Apartment Income REIT Corp. (AIRC) is a self-administered and self-managed real estate investment trust (REIT) that owns and operates a diversified portfolio of stabilized apartment communities across the United States. The company has demonstrated a track record of consistent financial performance and strategic portfolio management, positioning it well for continued growth and value creation.
Financials
In the fiscal year 2023, AIRC reported annual net income of $635.1 million, annual revenue of $820.0 million, annual operating cash flow of $577.5 million, and annual free cash flow of $388.0 million. These strong financial results reflect the company's disciplined approach to operations and capital allocation.
For the first quarter of 2024, AIRC reported net loss of $4.3 million, total revenues of $195.6 million, and net cash provided by operating activities of $76.9 million. The company's quarterly performance was impacted by higher interest expense, which increased by $0.07 per share year-over-year, primarily due to the acceleration of interest expense from the company's third quarter 2023 refinancing activities and additional borrowings to fund property upgrades.
Business Overview
AIRC owns and operates a portfolio of 76 apartment communities with 27,015 apartment homes, diversified across 10 states and the District of Columbia. The company's portfolio is focused on stabilized, high-quality assets in top markets, including Boston, Philadelphia, Washington, D.C., Miami, Denver, the San Francisco Bay Area, Los Angeles, and San Diego.
AIRC's strategy is centered on enhancing the quality and growth profile of its portfolio through strategic acquisitions, dispositions, and joint venture partnerships. In 2023, the company grew its "AIR Edge" portfolio, which refers to properties that benefit from the company's operational expertise and technology platform, through four acquisitions in markets such as Miami, Bethesda, and Raleigh-Durham. These acquisitions were funded in a leverage-neutral manner, leveraging joint ventures, OP unit issuances, and the assumption of below-market fixed-rate debt.
The company's "AIR Edge" properties, which comprised 13% of the portfolio in 2023 and are expected to grow to 20% in 2024, have demonstrated superior performance, with the 2021 and 2022 acquisition classes generating net operating income growth that was 300 basis points better than the same-store portfolio. This outperformance is driven by the company's ability to apply its operational expertise and technology platform to drive higher revenue growth and lower expenses at these newly acquired assets.
Geographic Diversification and Market Outlook
AIRC's portfolio is geographically diversified, with a focus on high-growth markets in the Sunbelt and coastal regions. The company's strongest markets in 2024 are expected to be South Florida, Boston, Washington, D.C., and San Diego, while the San Francisco Bay Area is anticipated to lag in revenue growth, though the company remains optimistic about a strong recovery in this market.
The company's guidance for 2024 reflects a 3.8% increase in same-store revenue, driven by 2.4% of earn-in from 2023 leasing activity, 40 basis points of occupancy growth, 10 basis points of improvement in bad debt, and 50 basis points of contribution from community upgrades. AIRC expects positive growth across all of its markets, with the South, East, and West Coast regions leading the way.
Operational Excellence and the "AIR Edge"
A key differentiator for AIRC is its operational excellence, which the company refers to as the "AIR Edge." This platform includes best-in-class property management, a centralized rent collection team, and a focus on resident selection and retention. These operational initiatives have contributed to AIRC's industry-leading same-store net operating income growth, with the company's 2021 and 2022 acquisition classes outperforming the same-store portfolio by 300 basis points.
AIRC's strong operational performance is reflected in its industry-leading retention rate of 62.3% in 2023, as well as its ability to maintain controllable operating expense growth at just 20 basis points above the prior year. The company's focus on resident selection and centralized rent collection has also contributed to its low bad debt expense, which declined from 1.6% of revenues in 2021 to just 0.6% in 2023.
Liquidity
AIRC maintains a strong and flexible balance sheet, with investment-grade credit ratings and ample liquidity. As of March 31, 2024, the company had approximately $1.7 billion in available liquidity, including $80.6 million in cash and cash equivalents, $16.2 million in restricted cash, and $1.6 billion in available capacity on its revolving credit facility.
The company's debt profile is well-positioned, with a weighted-average remaining term of 6.1 years and a weighted-average interest rate of 4.4%. AIRC's leverage, as measured by net debt to adjusted EBITDA, was 6.9x as of the first quarter of 2024. The company's low leverage and ample liquidity provide it with the financial flexibility to pursue strategic growth opportunities while maintaining a conservative capital structure.
Acquisition and Disposition Activity
AIRC has been active in the transaction market, leveraging its joint venture partnerships and access to capital to enhance the quality and growth profile of its portfolio. In 2023, the company acquired four apartment communities in markets such as Miami, Bethesda, and Raleigh-Durham, funded in a leverage-neutral manner.
The company's acquisition strategy focuses on properties that can benefit from the "AIR Edge" operational platform, with the goal of generating a positive spread to its cost of capital and improving overall portfolio quality. AIRC's 2021 and 2022 acquisition classes have already demonstrated the success of this strategy, with net operating income growth that has outpaced the same-store portfolio by 300 basis points.
Looking ahead, AIRC expects to continue its transaction activity in 2024, with plans to sell properties, either outright or through joint ventures, to maintain a leverage-neutral position and fund additional acquisitions. The company is actively evaluating opportunities in its target markets, with a focus on properties that can benefit from the "AIR Edge" platform and generate attractive returns.
Guidance and Outlook
For the full year 2024, AIRC expects run rate funds from operations (FFO) of $2.38 per share at the midpoint, representing an 80 basis point increase from 2023. This growth is expected to be driven by a 3.8% increase in same-store net operating income, partially offset by a $0.07 per share increase in interest expense.
The company's guidance also includes an expectation of $0.11 per share in third-party service income, $0.06 of which is anticipated to be earned through existing property and asset management agreements, and the remaining $0.05 from short-duration service income.
AIRC's management team remains confident in the company's ability to deliver favorable performance relative to its peers in 2024, citing the strength of its operations, the quality of its portfolio, and the strategic initiatives undertaken to enhance growth and value creation.
Risks and Challenges
While AIRC's outlook is positive, the company faces several risks and challenges, including:
1. Interest rate environment: The company's interest expense is expected to increase by $0.07 per share in 2024, primarily due to the impact of higher market interest rates and additional borrowings to fund property upgrades.
2. Inflationary pressures: AIRC may face higher operating expenses, particularly in areas such as real estate taxes and insurance, which could impact its profitability.
3. New supply: The company's markets, particularly in the Sunbelt region, are experiencing elevated levels of new apartment construction, which could create headwinds for rental rate growth.
4. Regulatory and political risks: Changes in local, state, or federal regulations, as well as political shifts, could impact the company's operations and financial performance.
Despite these challenges, AIRC's diversified portfolio, operational excellence, and strong financial position position the company well to navigate the current market environment and continue delivering value to its shareholders.
Conclusion
Apartment Income REIT Corp. (AIRC) is a well-positioned REIT that has demonstrated a track record of consistent financial performance and strategic portfolio management. The company's focus on high-quality, stabilized apartment communities, coupled with its operational expertise and "AIR Edge" platform, has enabled it to outperform its peers and position itself for continued growth and value creation.
With a strong balance sheet, ample liquidity, and a disciplined approach to capital allocation, AIRC is well-equipped to navigate the current market environment and capitalize on strategic growth opportunities. The company's 2024 guidance reflects its confidence in its ability to deliver favorable performance relative to its peers, driven by the strength of its operations, the quality of its portfolio, and the strategic initiatives undertaken to enhance growth and value creation.