AIR Reports Fourth Quarter 2020 Results

DENVER–(BUSINESS WIRE)–Apartment Income REIT Corp (“AIR”) (NYSE: AIRC) announced today fourth quarter results for 2020.

Chief Executive Officer Terry Considine comments: “2020 was transformative due to the separation of AIR from Aimco. By doing so, we were able to unlock $1 billion of shareholder value. I am grateful to my colleagues on the board for their leadership, to my teammates for their hard work, and to the many shareholders who offered their advice and encouragement. Thank you all!

“AIR provides investors with a simple and transparent way to invest in the multi-family sector with public market liquidity, the safety of a diversified portfolio of apartment communities with low financial leverage, best-in-class operations, and sector low management costs.

“We begin 2021 with great optimism that the worst of COVID is behind us and with the expectation that our schools and businesses will soon reopen.”

Chief Financial Officer Paul Beldin adds: “Same Store revenue was down in the fourth quarter by 7.4%. In our stable, mostly suburban submarkets, which include approximately 60% of our Same Store apartment homes, revenue declined by 2.5%. Our dense urban submarkets, including the City of Los Angeles together with our communities on the San Francisco Peninsula and in Philadelphia, fared worse with Same Store revenue down by 12.6%.

“Fourth Quarter financial results are a lagging indicator; our leading indicators point to a building recovery. Net rental income increased each month from September through January, and average daily occupancy increased from a low of 93.3% in August to 95.4% in January.

“In 2021, we expect Same Store revenue growth between (3.00%) and (0.20%), and Same Store expense growth between 3.75% and 2.75%, resulting in Same Store NOI growth between (5.60%) and (1.40%). We also expect 2021 AIR FFO per share to be between $1.91 and $2.05. Our guidance should be viewed as our current best estimates for the ranges for expected outcomes. We ask that you consider these ranges carefully and avoid over reliance on the mid-point of these ranges.”

Financial Results: Fourth Quarter Pro Forma FFO Per Share

For financial reporting purposes, GAAP requires that Aimco be treated as the predecessor to AIR. As a result, unless otherwise stated, financial results prior to the December 15, 2020, separation include the combined results of AIR and Aimco. The financial results of Aimco before the separation are presented as discontinued operations.

AIR Pro Forma Funds From Operations presented in the following table exclude the financial results of Aimco before the separation.

 

 

FOURTH QUARTER

FULL YEAR

 

(all items per common share – diluted)

 

2020

 

 

2020

 

Net loss

 

$

(0.96

)

 

$

(0.85

)

Nareit Funds From Operations (FFO)

 

$

(0.45

)

 

$

1.58

 

Adjustment to weight reverse stock split*

 

$

0.07

 

 

$

(0.28

)

Nareit FFO attributable to Aimco and sold properties**

 

$

(0.16

)

 

$

(0.69

)

Pro forma adjustments, net***

 

$

0.92

 

 

$

1.12

 

AIR Pro forma Funds From Operations (Pro forma FFO)

 

$

0.38

 

 

$

1.73

 

 

* Reflects an adjustment to eliminate the per share impact of the GAAP treatment to restate our weighted-average shares outstanding as if the reverse stock split occurred at the beginning of the period presented. See Supplemental Schedule 2 for the reconciliation of weighted-average shares outstanding used for Nareit FFO and Proforma FFO.

** Reflects an adjustment to exclude the financial results of Aimco, prior to the separation, which are included in Nareit FFO.

*** Primarily separation costs, the non-cash tax effect of making a REIT election at a taxable subsidiary, debt prepayment penalties, and restructuring costs. See Supplemental Schedule 1 for a detailed list of pro forma adjustments to FFO.

COVID-19 Response Update

Our top priority is the health and safety of our residents and teammates. Accordingly, we maintain enhanced cleaning procedures as well as physical distancing and remote working guidelines at our communities and corporate offices. Additionally, seeing residents as individuals, each impacted differently by the pandemic and lockdown, our teammates have undertaken to speak to every resident in need, to listen, and to help each to solve his or her problems. We also seek to assist the broader communities where our residents and employees live and work.

We estimate that, in addition to decreased occupancy and lower rental rates, we incurred incremental costs of $7.2 million in the fourth quarter, and $24.6 million year-to-date. The table below provides additional detail for AIR, excluding impacts attributable to our discontinued operations.

 

FOURTH QUARTER

 

FULL YEAR

 

2020

 

2020

FFO Impacts ($ in millions, except per share data)

$

 

$/sh

 

$

 

$/sh

Incremental Bad Debt Expense

$

5.3

 

$

0.05

 

$

10.6

 

$

0.08

Lower Commercial Revenue

 

1.4

 

 

0.01

 

 

3.8

 

 

0.03

Lower Other Income, due to local restriction on charging late fees

 

0.1

 

 

 

 

0.9

 

 

0.01

Other COVID-related amounts

 

0.4

 

 

 

 

1.0

 

 

0.01

Property Level Impact

$

7.2

 

$

0.06

 

$

16.3

 

$

0.13

Net Incremental Interest Expense

 

 

 

 

 

5.4

 

 

0.05

Write-off of Commercial Straight-line Rent Receivables

 

 

 

 

 

2.9

 

 

0.02

FFO Impact

$

7.2

 

$

0.06

 

$

24.6

 

$

0.20

Rent Collection Update

Residential Rent Collection – We measure residential rent collection as the amount of payments received as a percentage of all residential amounts owed. Through December 31st, we have collected 98.3% of all amounts owed relating to the first nine months of 2020.

In the fourth quarter, we recognized 98.0% of all residential revenue billed during the quarter, treating the balance of 2.0% as bad debt. Of the 98.0% of residential revenue recognized, as of year-end, we had collected in cash all but 100 basis points. During the fourth quarter, we wrote off both the 2% mentioned above and an additional $2.3 million of receivables associated with our residents who have not paid rent since June. More than half of these residents reside in the City of Los Angeles, where financially capable residents can live rent free by abusing emergency measures intended to help those in need because of the pandemic.

For the year, we recognized 98.2% of all residential revenue, treating the balance of 1.8% as bad debt. At December 31st, the amount of uncollected and unreserved residential accounts receivable, not offset by tenant security deposits totaled $1.3 million. Most of the balance is expected to be collected during the first quarter of 2021.

Looking forward, we expect monthly bad debt expense to decline, but the timing and pace will depend on unwinding the emergency ordinances that currently allow residents to live rent free, so that we are again able to collect rent or to re-rent these apartments to new residents who pay the rent that is owed.

AIR Operating Results: Fourth Quarter Same Store NOI Down 12.5%; Full Year NOI Down 4.0%

The table below includes the operating results of the 91 properties of AIR that meet our Same Store definition. Properties retained in the separation by Aimco are excluded.

The Same Store portfolio together with our properties leased to Aimco for their development or redevelopment represents essentially all of our owned properties.

 

FOURTH QUARTER

FULL YEAR

 

Year-over-Year

Sequential

Year-over-Year

($ in millions)

2020

2019

Variance

3rd Qtr.

Variance

2020

2019

Variance

Revenue, before utility reimbursements

$149.1

$161.0

(7.4%)

$152.0

(1.9%)

$619.2

$634.7

(2.4%)

Expenses, net of utility reimbursements

44.1

41.0

7.6%

44.6

(1.0%)

173.6

170.8

1.6%

Net operating income (NOI)

$105.0

$120.0

(12.5%)

$107.4

(2.2%)

$445.6

$463.9

(4.0%)

Components of Same Store Revenue Growth – Same Store revenue growth was impacted by lower residential rental rates, lower average daily occupancy, increased bad debt expense, waived late fees, and reduced commercial rents. The table below summarizes the change in the components of our Same Store revenue growth.

 

 

FOURTH QUARTER

FULL YEAR

Same Store Revenue Components

 

Year-over-Year

Sequential

Year-over-Year

Residential Rents

 

 

(1.4

%)

 

 

(1.3

%)

 

 

1.0

%

 

Average Daily Occupancy

 

 

(2.8

%)

 

 

0.9

%

 

 

(1.5

%)

 

Residential Net Rental Income

 

 

(4.2

%)

 

 

(0.4

%)

 

 

(0.5

%)

 

Bad Debt

 

 

(2.6

%)

 

 

(1.3

%)

 

 

(1.3

%)

 

Late Fees and Other

 

 

0.2

%

 

 

(0.4

%)

 

 

0.1

%

 

Residential Revenue

 

 

(6.6

%)

 

 

(2.1

%)

 

 

(1.7

%)

 

Commercial Revenue

 

 

(0.8

%)

 

 

0.2

%

 

 

(0.7

%)

 

Same Store Revenue Growth

 

 

(7.4

%)

 

 

(1.9

%)

 

 

(2.4

%)

 

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 that 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 new and renewal lease rates, as well as the weighted-average (blended) lease rates for leases executed in the respective period.

 

FOURTH QUARTER

 

FULL YEAR

 

2020

 

2021

 

 

2020

 

2019

 

Variance

 

2020

 

2019

 

Variance

 

October

 

November

 

December

 

January

 

Renewal rent changes

 

1.4

%

 

5.1

%

 

(3.7

%)

 

3.8

%

 

5.1

%

 

(1.3

%)

 

1.5

%

 

1.2

%

 

1.3

%

 

1.5

%

New lease rent changes

 

(10.9

%)

 

0.6

%

 

(11.5

%)

 

(6.2

%)

 

1.9

%

 

(8.1

%)

 

(10.8

%)

 

(11.2

%)

 

(11.0

%)

 

(8.4

%)

Weighted-average rent changes

 

(8.5

%)

 

2.4

%

 

(10.9

%)

 

(1.8

%)

 

3.4

%

 

(5.2

%)

 

(7.6

%)

 

(9.2

%)

 

(9.5

%)

 

(6.6

%)

Average Daily Occupancy

 

94.4

%

 

97.2

%

 

(2.8

%)

 

95.2

%

 

96.7

%

 

(1.5

%)

 

93.7

%

 

94.3

%

 

95.1

%

 

95.4

%

During the fourth quarter of 2020, approximately 80% of our lease activity were New Leases.

Same Store Markets – Our portfolio is diversified by price point and geography, and with a mix of urban and suburban submarkets. While fourth quarter results varied based on population density, overall results showed a consistent strengthening of the business throughout the fourth quarter that continued into January.

Suburban properties include 15,226 units, or 60% of our Same Store portfolio. These communities finished December with an ADO of 97.2%, with increases in occupancy for each month since June.

Urban properties total 9,975 units, the 40% balance of our Same Store portfolio. These communities finished December with an ADO of 91.7%, with increases in occupancy for each month since August, including 120 basis points of occupancy growth from November to December, and an additional 80 basis points in January. This reflects a leasing pace that was 37% ahead of fourth quarter 2019.

In the fourth quarter, New Lease rates were roughly stable, in line with September’s results. This is encouraging, as rates generally erode seasonally in the fourth quarter. In January, we are seeing continued recovery. As compared to December, January leasing velocity improved 30%; occupancy increased 30 basis points; and new lease rent growth improved by 260 basis points.

The following table details changes in average daily occupancy and signed new lease rents:

Average Daily Occupancy & Signed New Lease Rent Changes

 

2020

 

2021

 

September

 

October

 

November

 

December

 

January

Average Daily Occupancy

93.3%

 

93.7%

 

94.3%

 

95.1%

 

95.4%

Signed New Lease Rent Changes

(12.3%)

 

(12.0%)

 

(10.7%)

 

(10.1%)

 

(7.5%)

Portfolio Management

Our portfolio of apartment communities is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality, and is also diversified across several of the largest markets in the United States. The table below relates to the AIR portfolio and includes the properties leased to Aimco after year-end for their development or redevelopment and excludes the properties retained by Aimco in the separation from AIR.

 

FOURTH QUARTER

 

2020

2019

Variance

Apartment Communities

99

99

Apartment Homes

26,592

26,592

Average Revenue per Apartment Home

$2,231

$2,364

(6%)

Percentage A (4Q 2020 Average Revenue per Apartment Home $2,819)

57%

55%

2%

Percentage B (4Q 2020 Average Revenue per Apartment Home $1,971)

26%

29%

(3%)

Percentage C+ (4Q 2020 Average Revenue per Apartment Home $1,761)

17%

16%

1%

NOI Margin

70%

74%

(4%)

Free Cash Flow Margin

70%

74%

(4%)

Fourth Quarter Portfolio – For our entire portfolio, average monthly revenue per apartment home was $2,231 for fourth quarter 2020, a 6% decrease compared to fourth quarter 2019.

Acquisitions – We had no acquisitions in the fourth quarter.

Dispositions – We had no dispositions in the fourth quarter.

Joint Venture Transaction – As previously announced, in September, we formed a joint venture with a passive institutional investor to own a portfolio of 12 multi-family communities with 4,051 apartment homes located in California.

The properties were valued at $2.40 billion, or approximately $592,000 per unit, equivalent to an implied NOI cap rate of approximately 4.2%. The valuation is equal to 97% of our pre-COVID-19 valuation of the properties and confirms our previously published NAV. The joint venture has existing property debt of $1.22 billion and an implied equity value of $1.18 billion. In exchange for a 39% interest subject to $475 million of property debt, we received $461 million. We retain ownership of 61% of the joint venture and control and will operate the properties in exchange for property and asset management fees.

Balance Sheet

Leverage

We seek to increase financial returns by using leverage with appropriate caution. We limit risk through our balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; and we build financial flexibility by maintaining ample unused and available credit; holding properties with substantial value unencumbered by property debt; maintaining an investment grade rating; and using partners’ capital when it enhances financial returns or reduces investment risk.

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

 

 

AS OF DECEMBER 31, 2020

$ in Millions

 

Amount

 

 

% of Total

 

 

Weighted-Avg.

Maturity (Yrs.)

AIR share of long-term, non-recourse property debt

 

$

3,160

 

 

 

82

%

 

 

8.4

Term loan

 

 

350

 

 

 

9

%

 

 

0.3

Outstanding borrowings on revolving credit facility

 

 

266

 

 

 

7

%

 

 

1.1

Preferred equity*

 

 

81

 

 

 

2

%

 

 

9.9

Total Leverage

 

$

3,857

 

 

 

100

%

 

 

7.2

Cash, restricted cash, and investments in securitization trust assets

 

 

(158

)

 

 

 

 

 

 

 

Notes receivable from Aimco

 

 

(534

)

 

 

 

 

 

 

 

Net Leverage

 

$

3,165

 

 

 

 

 

 

 

 

 

*AIR’s Preferred equity is perpetual in nature; however, for illustrative purposes, we have computed the weighted-average maturity of our Preferred OP Units assuming a 10-year maturity and Preferred Stock assuming it is called at the expiration of the no-call period.

We have notes receivable from Aimco with an aggregate principal amount of $534 million. The notes will mature on January 31, 2024 and are secured by a pool of properties owned by Aimco. We consider the notes a reduction of leverage as their proceeds will be used to repay current amounts outstanding.

Leverage Ratios

Our current target leverage ratios are Net Leverage to Adjusted EBITDAre < 6.0x and Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends > 2.5x. Our calculation of Adjusted EBITDAre reflects EBITDA earned from AIR’s operations.

 

 

Annualized

Current Quarter

 

Trailing Twelve

Months

Proportionate Debt to Adjusted EBITDAre

 

7.3x

 

7.1x

Net Leverage to Adjusted EBITDAre

 

7.5x

 

7.3x

Adjusted EBITDAre to Adjusted Interest Expense

 

3.9x

 

3.3x

Adjusted EBITDAre to Adjusted Interest Expense and Preferred Dividends

 

3.7x

 

3.1x

Our leverage to Adjusted EBITDAre ratio is higher than our September target due to the approximately $45 million reduction in pro forma property NOI, due primarily to the impacts of COVID-19 and the related governmental response, and due also to the increased leverage of approximately $440 million. Of this total, approximately $240 million is due to an increase in Aimco’s initial capitalization; $135 million is due to additional investment in properties owned by AIR; and $65 million due to our fourth quarter 2020 special cash dividend.

Under our revolving credit facility and term loan, we have agreed to maintain a fixed charge coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the period ended December 31, 2020, our fixed charge coverage ratio was 1.92x. We expect to remain in compliance with our covenants.

Consistent with our paired trade philosophy, we expect to repay the incremental borrowings through the sale of whole or partial interests in low-cap rate properties.

Liquidity

We use our credit facility primarily for working capital and other short-term purposes and to secure letters of credit. In connection with the separation from Aimco, we entered into the third amended and restated senior credit agreement, which lowered the maximum borrowing capacity of our revolving credit facility from $800 million to $600 million, reflecting reduced borrowing needs with the elimination of redevelopment and development opportunities. At December 31, 2020, our share of cash and restricted cash was $58 million and we had the capacity to borrow up to $311 million under our revolving credit facility, bringing total liquidity to approximately $370 million.

We also manage our financial flexibility by maintaining an investment grade rating and holding communities that are unencumbered by property debt. AIR has been rated BBB by Standard & Poor’s, one level above Aimco’s rating prior to the separation. As of December 31, 2020, we held unencumbered communities with an estimated fair market value of approximately $2.8 billion.

Equity Capital Activities

On January 25, 2021, the AIR Board of Directors declared quarterly cash dividends of $0.43 per share of AIR Common Stock. This amount is payable on February 26, 2021, to stockholders of record on February 12, 2021. The safety and simplicity of our business model, combined with the predictability of our cash flows, allows us to distribute a greater percentage of income, leading to an improved dividend payout ratio after the separation from Aimco.

2021 Outlook

The AIR strategy is simple: provide a transparent, efficient, and low risk way to invest in multi-family properties:

  • Combine a narrow focus on allocating capital only to stabilized apartment communities with best-in-class operations, and do so with costs for corporate overhead < 15 basis points of the gross asset value of our investment assets;
  • Reduce risk by low leverage, the quality of the real estate, and the diversification of the portfolio; and
  • Measure success in Pro forma FFO per share with a high quality of earnings confirmed by cash dividends.

While results in all urban markets showed a consistent strengthening of business results throughout the fourth quarter of 2020 and into January, there is still uncertainty regarding the duration of the pandemic, continued government intervention, and the timing of economic re-opening. While we are seeing signs of improvement and we expect steady quarter to quarter improvements, we also expect year-over-year NOI and FFO growth to be negative in the first quarter, with improvements throughout 2021 so that year-over-year comparisons become positive as business strengthens in the second half of the year.

In 2021, our simple strategy will focus on (1) property net income, including income from properties leased for their development or redevelopment; (2) a declining cost of leverage; and (3) a low level of offsite costs.

The following table details the change in AIR’s Pro Forma FFO per share for 2020 to 2021 guidance:

Components of 2020 to 2021 FFO Growth

 

Low

 

High

2020 AIR Pro forma FFO

$

1.73

 

 

$

1.73

 

Operations

 

(0.17

)

 

 

(0.04

)

Lease Income

 

0.19

 

 

 

0.19

 

Cost of Capital

 

0.09

 

 

 

0.09

 

Offsite Costs

 

0.06

 

 

 

0.06

 

Other

 

0.01

 

 

0.02

2021 Pro forma FFO

$

1.91

$

2.05

Our guidance should be viewed as our current best estimates for the ranges for expected outcomes. We ask that you consider these ranges carefully and avoid over reliance on their mid-points. Our guidance ranges are based on the following components:

($ Amounts represent AIR Share)

 

FULL YEAR 2021

 

FULL YEAR 2020

 

 

 

 

 

Net Income per share

 

$(0.18) to $(0.05)

 

$(0.85)

Pro forma FFO per share [1]

 

$1.91 to $2.05

 

$1.73

 

 

 

 

 

Same Store Operating Components of Nareit FFO

 

 

 

 

Revenue change compared to prior year

 

(3.00%) to (0.20%)

 

(2.4%)

Expense change compared to prior year

 

3.75% to 2.75%

 

1.6%

NOI change compared to prior year

 

(5.60%) to (1.40%)

 

(4.0%)

 

 

 

 

 

Offsite Costs [2]

 

 

 

 

Property management expenses

 

~$24M

 

$31M

General and administrative expenses

 

~$16M

 

$22M

 

 

 

 

 

Other Earnings

 

 

 

 

Lease income [3]

 

~$30M

 

N/A

Tax (expense)/benefit [4]

 

~($1M)

 

$6M

 

 

 

 

 

AIR Share of Capital Investments

 

 

 

 

Capital Enhancements

 

$45M to $55M

 

$27M

[1]

In the first quarter AIR anticipates Pro forma FFO between $0.45 and $0.49 per share.

[2]

Full year 2020 property management and general and administrative expenses in this table are recast to represent changes in the classification of certain expenses in order to be consistent with the 2021 presentation, however there is no impact on the total amount of offsite costs.

[3]

There were no revenues in 2020 associated with the development/redevelopment properties leased to Aimco. These leases commenced on January 1, 2021.

[4]

Full year 2020 tax (expense) benefit is presented net of approximately $89 million of Pro forma FFO adjustments related to the TRS REIT election and FFO adjustments related to income tax adjustments associated with sold properties.

Earnings Conference Call Information

Live Conference Call:

Conference Call Replay:

Thursday, February 11, 2021 at 1:00 p.m. ET

Replay available until May 11, 2021

Domestic Dial-In Number: 1-888-317-6003

Domestic Dial-In Number: 1-877-344-7529

International Dial-In Number: 1-412-317-6061

International Dial-In Number: 1-412-317-0088

Passcode: 0143909

Passcode: 10151372

Live webcast and replay:

 

investors.aircommunities.com

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 99 communities in 12 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 2021 results, including but not limited to: Nareit FFO, Pro forma FFO and selected components thereof; expectations regarding sales of AIR apartment communities and the use of proceeds thereof; and AIR liquidity and leverage metrics.

Contacts

Conor Wagner

SVP, Chief Investment Officer

(303) 757-8101

investors@aircommunities.com

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