Apartment Income REIT: Outperforming, Strong Growth, 5%-Plus Yield (NYSE:AIRC)

The Real Estate sector took it on the chin for most of 2023, due to rising rates, which impacted interest costs of REITs. However, as the Fed commentary has become increasingly bullish, the overall sector has bounced back over the last month, rising nearly 10%, and also rising 15% in the last quarter, outperforming the S&P 500.

The rising cost of housing has been one of the most stubborn parts of inflation over the past 2 years, with house prices and rentals escalating. However, the Residential REIT industry has lagged the broad Real Estate sector over the past year and so far in 2023.

The past month’s performance, though, shows Residential REIT’s keeping pace with the broad RE sector, with a 9.4% gain, vs. 9.8% for the entire sector.

Within the Residential REIT industry, there’s Apartment Income REIT (NYSE:AIRC), a relative newcomer in the market. AIRC just caught our eye, with its outperformance vs. its industry over the past month, up 12.3%, and quarter, up 9.4%.

Company Profile:

Apartment Income REIT Corp. is a self-managed real estate investment trust, which engages in the provision of apartment communities. It operates through Same Store and Other Real Estate segments. The Same Store segment includes communities owned and managed by Apartment Income REIT Corp. The Other Real Estate segment consists of five properties that were acquired in 2021 and four communities. AIR split off from developer AMICO in 2020. The company was founded on March 15, 2021 and is headquartered in Denver, CO.

(AIRC site)

Holdings:

AIR owns multi-family properties located in top markets including eight important geographic concentrations: Boston; Philadelphia; Washington, D.C.; Miami; Denver; the San Francisco Bay Area; Los Angeles; and San Diego.

AIR owns and operate a portfolio of stabilized apartment communities, diversified by both geography and price point, in 10 states and the District of Columbia. As of 9/30/23, AIR’s portfolio included 75 apartment communities with 26,623 apartment homes, in which it held an average ownership of approximately 81%. (AIRC Q3 ’23 10Q)

Earnings:

Q3 ’23: AIR’s properties had 95.3% daily occupancy, down slightly vs. 95.9% in Q3 ’22. Renewal rents were up 5.6%, while new lease rents rose 2.7%.

While revenue was down slightly, net income rose 8.5%, and NOI was up 6.3%. Funds From Operations (FFO) jumped ~27%, and FFO/Share rose 32%. Adjusted EBITDAre rose 8%. Here’s an atypical figure for these times – Interest expense actually dropped by 30% vs. Q3 ’22. The share count rose 2%.

Q1-3 ’23: AIRC has continued its 2022 growth story so far in 2023, with healthy Revenue, Net Income, NOI, FFO and EBITDAre growth. Interest expense is up 19.6%, but, as noted above, was down in Q3 ’23. The share count rose just 2%.

Revenues/Apartment have continued to rise in 2023, rising 7% vs. 2022, with a CAGR of 10.5% since 2020.

Here’s an interesting stat – Residential REIT Sunbelt growth by AIRC’s peers (gray line), has vastly outpaced Coastal peers (blue line) since 2019. AIRC’s sunbelt growth (red line) is ~% higher than its peers:

New Business:

Management has recycled ~$4.6B of capital since 2020, which is ~44% higher than the peer average. Management sold all of AIRC’s NYC properties, and shows a much higher % of overall acquisitions and disposals.

AIRC formed two joint ventures in Q2 ’23, the first of which closed on June 30, 2023 through the sale of a 70% interest in Huntington Gateway (the “Value-Add JV”), and the second of which closed on July 17, 2023 through the sale of a 47% interest in eight of ten properties (the “Core JV”). The remaining 2 properties within the Core JV are expected to close before year-end. AIR now has four separate joint venture partnerships. (AIRC site)

The Core JV provided AIR with $505M of capital and grew by over $100 million with the acquisition of The Elm in Bethesda, Maryland.

Guidance:

Management narrowed its guidance for full 2023 pro forma FFO to be between $2.39 and $2.43/share. They anticipate Q4 ’23 pro forma FFO between $0.63 and $0.67/share.

Dividends:

AIRC has paid $.45/quarter since Q1 ’22. Management raised the payout from $.43 to $.44 in Q3 2021. AIRC goes ex-dividend and pays in a Feb./May/Aug./Nov. schedule. At its 12/22/23 closing price, it yielded 5.32%, the 4th highest dividend yield in the Residential REIT industry.

The FFO/Dividend Payout ratio was stable in 2021-2022, at 82%-plus, but improved markedly in Q1-3 ’23, to 74.59%, as FFO/Share rose over 13%. “AFFO in excess of dividends about $56 million year-to-date and expected to be about $80 million for the full year.” (Q3 call)

Profitability & Leverage:

ROA slipped slightly, while ROE was down ~830 basis points vs. Q4 2022 TTM, due to a 17% rise in Equity. Total Debt/Equity improved from 1.44X to 1.16X, as did Net Debt/EBITDA, which improved to 5.6X. Interest coverage slipped, but was still over 4X. Other than Net Debt/EBITDA and Total Debt/Equity, all of AIRC’s figures below were much better than those of its industry.

Debt & Liquidity:

As of 9/30/23, AIRC had $2.1B of liquidity (3x peer-average), sufficient to refinance all maturing debt through 2027. “AIR benefits from access to capital via our partnerships with some of the largest and most sophisticated global investors and sovereign wealth funds.” (Q3 ’23 call)

AIRC has a weighted-average debt maturity of 6.9 years, with no debt maturing until Q2, 2025.

AIRC’s debt is rated BBB by S&P, and Baa2 by Moody’s.

Analysts’ Price Targets:

AIRC received 3 upbeat ratings from street analysts in August–October ’23; Outperform from Raymond James and Wedbush, with a $37 target; and Buy from Truist, with a $44.00 price target.

At its $33.86 12/22/23 closing price, AIRC was ~9% below analysts’ average price target of $37.09, and 23% below their $44.00 highest target.

Valuations:

AIRC looks much cheaper than its industry’s average on a P/FFO basis, an EV/EBITDA basis, and slightly cheaper on a P/Book basis. It has one of the highest yields in its industry.

Parting Thoughts:

We feel that falling rates will be a benefit to Residential REITs. We rate AIRC a BUY, based upon its attractive, well-covered yield, its cheaper-than-average valuations, its growth, and its well-laddered debt maturities.