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; and risks related to the provision of property management services to Aimco and our ability to collect property management related fees. 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. 24
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Table of Contents Executive Overview
We created AIR to be the most efficient and effective way to invest in
•
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 general and administrative expenses 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.
We own and operate a portfolio of stabilized apartment communities, diversified by both geography and price point. As ofJune 30, 2022 , our portfolio included 75 apartment communities with 25,363 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 second quarter of 2022 include:
•
Revenue increased by 11.6% and NOI increased by 16.4%, respectively, compared to the second quarter of 2021;
•
NOI margins were 73.6%, up 304 basis points from the second quarter of 2021; and
•
For leases becoming effective during the quarter, new lease rents increased by 18.9% and renewal rents increased by 11.1%, for a weighted-average increase of 14.3%; 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 basis points 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.
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 inthe United States . Since Separation, we have reduced our allocation toNew York City andChicago and increased our investment inMiami-Dade andBroward counties to 18% of GAV. 25
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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. 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. 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. 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 three months endedJune 30, 2022 and through July, we acquired four apartment communities, one located in theWashington, D.C. area and three located inSouth 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 three months endedJune 30, 2022 , we sold four apartment communities, three located inCalifornia and one inVirginia , 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 . 26
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During the balance of 2022, we anticipate selling approximately$550 million of communities in suburbanBoston andNew 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 three months endedJune 30, 2022 , 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.
During the three months endedJune 30, 2022 , 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 three months endedJune 30, 2022 , 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. 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 ofJune 30, 2022 , our share of cash and restricted cash, excluding amounts related to tenant security deposits, was$83.6 million and we had the capacity to borrow up to$840.9 million under our revolving credit facility, bringing total liquidity to$924.5 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 ofJune 30, 2022 , we held unencumbered apartment communities with an estimated fair market value of approximately$7.8 billion , more than double the amount fromDecember 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 sinceDecember 31, 2020 . AtJune 30, 2022 , the AIR share of non-recourse property debt represented 19% of undepreciated book value.
Dividends
OnJuly 26, 2022 , our Board of Directors declared a quarterly cash dividend of$0.45 per share of AIR Common Stock. This amount is payable onAugust 30, 2022 , to stockholders of record onAugust 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.
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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. 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.
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
In partnership with theNational 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. 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 (loss) attributable to common stockholders per common share, on a dilutive basis, increased$1.38 and$3.23 for the three and six months endedJune 30, 2022 , compared to 2021, respectively, due primarily to gains on dispositions of real estate.
Pro forma FFO per share was
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Results of Operations for the Three and Six 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 five properties acquired in 2021, three properties acquired in the second quarter of 2022, and three communities 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.
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 10 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 June 30, Historical Change in Ownership Ownership
(in thousands,
except
percentages) 2022 2021 $ % $ % $ %
Rental and other
property revenues,
before utility
reimbursements:
Same Store $ 142,066 $ 134,478 $ 7,588 5.6 % $ (7,173 ) (6.0 %) $ 14,761 11.6 %
Other Real Estate 17,279 1,840 15,439 nm - - % 15,439 nm
Total 159,345 136,318 23,027 16.9 % (7,173 ) (6.0 %) 30,200 22.9 %
Property operating
expenses, net of
utility
reimbursements:
Same Store 37,556 38,990 (1,434 ) (3.7 %) (1,471 ) (3.8 %) 37 0.1 %
Other Real Estate 6,765 1,263 5,502 nm - - % 5,502 nm
Total 44,321 40,253 4,068 10.1 % (1,471 ) (3.8 %) 5,539 13.9 %
Proportionate
property net
operating income:
Same Store 104,510 95,488 9,022 9.4 % (5,702 ) (7.0 %) 14,724 16.4 %
Other Real Estate 10,514 577 9,937 nm - - % 9,937 nm
Total $ 115,024 $ 96,065 $ 18,959 19.7 % $ (5,702 ) (7.0 %) $ 24,661 26.7 %
For the three months ended June 30, 2022 , compared to 2021, excluding changes
attributable to changes in ownership, our Same Store proportionate property NOI
increased by $14.7 million , or 16.4%. This increase was attributable primarily
to a $14.8 million , or 11.6%, increase in rental and other property revenues due
to a 750 basis point increase in residential rental rates, a 160 basis point
increase in ADO to 96.8%, and a 200 basis point decrease in bad debt.
Other Real Estate proportionate property NOI for the three months ended June 30,
2022 , compared to 2021, increased by $9.9 million , due primarily to the October
2021 acquisition of four properties located in the Washington, D.C. area and the
June 2021 acquisition of City Center on 7th.
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Change Attributable to Change Excluding Changes in
Six Months Ended June 30, Historical Change Changes in Ownership Ownership(in thousands, except percentages) 2022 2021 $ % $ % $ % Rental and other property revenues, before utility reimbursements: Same Store$ 280,174 $ 268,036 $ 12,138 4.5 %$ (14,292 ) (5.9 %)$ 26,430 10.4 % Other Real Estate 32,113 3,004 29,109 nm - - % 29,109 nm Total 312,287 271,040 41,247 15.2 % (14,292 ) (5.9 %) 55,539 21.1 % Property operating expenses, net of utility reimbursements: Same Store 75,059 76,891 (1,832 ) (2.4 %) (2,978 ) (4.0 %) 1,146 1.6 % Other Real Estate 12,873 2,396 10,477 nm - - % 10,477 nm Total 87,932 79,287 8,645 10.9 % (2,978 ) (4.0 %) 11,623 14.9 % Proportionate property net operating income: Same Store 205,115 191,145 13,970 7.3 % (11,314 ) (6.8 %) 25,284 14.1 % Other Real Estate 19,240 608 18,632 nm - - % 18,632 nm Total$ 224,355 $ 191,753 $ 32,602 17.0 %$ (11,314 ) (6.8 %)$ 43,916 23.8 % For the six months endedJune 30, 2022 , compared to 2021, excluding changes attributable to changes in ownership, our Same Store proportionate property NOI increased by$25.3 million , or 14.1%. This increase was attributable primarily to a$26.4 million , or 10.4%, increase in rental and other property revenues due to a 620 basis point increase in residential rental rates, a 210 basis point increase in ADO to 97.4%, and a 130 basis point decrease in bad debt. The increase in proportionate property NOI was offset partially by an increase of$1.1 million , or 1.6%, in Same Store property operating expenses, due primarily to an increase in controllable operating expenses of$1.0 million , or 2.7%. Other Real Estate proportionate property NOI for the six months endedJune 30, 2022 , compared to 2021, increased by$18.6 million , due primarily to theOctober 2021 acquisition of four properties located in theWashington, D.C. area and theJune 2021 acquisition of City Center on 7th.
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 endedJune 30, 2022 , compared to 2021, non-segment real estate operations decreased by$13.8 million , due primarily to$13.0 million of lower NOI attributable to properties sold subsequent toJune 30, 2021 .
For the six months ended
Depreciation and Amortization
For the three and six months ended
General and Administrative Expenses
For the three months ended
For the six months ended
Other (Income) Expenses, Net
Other (income) expenses, net, includes costs associated with our risk management activities, partnership administration expenses, and certain non-recurring items.
For the three months ended
For the six months endedJune 30, 2022 , compared to 2021, other expenses, net decreased by$4.4 million , or 82.5%, due primarily to a gain on the sale of a cost basis investment, noted above, offset partially by higher legal expenses. 30
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Table of Contents Interest Income For the three and six months endedJune 30, 2022 , compared to 2021, interest income increased by$10.0 million , or 63.6%, and$7.5 million , or 23.6%, respectively, due primarily to a$12.9 million prepayment penalty from the partial note repayment from Aimco during the second quarter of 2022, offset partially by$2.3 million of interest income earned in the second quarter of 2021 associated with our previous investment in a securitization trust. Interest income for the three and six months endedJune 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 rental payments which GAAP characterizes as interest income, associated with properties leased. Interest income for the three and six months endedJune 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. As noted above, we reached an agreement with Aimco during the three months endedJune 30, 2022 to cancel the existing leases, expected to occur in third quarter of 2022, and Aimco repaid$400 million of its note receivable during the second quarter of 2022, and the remaining$147 million balance inJuly 2022 .
Interest Expense
For the three and six months ended
Loss on Extinguishment of Debt
For the three months endedJune 30, 2022 , compared to 2021, loss on extinguishment of debt decreased by$37.2 million , due to prepayment penalties incurred in 2021 associated with the deleveraging of AIR's balance sheet and the write-off of deferred financing costs associated with our previous revolving credit facility in 2021.
For the six months ended
Gain on Dispositions of Real Estate and Derecognition of
During the three and six months ended
Apartment communities sold during the three and six months ended
Three Months Ended Six Months Ended
June 30, 2022 June 30 ,
2022
Number of apartment communities sold 4 12 Gross proceeds $ 203.1 $ 781.1 Net proceeds (1) $ 186.6 $ 646.8 (1)
Net proceeds for the three and six months ended
During the three and six months endedJune 30, 2021 , we recognized$3.4 million and$87.4 million , respectively, of gain associated with the derecognition of assets leased. There were no apartment communities sold during the three and six months endedJune 30, 2021 . Income Tax (Expense) Benefit
Certain of our operations, including property management, are conducted through taxable REIT subsidiaries ("TRS entities").
Our income tax (expense) benefit calculated in accordance with GAAP includes income taxes associated with the income or loss of our TRS entities for which the tax consequences have been realized or will be realized in future periods. Income taxes related to these items, as well as changes in valuation allowance, are included in income tax (expense) benefit in our condensed consolidated statements of operations. For the three months endedJune 30, 2022 , we recognized income tax expense of$1.5 million , compared to an income tax benefit of$2.0 million during the same period in 2021. 31
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For the six 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 June 30 ,
Six Months Ended
2022 2021 2022 2021
Net income (loss) attributable to AIR
common stockholders $ 196,722 $ (18,030 ) $ 572,603 $ 65,166
Adjustments:
Real estate depreciation and
amortization, net of noncontrolling
partners' interest 73,922 69,588 155,379 139,083
Gain on dispositions of real estate and
derecognition of leased properties, net
of noncontrolling partners' interest (175,450 ) (3,353 ) (587,453 ) (87,385 )
Income tax adjustments related to gain
on dispositions and other tax-related
items (1,100 ) (1,528 ) (1,100 ) 272
Common noncontrolling interests in AIR
OP's share of above adjustments 6,240 (3,217 ) 26,281 (2,573 )
Amounts allocable to participating
securities 88 (7 ) 296 -
NAREIT FFO attributable to AIR common
stockholders $ 100,422 $ 43,453 $ 166,006 $ 114,563
Adjustments:
Loss on extinguishment of debt (1) - 37,150 23,636 38,160
Separation, business transformation,
and transition related costs (2) 1,593 300 2,462 2,465
Non-cash straight-line rent (3) 642 669 1,284 1,337
Incremental cash received from leased
properties (4) 170 147 323 308
Other 152 797 355 780
Common noncontrolling interests in AIR
OP's share of above adjustments (154 ) (1,942 ) (1,719 ) (2,140 )
Amounts allocable to participating
securities (6 ) (14 ) (19 ) (14 )
Pro forma FFO $ 102,819 $ 80,560 $ 192,328 $ 155,459
Weighted-average common shares
outstanding - basic 155,927 154,608 156,327 151,609
Dilutive common share equivalents 209 504 280 474
Pro forma shares and dilutive share
equivalents used to calculate Pro forma
FFO per share 156,136 155,112 156,607 152,083
Net income (loss) attributable to AIR per share - diluted $ 1.26$ (0.12 ) $ 3.66$ 0.43 NAREIT FFO per share - diluted $ 0.64$ 0.28 $ 1.06$ 0.75 Pro forma FFO per share - diluted $ 0.66$ 0.52
$ 1.23
(1)
During 2022 and 2021, we incurred debt extinguishment costs related to the prepayment of debt. 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 transformation 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 related to 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 (income) expenses, net, in our condensed 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.
During the three and six months endedJune 30, 2022 , we sold our 2% cost basis investment in the portfolio serving as collateral for the Aimco note. We recognized$7.2 million of gain on dispositions of unconsolidated real estate partnerships in connection with the sale, or$5.4 million , net of tax. Consistent with prior treatment of gains on cost basis investments, this gain has been included in the determination of FFO given we consider the investment to be incidental to our main business as a REIT. Specifically, we only held the 2% interest in order to provide additional collateral for our short-term loan to Aimco and for tax planning associated with the Separation. Please see the Results of Operations section for discussion of the factors affecting our Pro forma FFO for 2022. Leverage Ratios
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, term loans, and unsecured notes. 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 remaining note receivable from Aimco, the proceeds of which were used inJuly 2022 to repay borrowings on our revolving credit facility. 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):
June 30, 2022
Total indebtedness $ 3,368,457
Adjustments:Debt issuance costs related to non-recourse property debt and term loans
15,570
Proportionate share adjustments related to debt obligations (393,320 ) Cash and restricted cash (100,891 ) Tenant security deposits included in restricted cash
10,626
Proportionate share adjustments related to cash and restricted cash 6,716 Note receivable from Aimco (147,039 ) Proportionate Debt$ 2,760,119 Perpetual preferred stock 2,000 Preferred noncontrolling interests in AIR Operating Partnership 79,330 Net Leverage$ 2,841,449 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;
•
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
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•
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
June 30, 2022
Net income $ 211,659
Adjustments:
Interest expense 26,027
Income tax expense 1,499
Depreciation and amortization 78,656Gain on dispositions of real estate and derecognition of leased properties
(175,606 )
EBITDAre $ 142,235
Net income attributable to noncontrolling interests in consolidated real estate partnerships
(381 ) EBITDAre adjustments attributable to noncontrolling interests and unconsolidated real estate partnerships
(7,285 ) Interest income and prepayment penalties on note receivable from Aimco
(19,297 )
Pro forma FFO adjustments, net (1) 6,176
Adjusted EBITDAre $
121,448
Annualized Adjusted EBITDAre, unadjusted for non-recurring items
$ 485,792
Removal of annualization impact for non-recurring items (2) (21,731 ) Annualized Adjusted EBITDAre $ 464,061 (1) Pro forma FFO 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. EBITDAre has also been adjusted by$4.5 million to reflect the acquisition of three apartment communities as ofApril 1, 2022 and a$1.0 million adjustment to reflect the disposition of four apartment communities during the period as if the transactions also closed onApril 1, 2022 .
(2)
Second quarter 2022 EBITDAre benefits from a$7.2 million gain on dispositions of unconsolidated real estate partnerships. This amount was not annualized in the computation of Annualized Adjusted EBITDAre.
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 future secured and unsecured financings.
Uses for liquidity include normal operating activities, payments of principal
and interest on outstanding 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 debt 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 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.
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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. 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. Additionally, we entered into floating to fixed interest rate swaps for$830 million notional principal value of debt, further reducing our exposure to increasing interest rates. 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 term loans, unsecured notes payable, revolving credit facility, preferred OP Units, and 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 6.9 years as ofJune 30, 2022 with a weighted-average interest rate of 3.8%. The interest rate on our fixed rate loans is 3.3% and on our floating rate loans is 3.6% and 7% of our debt will reprice before 2025, after consideration of the interest rate swaps. Under our unsecured notes payable and 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, a Maximum Unsecured Leverage ratio no greater than 0.60 to 1.00, and a Minimum Unsecured Interest Coverage Ratio no greater than 1.50 to 1.00. We were in compliance with these covenants as ofJune 30, 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 six months endedJune 30, 2022 , net cash provided by operating activities was$201.5 million . Our operating cash flow is affected primarily by rental rates, occupancy levels, operating expenses related to our portfolio of apartment communities, and changes in working capital items. Cash provided by operating activities for the six months endedJune 30, 2022 , increased by$107.7 million compared to the same period in 2021, due primarily to favorable timing of working capital and a higher contribution from our apartment communities.
Investing Activities
For the six months endedJune 30, 2022 , our net cash provided by investing activities of$574.7 million consisted primarily of proceeds from dispositions of real estate and proceeds from the partial repayment of the notes receivable from Aimco, offset partially by purchases of real estate and capital expenditures. Capital additions totaled$89.7 million and$54.2 million during the six months endedJune 30, 2022 and 2021, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.
We categorize capital spending for communities in our portfolio broadly into 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
•
casualty, which represents capitalized costs incurred in connection with the restoration of an apartment community after a 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):
Six Months Ended June 30,
2022 2021
Capital replacements $ 13,335 $ 13,916
Capital improvements 6,924 3,525
Capital enhancements 44,002 32,778
Initial capital expenditures 12,806 1,763
Casualty 10,986 1,262
Entitlement and planning 1,606 986
Total capital additions $ 89,659 $ 54,230
Plus: additions related to apartment communities
sold and held for sale 140 7,417
Consolidated capital additions$ 89,799 $
61,647
Plus: net change in accrued capital spending 800
14,822
Total capital expenditures per condensed consolidated statements of cash flows$ 90,599 $
76,469
For the six months endedJune 30, 2022 and 2021, we capitalized$0.7 million and$1.1 million of interest costs, respectively, and$7.7 million and$7.9 million of indirect costs, respectively.
Financing Activities
Net cash used in financing activities of$768.0 million for the six months endedJune 30, 2022 consisted primarily of repayments of non-recourse property debt and term loans, offset partially by proceeds from the issuance of unsecured notes payable. Net cash provided by financing activities of$112.9 million for the same period in 2021 consisted primarily of proceeds from term loans and the issuance of common stock, offset partially by repayments of non-recourse property debt and term loans.
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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