cost of approximately$730 million , with an expected first year yield of 4.3% and a long-term unlevered IRR of approximately 9%. During the quarter, ADO increased by 40 basis points related to these properties, and we signed 275 new and renewal leases at rates 23% above expiring leases.
Based on performance to date, we now expect the first year yield to be 4.5%, 20 basis points above underwriting.
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 inthe United States . During the first quarter of 2022, we exited theChicago market and reduced our exposure toCalifornia . 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. We plan to maintain a dynamic capital allocation and market selection process, expecting over time to reallocate our investment to locations with lower public tax burdens, including the southeasternUnited States and the Mountain West. We target geographic diversification in our portfolio to reduce the volatility of our rental revenue by avoiding undue concentration in any particular market. As part of our portfolio strategy, we seek to sell communities with lower expected free cash flow ("FCF") 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 FCF 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 Acquisitions We did not acquire any apartment communities in the first quarter. During the balance of the year we anticipate acquiring approximately$500 million of properties, where the "AIR Edge" is expected to provide IRRs above 8%, and 200 basis points above our cost of capital.
Dispositions
During the three months endedMarch 31, 2022 , we sold eight apartment communities located inChicago and various cities inCalifornia , with 1,332 apartment homes, for gross proceeds of$578 million at a NOI cap rate of 4.5%. Net sales proceeds, after transaction costs and repayment of debt at the sold properties, from these transactions were$460 million . The NOI cap rate reflects AIR's low property tax basis in the sevenCalifornia properties sold. Adjusting for market rate real estate taxes, the NOI cap rate is 3.7%. Subsequent to quarter end, we sold an additional three apartment communities located inCalifornia for gross proceeds of$161 million . Net proceeds, after transaction costs, were$159 million . Our NOI cap rate of 4.8% reflects AIR's low property tax basis in these properties. Adjusting for market rate real estate taxes, the NOI cap rate is 3.9%. 23
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Table of Contents 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 and primarily long-dated debt. 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.
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.
As of
•
•
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$400 million is expected to be repaid from the proceeds of a second quarter private placement of a ten year debenture. To protect against future increases in interest rates, we entered into a$400 million treasury hedge, locking the interest rate on the ten year treasury at 2.39%. The all-in cost of the private placement is estimated to be approximately 4.10%; and
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AIR's leverage, pro forma the above actions is (in thousands):
Pro forma Pro forma
March 31, 2022 Adjustments March 31, 2022
Fixed rate loans payable $ 1,481,336 $ - $ 1,481,336
Floating rate loans payable,
to be hedged 167,500 (167,500 ) -
Floating rate loans payable,
hedged - 167,500 167,500
Non-recourse property debt 1,648,836 - 1,648,836
Term loan to be repaid with proceeds from Aimco note 350,000 (350,000 ) - Term loan to be repaid with proceeds from new fixed rate bond offering 400,000 (400,000 ) - Term loan to be hedged/repaid 400,000 (400,000 ) - Floating rate term loans 1,150,000 (1,150,000 ) - Floating revolving credit facility borrowings 177,000 (177,000 ) (1) - Term loans now hedged - 232,500 232,500 New fixed rate bond offering - 400,000 400,000 Preferred equity 81,354 - 81,354 Total Leverage 3,057,190 (694,500 ) 2,362,690 Cash and restricted cash (88,860 ) (22,000 ) (1) (110,860 ) Leverage, net of cash and restricted cash$ 2,968,330 $ (716,500 ) $ 2,251,830 Floating rate leverage %, net of cash 47 % - % Fixed rate leverage %, net of cash 53 % 100 % Total 100 % 100 % Weighted average maturity 6.3 years 8.2 years Weighted average interest rate 2.7 % 3.5 % Gross Leverage to Adjusted EBITDAre 6.5x 5.4x Net Leverage to Adjusted EBITDAre 5.7x 5.4x (1) Amount represents the application of the net proceeds from April property sales, Aimco note proceeds and related prepayment penalty in excess of the term loan repayments.
The result is a stronger and more flexible balance sheet with limited repricing risk and a better maturity profile.
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Since AIR's separation from Aimco, and pro forma for the above, AIR has:
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Reduced gross leverage by
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Brought gross and net leverage to parity and reduced Leverage to EBITDAre to 5.4x.
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Increased the pool of unencumbered properties to
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Reduced refunding and repricing risk through balanced ladders for debt maturity and repricing. Only$146 million , or 6%, of our pro forma debt reprices through the end of 2024.
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Limited exposure to floating interest rates. AIR has taken steps to reduce floating rate exposure. Should we incur floating rate debt in the future, we plan to limit it to less than 60% of annual revenues. We believe increases in interest rates and rental rates are correlated and therefore rents provide a natural hedge against rising interest rates. Today, that limit would approximate$380 million ; representing 14% of total debt and less than 3% of gross asset value. Please see the Liquidity and Capital Resources section for additional information regarding our leverage and the Leverage Ratios subsection of the Non-GAAP Measures section for further information about the calculation of our leverage ratios. Liquidity We use our revolving credit facility for working capital, other short-term purposes, and to secure letters of credit. As ofMarch 31, 2022 , our share of cash and restricted cash, excluding amounts related to tenant security deposits, was$88.9 million and we had the capacity to borrow up to$411.6 million under our revolving credit facility, bringing total liquidity to$500.5 million . We increased liquidity by$400 million through the exercise of the accordion feature on our revolving credit facility. After consideration of April property sales and the exercise of the accordion, our liquidity is more than$1.0 billion . We manage our financial flexibility by maintaining an investment grade rating and holding communities that are unencumbered by property debt. AIR credit has been rated BBB byStandard & Poor's . 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. We have lowered the amount of non-recourse property debt by$1.5 billion sinceDecember 31, 2020 . AtMarch 31, 2022 AIR share of non-recourse property debt represented 19% of undepreciated book value.
Dividend
OnApril 26, 2022 , our Board of Directors declared a quarterly cash dividend of$0.45 per share of AIR Common Stock. This amount is payable onMay 31, 2022 , to stockholders of record onMay 20, 2022 .
In setting AIR's 2022 dividend, our Board of Directors targets a dividend level of approximately 75% of full year FFO per share.
We expect that the after-tax dividend will benefit from AIR's refreshed tax basis. Two-thirds of the 2021 dividend was considered return of capital while the remaining one-third was treated as capital gains.
The Board of Directors recently authorized both a common stock repurchase
program of up to
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 becomingUnited 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 bythe 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. 25
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Corporate responsibility is a longstanding priority and a key part of our culture. We strive for transparency, and continuous improvement, as measured by GRESB. We are aligned with the UN Sustainable Development Goals. We have established targets for energy, water, and greenhouse gas reductions, embarked on environmental certifications for our properties, and are implementing resilience strategies including physical and climate risk assessments of the portfolio. Our focus on our team and our culture is recognized externally, as well. AIR was recognized for our gender-balanced board by theWomen's Leadership Foundation inColorado and is in the top 15% of public companies inColorado to achieve this milestone.
We are continuing our longstanding commitment to offer the AIR Gives Opportunity
Scholarship to students living in affordable housing across the country in
partnership with the
AIR has been recognized nationally as a "National Top Workplace Winner." In addition to that national recognition, AIR has previously been recognized as a top workplace inColorado , theWashington, D.C. area, and theSan Francisco Bay area. Specifically in 2021, out of hundreds of participating companies, AIR was one of only six recognized by theDenver Post as a "Top Workplace" inColorado for each of the past nine years. Also in 2021, AIR was recognized by theWashington Post as a "Top Workplace" in theWashington, D.C. area. AIR was recognized by theDenver Business Journal as one of theDenver Area's Healthiest Employers in 2022 for the third consecutive year.
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 attributable to common stockholders per common share, on a dilutive basis, increased$1.83 for the three months endedMarch 31, 2022 compared to 2021, due primarily to an increase in gain on dispositions of real estate.
Pro forma FFO per share was
Results of Operations for the Three Months Ended
Property Operations We have two segments: Same Store andOther 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. OurOther Real Estate segment includes the five properties that were acquired in 2021 and four communities that we expect to sell or lease to a third party, but do not yet meet the criteria to be classified as held for sale.
As of
Proportionate Property Net Operating Income
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.
We use proportionate property NOI to assess the operating performance of our
communities. Proportionate property NOI reflects our share of rental and other
property revenues, excluding utility reimbursements, less direct property
operating expenses, net of utility reimbursements. In our condensed consolidated
statements of operations, utility reimbursements are included in rental and
other property revenues in accordance with GAAP.
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We do not include offsite costs associated with property management, casualty
gains or losses, or the results of apartment communities sold or held for sale
in our assessment of segment performance. Accordingly, these items are not
allocated to our segment results discussed below.
Please see Note 9 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.
Change Attributable to Changes Change Excluding Changes in
Three Months Ended March 31, Historical Change in Ownership Ownership
(in thousands) 2022 2021 $ % $ % $ %
Rental and other
property revenues,
before utility
reimbursements:
Same Store $ 138,108 $ 133,558 $ 4,550 3.4 % $ (7,119 ) (5.8 %) $ 11,669 9.2 %
Other Real Estate 15,644 1,914 13,730 nm - - % 13,730 nm
Total 153,752 135,472 18,280 13.5 % (7,119 ) (5.8 %) 25,399 19.3 %
Property operating
expenses, net of
utility
reimbursements:
Same Store 37,234 37,901 (667 ) (1.8 %) (1,783 ) (4.9 %) 1,116 3.1 %
Other Real Estate 6,334 1,364 4,970 nm - - % 4,970 nm
Total 43,568 39,265 4,303 11.0 % (1,783 ) (4.9 %) 6,086 15.9 %
Proportionate
property net
operating income:
Same Store 100,874 95,657 5,217 5.5 % (5,336 ) (6.2 %) 10,553 11.7 %
Other Real Estate 9,310 550 8,760 nm - - % 8,760 nm
Total $ 110,184 $ 96,207 $ 13,977 14.5 % $ (5,336 ) (6.2 %) $ 19,313 20.7 %
For the three months ended March 31, 2022 , compared to 2021, excluding changes
attributable to changes in ownership, our Same Store proportionate property NOI
increased by $10.6 million , or 11.7%. This increase was attributable primarily
to a $11.7 million , or 9.2%, increase in rental and other property revenues due
to a 500 basis point increase in residential rental rates, a 270 basis point
increase in ADO to 98.1%, and a 60 basis point decrease in bad debt.
The increase in proportionate property NOI was partially offset by an increase
of $1.1 million , or 3.1%, in Same Store property operating expenses, due
primarily to increases in controllable operating expenses of $0.5 million , or
2.8%, and an increase of $0.6 million in net utilities expense, real estate
taxes, and insurance.
Other Real Estate proportionate property NOI for the three months ended March
31, 2022 , compared to 2021, increased by $8.8 million , due primarily to the June
acquisition of City Center on 7th and October 2021 acquisition of four
properties located in the Washington, D.C. area.
Non-Segment Real Estate Operations
Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, and the results of apartment communities sold or held for sale, which we do not allocate to our segments for purposes of evaluating segment performance.
For the three months ended
•
•
•
Depreciation and Amortization
For the three months endedMarch 31, 2022 , compared to 2021, depreciation and amortization expense increased$9.3 million , or 12.3%, due primarily to apartment homes acquired in the second and fourth quarters of 2021, partially offset by decreases associated with apartment communities sold. 27
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General and Administrative Expenses
For the three months ended
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 months ended
Interest Income
For the three months endedMarch 31, 2022 , compared to 2021, interest income decreased by$2.5 million , or 15.6%, due primarily to interest income included in 2021 associated with our previous investment in a securitization trust. Interest income for each of the three months endedMarch 31, 2022 and 2021 includes$6.9 million of income associated with our note receivable from Aimco, and$6.5 million and$6.4 million , respectively, of rental payments, which GAAP characterizes as interest income associated with properties leased.
Interest Expense
For the three months endedMarch 31, 2022 , compared to 2021, interest expense decreased by$13.9 million , or 38.6%, primarily due to debt payoff activity and lower interest expense on debt following refinancing activity.
Through
Loss on Extinguishment of Debt
For the three months endedMarch 31, 2022 , compared to 2021, loss on extinguishment of debt increased by$22.6 million , primarily due to$23.6 million of prepayment penalties from the early payment of property debt in the first quarter to achieve our deleveraging targets, compared to$1.0 million in the first quarter of 2021.
Gain on Derecognition of
During the three months ended
Apartment communities sold during the three months ended
2022
Number of apartment communities sold 8
Gross proceeds $ 578.0
Net proceeds (1) $ 460.2
(1)
Net proceeds are after repayment of
During the three months endedMarch 31, 2021 , we recognized an$83.7 million gain associated with the derecognition of assets leased. There were no apartment communities sold during the three months endedMarch 31, 2021 .
Income Tax Benefit (Expense)
Certain of our operations, including property management, are conducted through taxable REIT subsidiaries ("TRS entities").
Our income tax benefit (expense) 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 items, as well as changes in valuation allowance,
are included in income tax benefit (expense) in our condensed consolidated
statements of operations.
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For the three months ended
Critical Accounting 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 theAIR Operating Partnership's combined Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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
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.
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 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 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 certain amounts that are unique or occur infrequently.
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.
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NAREIT FFO and Pro forma FFO are calculated as follows (in thousands, except per
share data):
Three Months Ended March 31,
2022 2021
Net income attributable to AIR common stockholders $ 375,881 $ 83,196
Adjustments:
Real estate depreciation and amortization, net of
noncontrolling partners' interest 81,457 69,495
Gain on derecognition of leased properties and dispositions of real estate (412,003 ) (84,032 ) Income tax adjustments related to gain on dispositions and other tax-related items -
1,800
Common noncontrolling interests in AIR OP's share of above adjustments 20,041
644
Amounts allocable to participating securities 208 7 NAREIT FFO attributable to AIR common stockholders$ 65,584 $ 71,110 Adjustments: Loss on extinguishment of debt (1) 23,636
1,010
Separation and transition related costs (2) 869
2,165
Non-cash straight-line rent (3) 642
669
Incremental cash received from leased properties (4) 153
162
Casualty losses and other (5) 203 - Common noncontrolling interests in AIR OP's share of above adjustments (1,565 ) (215 ) Amounts allocable to participating securities (13 ) (2 ) Pro forma FFO$ 89,509
Weighted-average common shares outstanding - basic 156,736
148,611
Dilutive common share equivalents 352
219
Pro forma shares and dilutive share equivalents used to calculate Pro forma FFO per share 157,088
148,830
Net income attributable to AIR per common share - diluted $ 2.39 $ 0.56 NAREIT FFO per share - diluted $ 0.42 $ 0.48 Pro forma FFO per share - diluted $ 0.57
$ 0.50
(1)
We incurred$24 million and$1 million of debt extinguishment costs from the prepayment of debt in 2022 and 2021, respectively. In 2022, approximately 50% of the prepayment penalty reflects the mark-to-market on the debt and accelerates future interest expense. The remaining 50% is an investment in increased financial flexibility. We excluded these costs from Pro forma FFO because we believe they are not representative of future cash flows.
(2)
During 2022, we incurred consulting, placement, legal, and other transition related costs as we fully implement AIR's business model, including projects intended to increase efficiency and reduce costs in future periods. During 2021, we incurred tax, legal and other costs in connection with the separation. We excluded these costs from Pro forma FFO because we believe they are not representative of ongoing operating performance.
(3)
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, in our consolidated statements of operations.
(4)
We have certain properties leased. Due to the terms of these leases, cash received in 2022 and 2021 exceeded GAAP income. We include the cash lease income in Pro forma FFO.
(5)
In the third quarter of 2021, we incurred casualty losses due to Hurricane Ida-induced flooding in downtownPhiladelphia causing damage to ourPark Towne Place apartment community, and continued to incur incremental costs related to its cleanup in 2022. We excluded these costs from Pro forma FFO because of the unusual nature of the weather event.
Please see the Results of Operations section for discussion of the factors affecting our Pro forma FFO for 2022.
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.
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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 note 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
The reconciliation of total indebtedness to Proportionate Debt and Preferred Equity, as used in our leverage ratios, is as follows (in thousands):
March 31, 2022
Total indebtedness $ 3,355,931
Adjustments:Debt issuance costs related to non-recourse property debt and term loans
14,718
Proportionate share adjustments related to debt obligations (394,818 ) Cash and restricted cash (103,911 ) Tenant security deposits included in restricted cash
11,008
Proportionate share adjustments related to cash and restricted cash 4,048 Note receivable from Aimco (534,127 ) Proportionate Debt$ 2,352,849 Perpetual preferred stock 2,000
Preferred noncontrolling interests in
79,354
Net Leverage $
2,434,203
Leverage reduction funded byApril 2022 property sales (158,585 ) Net Leverage, Pro forma forApril 2022 sales $
2,275,618
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 are 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 note receivable from Aimco is excluded, as their proceeds are expected to be used to repay current amounts outstanding;
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•
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 leased properties is included.
The reconciliation of net income to EBITDAre and Adjusted EBITDAre, as used in our leverage ratios, is as follows (in thousands):
Three Months Ended
March 31, 2022
Net income $ 401,384
Adjustments:
Interest expense 22,107
Loss on extinguishment of debt 23,636
Income tax benefit (579 ) Depreciation and amortization
84,549
Gain on derecognition of leased properties and dispositions of real estate
(412,003 )
EBITDAre $ 119,094
Net loss attributable to noncontrolling interests in consolidated real estate partnerships
564
EBITDAre adjustments attributable to noncontrolling interests and unconsolidated real estate partnerships
(5,926 )
Interest income on note receivable from Aimco (1) (6,944 )
Pro forma FFO adjustments, net (2) 342
Adjusted EBITDAre $ 107,130
Annualized Adjusted EBITDAre $ 428,520
April 2022 property sales, annualized (7,955 )
Pro forma Adjusted Annualized EBITDAre $ 420,565
(1)
Adjusted EBITDAre would be approximately$114 million on a gross basis including the interest income on the note receivable from Aimco. Our calculation of Net Leverage to EBITDAre, including the related interest income, was 6.5x as ofMarch 31, 2022 .
(2)
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, and a$1.8 million adjustment to reflect the disposition of eight apartment communities during the period as if the transactions closed onJanuary 1, 2022 .
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 credit facilities, proceeds from our note receivable from Aimco, and proceeds from equity offerings.
As of
•
•
•
Additional liquidity may also be provided through property debt financing at properties unencumbered by debt and proceeds from our note receivable from Aimco.
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, primarily
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through secured and unsecured 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.
There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of AIR's and theAIR Operating Partnership's combined Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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 readily available. However, in recent months, we have seen interest rates begin to increase. 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. 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 6.3 years as ofMarch 31, 2022 with a weighted-average interest rate of 2.7%. 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 throughMarch 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 ofMarch 31, 2022 and expect to remain in compliance during the next 12 months.
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 three months endedMarch 31, 2022 , net cash provided by operating activities was$72.7 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 three months endedMarch 31, 2022 , increased by$23.5 million compared to the same period in 2021. The increase was due primarily to higher contribution from our apartment communities. Investing Activities For the three months endedMarch 31, 2022 , our net cash provided by investing activities of$513.3 million consisted primarily of proceeds from dispositions of real estate, offset partially by capital expenditures.
Capital additions totaled
We categorize capital spending for communities in our portfolio broadly into five 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;
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•
initial capital expenditures, which represent capital additions contemplated in the underwriting at our recently acquired communities. These amounts are considered in the underwriting of the acquisition and are therefore included with the purchase price when determining expected returns; and
•
other additions, which may include capital expenditures incurred in connection with the restoration of an apartment community after a casualty event and other capitalizable costs. During the first quarter, we incurred$7.5 million of costs associated with restoring ourPark Towne Place property after a 2021 casualty event.
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.
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):
Three Months Ended March 31,
2022 2021
Capital replacements $ 5,552 $ 7,449
Capital improvements 1,817 1,393
Capital enhancements 14,102 9,097
Initial capital expenditures 5,660 1,121
Other capital expenditures 9,972 608
Total capital additions $ 37,103 $ 19,668
Plus: additions related to apartment communities
sold and held for sale 58 3,504
Consolidated capital additions$ 37,161 $ 23,172 Plus: net change in accrued capital spending 141
15,903
Total capital expenditures per condensed consolidated statements of cash flows$ 37,302
For the three months ended
Other capital expenditures increased by$9.4 million for the three months endedMarch 31, 2022 , compared to 2021, due primarily to amounts capitalized related to the casualty event at ourPark Towne Place apartment community related to Hurricane Ida. Financing Activities Net cash used in financing activities for the three months endedMarch 31, 2022 increased by$568.3 million compared to the same period in 2021. The increase was due primarily to higher principal repayments on non-recourse debt and net repayments on our credit facility.
Future Capital Needs
We expect to fund any future acquisitions, debt maturities, and other capital spending principally with proceeds from apartment community sales (including the formation of joint ventures), secured and unsecured borrowings, the issuance of equity securities (including OP Units), 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 2022 and beyond.
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