AIR Reports Fourth Quarter and Full Year 2022 Results: Record Same Store NOI Growth of 14.0%; Operating Fundamentals Across All Markets Remain Strong

Fourth Quarter Blended Signed Lease Rate Growth of 10.2%; Initiating 2023 Same Store NOI Growth Guidance Range of 7.3% – 10.3%

DENVER–(BUSINESS WIRE)–$AIRC #AIRC–Apartment Income REIT Corp. (“AIR”) (NYSE: AIRC) announced today fourth quarter and full year results for 2022.

Terry Considine, Chief Executive Officer, comments: “2022 was a terrific year! Average rents in our portfolio reached a new high. Same Store NOI growth of 14% surpassed our expectations. NOI in our newly acquired properties grew even faster. We had the highest operating margins in the sector. We were the most efficient in converting rent to Free Cash Flow.”

“Acquisitions have greatly improved our portfolio. Paired trades improved both portfolio quality and rental growth rates. A good example is our fourth quarter trade of 50-year-old garden apartments in the outer suburbs of Boston for an essentially new midrise building in dynamic Miami Beach. We invest in locations that are attractive to high quality residents and have some protection from competitive new supply.”

“Keith and his Ops team achieved fourth quarter operating margins above 76% with controllable operating expenses down 10 basis points for the full year, an impressive result during the highest inflation of the past 40 years.”

“We have excellent prospects for 2023, and plan for more of the same: Keith will continue to select the best residents, and work hard to satisfy and retain them. John and Josh on his team will look for acquisitions whose returns, magnified by the AIR Edge, will be highly accretive to AIR’s cost of capital. And Paul will keep score, maintaining a safe balance sheet with low leverage, long duration, limited interest rate exposure, and abundant liquidity.”

Paul Beldin, Chief Financial Officer, comments further: “2022 was highly productive. We lowered leverage, extended its duration, and reduced by 90% our exposure to higher rates, from $1.5 billion to $150 million. We placed our inaugural corporate bond and earned a Moody’s investment grade rating. We now have access to all capital sources in the debt markets.”

“We have no debt maturities until the second quarter of 2025. Fourth quarter leverage to EBITDAre of 6.05x was $25 million above target due to the timing of share repurchases and the closing of a property sale.”

“The strength of our balance sheet enabled us to buy back 8 million shares, 5% of outstanding stock, at a substantial discount to its underlying value.”

“In 2023, we expect continued momentum with Same Store Revenue growth of 7.0% to 9.0%, Same Store Expense growth of 5.0% to 6.5%, and Same Store NOI growth of 7.3% to 10.3%.”

“Acquisitions play an important part. The Class of 2021, now in our Same Store portfolio, adds 100 basis points to 2023 Same Store NOI growth. Outside Same Store, we have an acquisition portfolio including the Classes of 2022 and 2023 with annualized NOI growth rates greater than 20%.”

“We expect Net Leverage to Adjusted EBITDAre between 5.0x to 6.0x. We expect Net G&A to be less than 15 basis points of Gross Asset Value. At the bottom line, we expect 2023 Pro Forma FFO per share to be between $2.35 and $2.47, approximately 10% higher than 2022 Pro Forma Run Rate FFO per share of $2.19, which excludes contribution from the Aimco note repayment received in 2022.”

Financial Results: Fourth Quarter Pro Forma FFO Per Share

Operating Results: Same Store NOI Up 4.2% Sequentially

The table below includes the operating results of the 58 AIR properties that meet our definition of Same Store. Same Store properties generated approximately 86% of AIR’s year-to-date 2022 rental revenue.

Fourth quarter 2022 Same Store NOI margin was 76.1%, up 240 basis points from the fourth quarter of 2021. Same Store NOI margin benefited from Residential Rental Income growth of 9.7% and a decline of 10 basis points in controllable operating expenses.

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

Same Store Rental Rates – Changes in rental rates are measured by comparing, on a lease-by-lease basis, the effective rate on a newly executed lease to the effective rate on the expiring lease for the same apartment. A newly executed lease is classified either as a new lease, where a vacant apartment is leased to a new customer, or as a renewal.

The table below depicts changes in lease rates, as well as the weighted-average blended lease rates for leases executed in the respective period. Transacted leases are those that became effective during a reporting period and are therefore the best measure of immediate effect on current revenues. Signed leases are those executed during a reporting period and are therefore the best measure of current pricing.

Same Store Markets – Consumer demand remained strong through the quarter, with signed new lease rates up 10.6% from the prior leases and renewals up 8.7%, resulting in a weighted-average increase of 10.2%. We saw a sequential increase in ADO of 120 basis points to 97.1% as the third quarter includes higher frictional vacancy consistent with the higher move out volume that is typical during the summer leasing season. Year-to-date ADO of 97.0% was 70 bps higher than in the prior year. We anticipate maintaining occupancy above 97% through the first quarter before summer leasing activity begins.

Acquisition Portfolio – The acquisition portfolio is comprised of five properties acquired in 2021, four properties acquired in 2022, and Southgate Towers, which was our first acquisition of 2023. These acquisitions represent 17% of AIR GAV. We target a 30% allocation to the high-growth Acquisition Portfolio.

At those properties acquired in 2021, representing 8% of AIR GAV, leasing continues to exceed expectations with signed blended lease rates up 17.3% in the fourth quarter. Revenue growth in the fourth quarter, which was the first reporting period with a year-over-year comparison, was more than 50% above the 2022 Same Store portfolio. These properties are included in AIR’s Same Store portfolio in 2023, and are expected to increase the rate of Same Store NOI growth by approximately 100 basis points.

At properties acquired in 2022, performance is consistent with our expectations, and rental rate achievement is in line with our projections.

The impact of the AIR Edge is most significant between the second and fourth year of ownership where we are able to improve the resident profile, optimize the rent roll, and make income generating improvements, which in aggregate are expected to generate an unlevered internal rate of return (“IRR”) of 10% or higher, more than 200 basis points higher than AIR’s cost of capital.

Rent Collection Update

We measure residential rent collection as the dollar value of payments received as a percentage of all residential amounts owed. In the fourth quarter, residents paid, on a current basis, 98.7% of all residential revenue billed during the quarter. The remaining 1.3% of revenue was treated as bad debt. Gross bad debt, which is bad debt before any consideration of government assistance payments and payments from former residents, was 1.5% of revenue, 100 basis points of which is due to governmental protections in California and court delays in many jurisdictions. Governmental protections in California are now expected to end on March 31, 2023 and the courts across the country are continuing to catch up on a backlog of eviction cases. As a result, we anticipate that AIR’s bad debt should continue to normalize throughout 2023 and trend toward our typical loss of approximately 30 basis points of revenue.

As of December 31, 2022, our proportionate share of gross residential accounts receivable was $7.6 million. After consideration of tenant security deposits and reserves for uncollectible amounts, our net exposure is below $0.1 million, which we anticipate collecting during the first quarter of 2023.

Our accounts receivable balance has decreased from $11.7 million at the beginning of the year, and the number of residents delinquent by two or more months has decreased from 1,000 at the start of 2022 to approximately 250 today, the vast majority of which are now in the collection process.

Portfolio Management

Our portfolio of apartment communities is diversified across primarily “A” and “B” price points, averaging “A-” in quality, and also across eight core markets in the United States. In the two years since the Separation, AIR has recycled approximately $4.1 billion, or 41%, of its gross asset value, all during a period of attractive pricing for multi-family properties, using $2.2 billion of gross proceeds from property sales and joint ventures to reduce leverage and to acquire $1.9 billion of acquisitions to improve the quality and expected profitability of our real estate portfolio. The $1.9 billion of acquisitions in the last two years, inclusive of the Southgate Towers, represents 17% of AIR GAV. We target a 30% allocation to this high-growth Acquisition Portfolio.

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

Since 2019, we have improved AIR’s portfolio through reducing our exposure to regulatory risk. We have achieved this through property sales in the New York, Chicago, and California markets, as well as through a strategic joint venture in California. This has allowed AIR to reallocate capital into higher growth submarkets, such as Miami-Dade and Broward counties, now 22% of AIR GAV, both markets with limited REIT competition.

We estimate real estate values declined in 2022 by approximately 10% to 12% on average, the result of approximately 90 to 150 basis points of NOI cap rate expansion with about half the impact offset by strong NOI growth in the year. As a paired trade investor, AIR is agnostic as to market changes insofar as we buy and sell properties in the same market conditions, with focus on gaining an accretive “spread.” As market conditions change, AIR adjusts target returns and spreads to reflect our new cost of capital. Our paired trade approach is intended to ensure that new acquisitions are accretive to earnings in the near-term, and will generate attractive spreads to unlevered IRRs in the long-term.

Transactions

Acquisitions

As previously announced and subsequent to the end of the quarter, AIR acquired Southgate Towers, a 495-unit luxury apartment community located in the South Beach neighborhood of Miami Beach for $298 million. AIR’s presence in South Beach, a submarket with limited supply, now comprises 1,630 apartment homes between Flamingo Towers and Southgate Towers. This transaction is consistent with AIR’s paired trade strategy where we look to achieve, on new acquisitions, unlevered IRRs of 200 basis points or higher relative to our cost of capital, driven by the implementation of the AIR Edge. AIR funded the transaction with proceeds from the New England portfolio sale discussed below, the assumption of $101.2 million of 4.15% in place financing maturing in 2036, and the issuance of $22.4 million of Operating Partnership Units (“OP Units”). To neutralize the issuance of OP Units, in November and December AIR repurchased an equal number of shares of common stock.

Dispositions

During the fourth quarter, we sold six properties totaling 1,314 units in the New England region for a gross sales price of $495 million, representing a trailing twelve-month NOI cap rate of 4.5%. Since the end of 2020, AIR has completed $2.2 billion of property sales and joint venture transactions at prices averaging 17% above internal estimates of GAV as measured in Q1 2020.

Capital Allocation – Share Repurchases

During the fourth quarter, AIR repurchased 3.9 million shares for $145 million, at an average price of $37.06 per share.

For the year, we repurchased an aggregate of 8.0 million shares at an average price of $39.49 for $317 million. We are authorized by AIR’s Board of Directors to repurchase up to an additional $183 million of shares. We consider share buybacks as part of a balanced investment program.

Balance Sheet

We seek to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage and primarily long-dated debt. We target a Net Leverage to EBITDAre ratio between 5.0x and 6.0x, but anticipate the actual ratio will vary based on the timing of transactions. We maintain financial flexibility through ample unused and available credit, holding properties with substantial value unencumbered by property debt, maintaining an investment grade rating, and using partners’ capital when it enhances financial returns or reduces investment risk. We seek to minimize refunding and repricing risk.

Components of Leverage

Our leverage includes AIR’s 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.

Subsequent to year-end, and on a leverage neutral basis, AIR borrowed $320 million using 10-year fixed rate financing, bearing interest at 4.9%. Proceeds were used to refinance a floating rate loan and reduce borrowings by $230 million on our revolving credit facility. This transaction reduced floating rate debt not subject to interest rate caps or swaps to 4%, or $150 million, and increased our weighted-average maturity by nine months. Pro forma for this transaction, AIR has no debt maturing before the second quarter of 2025.

Liquidity

We use our revolving credit facility for working capital and other short-term purposes, and to secure letters of credit. At December 31, 2022, our share of cash and restricted cash, excluding amounts related to tenant security deposits, was $287 million and we had the capacity to borrow up to $527 million on our revolving credit facility, bringing total liquidity to $814 million.

We manage our financial flexibility by maintaining an investment grade rating from S&P and Moody’s, from which AIR was awarded a first-time investment grade Baa2 issuer rating in the fourth quarter, and holding communities that are unencumbered by property debt. As of December 31, 2022, we held unencumbered apartment communities with an estimated fair market value of approximately $7.6 billion, almost triple the amount as of December 31, 2020. AIR’s two investment grade ratings provide the company access to all debt capital market sources.

Dividend and Equity Capital Markets

On January 31, 2023, our Board of Directors declared a quarterly cash dividend of $0.45 per share of Common Stock. This amount is payable on February 28, 2023, to shareholders of record on February 17, 2023. On an annualized basis, the dividend represents $1.80 per share, reflecting a dividend yield of approximately 4.6% based on AIR’s closing share price on February 8, 2023. In setting AIR’s 2022 dividend, our Board of Directors targeted a dividend level of approximately 75% of full year FFO per share.

As planned, AIR’s refreshed tax basis is resulting in a tax-efficient dividend being paid to stockholders. In 2022, approximately 86% of our dividend was taxable at capital gain rates, with the remainder taxable at ordinary income rates. We believe the tax characteristics of our dividend makes our stock more attractive to taxable investors, such as foreign investors, taxable individuals, and corporations by comparison to peer shares whose dividends are taxed at higher rates. For example, AIR’s dividend characteristics in 2022 compare to a peer average of approximately 19% at capital gains rates and 71% at ordinary income rates, with 10% treated as return of capital. As a result, an investor would retain approximately 39% more of its dividend on an after tax basis through AIR’s common shares as compared to the peer average.

Corporate Governance and Responsibility Update

During the year, AIR met directly with holders of more than 70% of its outstanding common shares. Through a series of lunches, dinners, video meetings, conferences, property tours, in-person meetings, and calls, select Board members and Management discussed a variety of topics, such as governance, investment strategy, operations, and corporate responsibility, including CEO succession planning and Environmental, Social, and Governance (“ESG”).

Our commitment to strong corporate governance was further demonstrated in the fourth quarter, where AIR’s Board determined to amend AIR’s charter to reduce to a simple majority vote the threshold to amend our bylaws, which will be voted on at our next annual meeting. Our commitment extends not just to maintaining open lines of communication with shareholders, but also to improving as best practices in governance evolve. This direct shareholder engagement yielded positive results with the outcome of our annual meeting as shareholders overwhelmingly supported our directors, as well as “say on pay” where AIR had the highest support among peers.

Strong progress was made by AIR in 2022 in advancing its commitments to responsibility beyond governance, which is detailed in AIR’s newly launched corporate responsibility website and our annual corporate responsibility report. Some highlights of 2022 include:

• Publishing of goals and targets consistent with the UN Sustainability Goals, with an additional commitment to transparent, data-driven disclosures consistent with the Sustainability Accounting and Standards Board (“SASB”), which guides the disclosure of financially material sustainability information by companies to their investors. The standards identify the subset of environmental, social, and governance issues most relevant to financial performance in each industry.
• A GRESB score of 78, which includes a perfect social responsibility score, a near perfect score in corporate governance, and an “A” for both public disclosure and alignment with the Task Force for Climate-Related Financial Disclosures (“TCFD”), which informs investors as to which companies are most at risk from climate change, best prepared, and taking action.
• Being named a Kingsley Elite Five, second overall and first among publicly traded peers. To earn the award, a property’s resident satisfaction must exceed The Kingsley Index™, which is the most comprehensive performance benchmarking database in the real estate industry, and represents over six million prospects and residents surveyed annually.
• Received a 2022 Top Workplaces USA Award for the second consecutive year and named a 2022 Healthiest Employer in Colorado. Both awards are based solely on employee feedback gathered through a third-party survey.

Contacts

Matthew O’Grady

Senior Vice President, Capital Markets

(303) 691-4566

Mary Jensen

Head of Investor Relations

(303) 691-4349

[email protected]

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