Apartment Income REIT Corp. ("AIR") (NYSE: AIRC) was formed to provide investors the most efficient and effective way to allocate capital to multi-family real estate. In only 18 months, or one-half the expected time, the establishment of AIR is complete. The balance sheet has been transformed with leverage reduced by $850 million, or 23%. The relationship with Apartment Investment & Management Company ("Aimco"), approximately 14% of AIR’s net asset value ("NAV") at year-end 2020, is now approximately 34 basis points.

What AIR was designed to be is now visible through its:

• Market-leading operating platform. The AIR Edge reflects the cumulative results of our focus on resident selection, satisfaction, and retention, as well as relentless innovation in delivering best-in-class property management. The AIR Edge has delivered peer-leading NOI margins over 26 consecutive quarters, while maintaining flat onsite controllable operating expenses for over 12 years.
• High-quality, diversified portfolio. AIR’s portfolio has been materially enhanced through recycling approximately $1.4 billion of its gross asset value ("GAV"). The sale of lower rated properties and capital sourced through joint ventures allowed AIR to (i) enhance portfolio quality with pro forma average monthly rent per unit of $2,590, third among our peer group, up 16% in 18 months (ii) exit markets with greater regulatory risks such as New York and Chicago, and (iii) reallocate capital to higher growth submarkets, such as Miami-Dade County and Broward County, now 18% of AIR's portfolio based on GAV and where there is limited REIT competition.
• High-growth acquisition portfolio. Since the separation, AIR has used paired trades to fund $1.4 billion of new acquisitions, 11% of AIR's GAV. We expect the properties acquired will benefit from the AIR Edge and earn returns, on an unlevered IRR basis, that are at least 200 basis points higher than the properties sold.
• Efficiency. AIR has capped G&A expense at 15 basis points of GAV. In 2021, our CEO voluntarily returned $2.5 million of compensation for AIR to meet this target. In combination with peer leading NOI margins, low G&A expense results in AIR converting a higher percentage of Same Store Revenue into Free Cash Flow compared to any of our peers, a durable advantage expected to compound over time.
• Low leverage. AIR has low financial risk after $850 million of leverage reduction. AIR also has well laddered refunding and repricing schedules, and $925 million of available liquidity.
• Deep and talented team. AIR values respect for each teammate, collaboration among teammates, and pay-for-performance. These policies have created a strong culture, a stable team, and best-in-class engagement. AIR generally promotes from within its deep talent pool, and will also recruit from outside when doing so strengthens our team.

Chief Executive Officer Terry Considine comments: "With a clear strategy focused on efficient operations, low leverage, a capable team, and an engaged Board, AIR has achieved substantially all of the goals set out by the Board at the separation. AIR is now well positioned to use its platform for growth and so fulfill the potential the Board saw in the separation of AIR's business from Aimco."

"AIR has low financial risk with leverage at 22% of GAV, low execution risk with no development, and lower regulatory risk after exiting markets with an appetite for rent control."

"AIR is insulated from inflation, not exposed to higher interest rates, and prepared for recession."

Chief Financial Officer Paul Beldin adds: "AIR enjoys accelerating growth. Organic growth in the quarter was strong with signed blended leases rates up 14.1% and Same Store NOI up 16.4%. At the expected levels of year-end loss-to-lease, we see the potential for Same Store Revenue to grow next year at rates in the mid- to high-single digits. We expect operating results for the acquisition portfolio will improve at an even faster pace. For example, market cap rates were in the high 3%s at the times we made our 2021 acquisitions and we now expect an annualized 5% NOI yield by the end of this year."

"AIR's balance sheet is strong with increased flexibility. We expanded our access to debt markets when we issued $400 million of senior unsecured notes. Our floating rate exposure is 2% of total leverage. Only 7% of our debt reprices through the end of 2024. We remain on track to achieve year-end Leverage EBITDAre of 5.5:1."

"Second quarter Pro forma FFO was $0.66 per share; $0.01 above the midpoint of guidance, pro forma for the timing of the repayment of the Aimco note. We had anticipated that the Aimco note would be fully repaid in the second quarter. Instead, the last $147 million was paid in July, shifting $0.03 of prepayment penalty income from June into July. The aggregate prepayment penalty was approximately $0.035 lower than originally anticipated due to higher than forecasted interest rates on short-term treasury notes. This was offset in our second quarter results by the $5.4 million sale, net of tax, of AIR’s 2% cost basis investment in the portfolio that served as collateral for the Aimco note."

"Looking forward, we are narrowing our expectations for full year Pro forma FFO to between $2.38 and $2.44 per share, while maintaining the midpoint of $2.41. Similarly, our expectations for run-rate FFO are unchanged at $2.19 per share. Relative to our prior guidance, we now expect:

• $0.03 per share of increased contribution from operations; offset by
• ($0.02) per share of dilution from the Aimco lease cancellation which we expect to recover through future NOI growth; and
• ($0.01) per share of lower contribution from a combination of other factors."

Financial Results: Second Quarter Pro forma FFO Per Share

AIR Operating Results: Second Quarter Same Store NOI Up 3.9% Sequentially and 16.4% Year-Over-Year

The table below includes the operating results of the 64 AIR properties that meet our definition of Same Store. Same Store properties generated approximately 91% of AIR’s year to date 2022 rental revenue.

Second quarter 2022 NOI margins were 73.6%, up 304 basis points from the second quarter of 2021. NOI margins benefited from Residential Rental Income growth of 9.1% and operating expenses that were up only 10 basis points compared to the prior year.

Components of Same Store Revenue Growth – Second quarter year-over-year Same Store revenue growth was impacted by increased residential rental rates, higher average daily occupancy ("ADO"), and lower net bad debt expense. The table below summarizes the change in the components of our Same Store revenue growth.

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

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

Same Store Markets – In the second quarter, AIR enjoyed stronger than typical consumer demand across all markets. Signed new lease rates were up 18.4% from the prior lease, with renewals up 10.6%, resulting in a weighted-average increase of 14.1%. We saw sequential declines in ADO, associated with higher move out volume during the summer leasing season. Second quarter ADO of 96.8% was 160 bps higher than the prior year.

2021 Acquisition Performance – Included in AIR's acquisition portfolio are five properties acquired in 2021. Leasing at these properties has exceeded our expectations. Transacted new lease rates were up 28%, with renewals up 25%, resulting in a weighted-average increase of 26%. Fourth quarter revenue growth in this portfolio, the first reporting period with a year-over-year comparison, is anticipated to be 600 basis points above the Same Store portfolio. We anticipate our 2022 acquisitions will also grow faster than the Same Store portfolio. We will report their results as comparative data becomes available.

Rent Collection Update

We measure residential rent collection as the dollar value of payments received as a percentage of all residential amounts owed. In the second quarter, we collected 97.9% of all residential revenue billed during the quarter, treating the balance of 2.1% as bad debt. We also received $3 million of government payments on behalf of eligible residents with past due accounts. These payments reduced accounts receivable previously reserved and so reduced second quarter bad debt expense by 190 basis points of revenues, resulting in net bad debt expense of approximately 20 basis points.

Outside of California, 98.7% of our residents are current, leaving approximately 150 residents where eviction notices have been filed, but the eviction process is not complete due to a slowed cycle time. Previously, in these locales, an eviction took between 45 and 90 days to complete. Today, the eviction timeline is extended and less predictable, resulting in greater amounts of unpaid rent and increased bad debt. We estimate that the prolonged timeline increased our second quarter bad debt from our historic experience of approximately 20 basis points to 100 basis points.

In California, we continue to be subject to government limitations on our ability to enforce our contractual remedies for nonpayment of rent. This has allowed approximately 400 California residents, about 5% of the total, to become delinquent by two or more months. As a result, gross bad debt expense in California was approximately 3% of second quarter residential revenues. After consideration of government payments reducing accounts receivable previously reserved, net bad debt was a $0.3 million contra-expense.

As of June 30, 2022, our proportionate share of gross residential accounts receivable was $9.9 million. After consideration of tenant security deposits and reserves for uncollectible amounts, our net exposure is $1.1 million, an amount expected to be collected during the third quarter of 2022.

Portfolio Management

Our portfolio of apartment communities is diversified across primarily "A" and "B" price points, averaging “B/B+” in quality, and also across eight core markets in the United States. Since separation, we have reduced our allocation to New York City and Chicago and increased our investment in Miami-Dade and Broward counties to 18% of GAV.

AIR uses "paired trades" to fund acquisitions, basing our cost of capital on the anticipated unlevered internal rates of return ("IRR") of the communities sold. We require an unlevered IRR at least 200 basis points higher on the communities purchased. As our cost of capital has increased, we have raised our required returns.

Since separation, we have acquired $1.4 billion of properties new to the AIR operating platform. This represents approximately 11% of our portfolio; our target is 30%. In a typical AIR Edge acquisition, the acquired property will experience NOI growth at market rates for six to 12 months, as the property is integrated onto AIR’s platform. During the following two to four years, NOI growth is expected to exceed the market growth rate by two or three times.

For example, AIR acquired five properties in 2021, at a cost of approximately $730 million. At the time, market cap rates were in the high 3% range. With confidence in the AIR Edge, we underwrote a first year yield of 4.3% and a long-term unlevered IRR of approximately 9%. We now expect these acquisitions will outperform their first-year underwriting by $2.6 million, or 9%, increasing the annualized fourth quarter 2022 yield to 5.0% and the expected long-term unlevered IRRs to over 11%.

When market conditions change, AIR adjusts its target returns and spreads to reflect the new environment. AIR seeks acquisitions that are accretive to earnings in the near term and that generate unlevered IRRs at least 200 basis points higher than the expected returns of the properties sold in the paired trade.

Transactions

Acquisitions

During the second quarter and through July, we acquired four apartment communities, one located in the Washington, D.C. area and three located in South Florida, with 1,351 apartment homes for a total purchase price of $640.1 million.

We also reached an agreement with Aimco to cancel existing master leases at four properties owned by AIR and leased to Aimco for the purpose of their development. With the developments largely completed, we agreed to terminate the leases for a payment of $200 million. The four properties include 865 apartment homes with average monthly rents of approximately $3,400 per home.

In aggregate, we anticipate a first year NOI yield of 4.0%. The yield is anticipated to grow to 5.0%, annualized, by the third quarter of next year. The expected unlevered IRR is approximately 9%.

Dispositions

During the second quarter, we sold four apartment communities, three located in California and one in Virginia, with 718 apartment homes, for gross proceeds of $203.1 million at a trailing twelve-month NOI cap rate of 4.7%, reflecting AIR’s low property tax basis. Adjusting for market rate real estate taxes, the NOI cap rate is 4.0%. Net sales proceeds, after transaction costs and repayment of debt at the sold properties, were $186.6 million.

During the balance of 2022, we anticipate selling approximately $550 million of communities in suburban Boston and New York City, at expected trailing twelve-month NOI cap rates of approximately 4%. The proceeds are expected to be used to fund the Aimco lease cancellation, the four apartment communities acquired in 2022, and the completed share repurchases.

Capital Allocation – Share Repurchases

During the second quarter, AIR repurchased 2.9 million shares for $125 million, an average price of $42.93 per share. We are authorized to purchase an additional $375 million of shares. We regularly consider buybacks relative to alternative uses of capital.

Balance Sheet

We seek to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage and primarily long-dated debt. We target a leverage to EBITDAre ratio of approximately 5:5:1, and anticipate the actual ratio will vary based on the timing of transactions. We maintain financial flexibility through ample unused and available credit, holding properties with substantial value unencumbered by property debt, maintaining an investment grade rating, and using partners’ capital when it enhances financial returns or reduces investment risk.

Components of Leverage

Our leverage includes our share of long-term, non-recourse property debt encumbering our apartment communities, together with outstanding borrowings under our revolving credit facility, our term loans, unsecured notes payable, and preferred equity.

During the second quarter, we issued three tranches of guaranteed, senior unsecured notes, totaling $400 million at a weighted-average effective interest rate of 4.3%, inclusive of the previously placed treasury lock, and a weighted-average maturity of eight years.

Proceeds from the offering were used to repay borrowings on our revolving credit facility. The private placement of unsecured notes is an important step in the transition of AIR from a secured borrower to a primarily unsecured borrower.

During the second quarter, we received $400 million from Aimco in payment on its note to AIR, inclusive of a $12.9 million prepayment penalty. The $147 million balance and a $4.5 million prepayment penalty were repaid in July. Proceeds were used to repay $350 million in term loans and to reduce borrowings on our revolving credit facility.

Liquidity

We use our revolving credit facility for working capital, other short-term purposes, and to secure letters of credit. At June 30, 2022, our share of cash and restricted cash, excluding amounts related to tenant security deposits, was $84 million and we had the capacity to borrow up to $841 million on our revolving credit facility, bringing total liquidity to $925 million.

We manage our financial flexibility by maintaining an investment grade rating from S&P and holding communities that are unencumbered by property debt. As of June 30, 2022, we held unencumbered apartment communities with an estimated fair market value of approximately $7.8 billion, more than double the amount from December 31, 2020.

We anticipate seeking an investment grade credit rating from Moody’s. In assigning ratings, Moody’s places significant emphasis on the amount of non-recourse property debt as a percentage of the undepreciated book value of a borrower’s assets. We have lowered the amount of non-recourse property debt by $1.5 billion since December 31, 2020. At June 30, 2022, the AIR share of non-recourse property debt represented 19% of undepreciated book value.

Dividend and Equity Capital Markets

On July 26, 2022, our Board of Directors declared a quarterly cash dividend of $0.45 per share of AIR Common Stock. This amount is payable on August 30, 2022, to stockholders of record on August 19, 2022.

In setting AIR's 2022 dividend, our Board of Directors targeted a dividend level of approximately 75% of full year FFO per share.

The after-tax dividend will benefit from AIR's refreshed tax basis. Two-thirds of the 2021 dividend was a tax- free return of capital while the remaining one-third was taxable at capital gain rates. In the same year, approximately 60% of peer dividends were taxed at ordinary income rates, with the remaining 40% taxed at capital gain rates.

In 2022, we currently project a majority of our dividend will be taxed at capital gain rates, with the remainder taxed at ordinary income rates. We believe the tax characteristics of our dividend makes our stock more attractive to taxable investors, such as foreign investors, taxable individuals, and corporations by comparison to peer shares whose dividends are taxed at higher rates.

Corporate Responsibility Update

Corporate responsibility is a longstanding AIR priority and a key part of our culture. We are committed to transparency, and continuous improvement...as measured by GRESB. Based on UN Sustainable Development Goals, we have set targets for energy, water, and greenhouse gas reductions. We contracted for expert review of the environmental impacts of our properties, and we are considering various ways to improve portfolio resilience.

During the quarter, AIR was honored as a Kingsley Elite Five, ranking first among public multi-family companies and second among all multi-family companies in customer satisfaction.

In partnership with the National Leased Housing Association, we continue our longstanding commitment to offer AIR Gives Opportunity Scholarship to students living in affordable housing. During the quarter, we awarded 14 scholarships to students living in affordable housing.

Our team is a critical part of our success. In 2022, AIR was named a National Top Workplaces winner and also for a third year a 2022 Healthiest Employer by the Denver Business Journal.

2022 Outlook

AIR expects full year Pro forma FFO between $2.38 and $2.44 per share. Our midpoint of $2.41 per share remains unchanged. Similarly, our expectations for run-rate FFO are unchanged at $2.19 per share. Relative to our prior guidance, we now expect:

• $0.03 per share of increased contribution from operations: $0.02 per share attributable to Same Store and $0.01 per share attributable to 2021 acquisitions; offset by
• ($0.02) per share of lower contribution from the lease cancellation with Aimco in 2022, net of funding costs; and
• ($0.01) per share of lower contribution, net, due to higher offsite costs reflecting greater than planned compensation increases due to the higher than expected inflation. Higher casualty losses are offset by the accretive second quarter share repurchases.

The following tables compare our previous FFO expectations, at the midpoint, to today, reflecting the impact of the above:

Our guidance ranges are based on the following components:

In the third quarter of 2022, AIR anticipates Pro forma FFO between $0.54 and $0.58 per share, inclusive of $0.03 of prepayment penalty income received in July from the final payment of the Aimco note.

AIR Strategic Objectives

We created AIR to be the most efficient and effective way to invest in U.S. multi-family real estate, due to our simplified business model, diversified portfolio of stabilized apartment communities, and low leverage. The Board of Directors has set the following strategic objectives:

• Pursue a simple, efficient, and predictable business model with a low-risk premium
• Maintain a high quality and diversified portfolio of stabilized multi-family properties
• Improve our best-in-class property operations platform to generate above-market organic growth
• Maintain an efficient cost structure with G&A less than or equal to 15 basis points of Gross Asset Value
• Maintain a flexible, low levered balance sheet with access to public debt markets
• Enhance portfolio quality through a disciplined approach to capital allocation, targeting accretive opportunities on a leverage neutral basis
• Develop private capital partnerships as a source of equity capital for accretive growth
• Continue our commitment to corporate responsibility with transparent and measurable goals

   

Earnings Conference Call Information

Supplemental Information

The full text of this Earnings Release and the Supplemental Information referenced in this release is available on AIR’s website at investors.aircommunities.com.

Glossary & Reconciliations of Non-GAAP Financial and Operating Measures

Financial and operating measures found in this Earnings Release and the Supplemental Information include certain financial measures used by AIR management that are measures not defined under accounting principles generally accepted in the United States ("GAAP"). Certain AIR terms and Non-GAAP measures are defined in the Glossary in the Supplemental Information and Non-GAAP measures reconciled to the most comparable GAAP measures.

About AIR

AIR is a real estate investment trust focused on the ownership and management of quality apartment communities located in the largest markets in the United States. AIR is one of the country’s largest owners and operators of apartments, with 76 communities in 11 states and the District of Columbia. AIR common shares are traded on the New York Stock Exchange under the ticker symbol AIRC, and are included in the S&P 400. For more information about AIR, please visit our website at www.aircommunities.com.

Forward-looking Statements

This Earnings Release and Supplemental Information contain forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements regarding projected results and specifically forecasts of 2022 results, including but not limited to: NAREIT FFO, Pro forma FFO and selected components thereof; expectations regarding consumer demand, growth in revenue and strength of other performance metrics and models; expectations regarding acquisitions as well as sales and joint ventures and the use of proceeds thereof; and AIR liquidity and leverage metrics. We caution investors not to place undue reliance on any such forward-looking statements.

These forward-looking statements are based on management’s current expectations, estimates and assumptions and subject to risks and uncertainties, that could cause actual results to differ materially from such forward-looking statements, including, but not limited to: the effects of the COVID-19 pandemic on AIR’s business and on the global and U.S. economies generally, and the ongoing, dynamic and uncertain nature and duration of the pandemic, all of which heightens the impact of the other risks and factors described herein; real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including inflation, the pace of job growth, and the level of unemployment; the amount, location and quality of competitive new housing supply; the timing and effects of acquisitions and dispositions; changes in operating costs, including energy costs; negative economic conditions in our geographies of operation; loss of key personnel; AIR’s ability to maintain current or meet projected occupancy, rental rate and property operating results; expectations regarding sales of apartment communities and the use of proceeds thereof; insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; financing risks, including the availability and cost of financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; the risk that earnings may not be sufficient to maintain compliance with debt covenants, including financial coverage ratios; legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of laws and governmental regulations that affect us and interpretations of those laws and regulations; possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by AIR; our relationship with Aimco after the business separation; the ability and willingness of the parties to the business separation to meet and/or perform their obligations under the related contractual arrangements and any of their obligations to indemnify, defend and hold the other party harmless from and against various claims, litigation and liabilities; and the ability to achieve the expected benefits from the business separation. Other risks and uncertainties are described in filings by AIR with the Securities and Exchange Commission ("SEC"), including the section entitled "Risk Factors" in Item 1A of AIR’s Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent filings with the SEC.

In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and depends on our ability to meet the various requirements imposed by the Code, through actual operating results, distribution levels and diversity of stock ownership.

These forward-looking statements reflect management’s judgment as of this date, and we assume no obligation to revise or update them to reflect future events or circumstances. This earnings release does not constitute an offer of securities for sale.

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