Apartment Income REIT: Cause For Pause
Summary
- Apartment Income REIT focuses on resident recruitment and retention through "good neighbor" policies and has a strong focus on affluent residents with strong credit.
- AIRC has achieved peer-leading same-store revenue growth and free cash flow conversion and has formed joint venture partnerships to raise funds for new acquisitions.
- Despite a decline in occupancy, AIRC expects improvement in the coming quarters and its CEO believes the business is returning to normal after the impacts of COVID-19.
- The company has exhibited rapid growth in revenue, pays a higher-than-average dividend yield, and sells for an attractive price.
- There is some cause for concern about a possible dividend cut, and shares are trading near their all-time low.
Joe Raedle/Getty Images News
Now that apartment rental growth rates have stabilized slightly higher than inflation, leaving concerns about oversupply appearing a bit overblown (as documented in previous articles), and since Freddie Mac estimates that the U.S. housing market is still more than 3 million housing units short of the country's demand, maybe it's time to take another look at some intriguing Apartment REITs.
This article looks at an Apartment REIT that is a little unusual, and has just one fly in the ointment, separating it from a solid Buy.
Meet the company
Apartment Income REIT
Formed in December of 2020 as a spin-off from Apartment Investment and Management (AIV), and headquartered in Denver, Apartment Income REIT Corp. (NYSE:AIRC) owns and operates 95 apartment communities spread across 15 U.S. states and Washington, D.C. The portfolio totals almost 26,000 units, with 58% of these classified as Class A and 42% as Class B.
The largest concentrations are in California (23 communities), Florida (11 communities), and Massachusetts (9 communities), followed by Colorado with 8, Pennsylvania with 7, and Virginia with 6.
What sets AIRC apart from the average Apartment REIT is its focus on two things:
- Resident recruitment and retention through "good neighbor" policies, resulting in a 61.9% retention rate over the past 12 months (peer average is 56%), and affluent residents with strong credit.
- Converting same-store revenue to free cash flow through its AIR Edge cost control system, posting a 66.8% conversion rate in 2022 (peer average is 60.2%).
The company claims to be on track to outperform all its peers for same-store revenue growth, both this year and next.
AIRC investor presentation
The peers in question are AvalonBay (AVB), Camden Property Trust (CPT), Equity Residential (EQR), Essex Property Trust (ESS), Mid-America Apartment (MAA), and UDR (UDR).
Occupancy has slipped a bit since its high level of 97.5% in Q1, and the previous 8.6% blended leasing spreads have slipped along with them, but remain healthy, at 6.6%.
AIRC investor presentation
Resident turnover is dropping steadily, from 43% in 2019, to 38% as of March 31. Another way of saying that would be that tenant retention has gone from 56.8% to 61.9% over that time period.
AIRC investor presentation
At the same time, the median tenant income is rising rapidly, from $117,250 in 2019, all the way to $170,000 in 2023, a CAGR of 9.7%. With average monthly rent of $2773, residents enjoy a healthy income-to-rent ratio of 5.11x.
AIRC investor presentation
With same-store NOI margin of 74.4% through the end of last year, AIRC had achieved 20 consecutive quarters of peer-leading NOI margin, and free cash flow conversion of 66.8% led all peers also.
AIRC investor presentation
AIRC recently formed joint venture partnerships with "two of the world's largest real estate investors," by selling part of its ownership in 11 properties, raising about $1.2 billion.
AIRC investor presentation
In 10 of the 11 deals, AIRC sold 47% of its interest in core holdings. In the other, they sold 70% of a value-add project in Virginia. The cash raised will be used to pay down revolver debts and fund new acquisitions with long-term levered IRR's greater than 10%. AIRC retains property and asset management responsibilities, and will collect about $2.5 million annually in fees as a result.
Since separating from AIV, AIRC has recycled assets worth about 45% of its GAV (gross asset value), raising average revenue per unit by 25% in the process.
Quarterly Results
AIRC reported the following mixed results for Q2 2023.
| Metric | Q2 2023 | Q2 2022 | YoY Change | H1 2023 | H1 2022 | YoY Change |
| Net income | (-$0.01) | $1.26 | NA | (-$0.09) | $3.66 | NA |
| FFO | $0.62 | $0.64 | (-3.1)% | $1.11 | $1.06 | 4.7% |
| Run-rate FFO | $0.58 | $0.51 | 13.7% | $1.12 | $1.04 | 7.7% |
* (Run-Rate FFO excludes earnings related to the Aimco note receivable and its repayment in 2022.)
Despite the loss thus far, AIRC management is guiding for net income of $0.71 per share at the midpoint.
In the same-store portfolio, AIRC reported the following results, posting solid gains despite a decline in occupancy. About 60 basis points of the decline in occupancy is a result of move-outs and evictions of non-paying residents as COVID-related protections expired. The company expects improvement in occupancy in Q3 and Q4.
| Metric | Q2 2023 | Q2 2022 | YoY Change | H1 2023 | H1 2022 | YoY Change |
| Revenue | $159m | $146m | 8.8% | $315m | $288m | 9.4% |
| Expenses | $41.0m | $39.4m | 4.1% | $81.8m | $78.9m | 3.7% |
| NOI | $118m | $107m | 10.6% | $234m | $209m | 11.6% |
| Occupancy | 95.5% | 96.6% | (-1.1)% | 96.5% | 97.2% | (-0.7)% |
CEO Terry Considine had this to say on the Q2 earnings call:
My final take away for the quarter is that the business is returning to normal after three tumultuous years. Since 2020, results have been driven by the COVID response, urban or suburban locations, sunbelt versus coastal markets, and the impacts and reactions to generationally high inflation. These factors are normalizing and what we're left with is an industry in which operations matter. This is the time when the AIR Edge will be increasingly apparent.
Growth metrics
Here are the 3-year growth figures for FFO (funds from operations), and TCFO (total cash from operations).
| Metric | 2019 | 2020 | 2021 | 2022 | 2-year CAGR |
| FFO (millions) | -- | $193 | $171 | $335 | -- |
| FFO Growth % | -- | -- | (-11.4) | 95.9 | 31.8% |
| FFO per share | -- | $1.73 | $2.14 | $2.41 | -- |
| FFO per share growth % | -- | -- | 23.7 | 12.6 | 18.0% |
| TCFO (millions) | -- | $283 | $333 | $421 | -- |
| TCFO Growth % | -- | -- | 17.7 | 26.4 | 22.0% |
Source: TD Ameritrade, Hoya Capital Income Builder, and author calculations
AIRC is clearly off to a very good start in its brief history, with growth figures all in the very high double digits.
Meanwhile, here is how the stock price has done over the past 2 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF (VNQ).
| Metric | 2020 | 2021 | 2022 | 2023 | 2-yr CAGR |
| AIRC share price Aug. 22 | -- | $49.99 | $44.32 | $32.78 | -- |
| AIRC share price Gain % | -- | -- | (-11.3) | (-26.1) | (-19.0)% |
| VNQ share price Aug. 22 | -- | $106.59 | $99.52 | $79.93 | -- |
| VNQ share price Gain % | -- | -- | (-6.6) | (-19.7) | (-13.4)% |
Source: MarketWatch.com and author calculations
Two years ago, REITs were near their zenith. Since then, investors have been pretty unimpressed with both AIRC (-19.0)% and the VNQ (-13.4)%. AIRC shares are trading at or near all-time lows, and searching for a bottom.
Balance sheet metrics
Here are the mixed balance sheet metrics. The company has a mild problem with indebtedness, but its EBITDA is strong, which puts its Debt/EBITDA at a healthy 5.3, and the balance sheet sports an investment-grade BBB rating.
| Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
| AIRC | 1.54 | 40% | 5.3 | BBB |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
As of June 30, AIRC had about 2.3 billion in available liquidity, against debts totaling $3.69 billion, held at a weighted average interest rate of 4.0%, with a weighted average maturity of 7.2 years, and no maturities at all until 2025. In 2025, however, the company faces $886 million in maturities, which amounts to some 24% of its total debt. Only 1% of the company's debt is held in variable rate instruments.
AIRC investor presentation
Dividend metrics
AIRC's dividend metrics paint an interesting picture. AIRC pays a much fatter yield than the average REIT, and despite a lackluster 2.3% dividend growth rate, its Dividend Score of 5.88 vastly outshines the average REIT.
| Company | Div. Yield | 5-yr Div. Growth | Div. Score | Payout | Div. Safety |
| AIRC | 5.49% | 2.3% * | 5.88 | 80% | D- |
* 2-year CAGR
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.
On the other hand, Seeking Alpha Premium assigns the company a D- for Dividend Safety, based on its high payout ratio and its indebtedness. This would ordinarily mean that the company is in imminent danger of a dividend cut.
However, although I have never before taken exception to a dividend safety rating designated by Seeking Alpha, I have to disagree with this one. AIRC's EBITDA is very strong, its FFO is steady and climbing, they face no debt maturities until 2025, and the company is exceptionally adept at converting FFO into free cash flow. I think AIRC deserves a picture-perfect C- or D+ rating for dividend safety, and I don't think a dividend cut is on the foreseeable horizon.
Nevertheless, this is the fly in the ointment. If a dividend cut does happen, the share price will tumble even further.
Valuation metrics
For a value investor, the valuation metrics for AIRC scream Buy. It pays a higher-than-average dividend yield, and in a sector that sells almost exactly at the REIT average, AIRC sells at just 13.7x FFO and a whopping (-33.1)% discount to NAV.
| Company | Div. Score | Price/FFO '23 | Premium to NAV |
| AIRC | 5.88 | 13.7 | (-33.1)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
From a growth investor's perspective, the combination of high revenue growth and low price is a rare one, but the below-average FFO multiple is actually a cause for pause. Definitive research by Hoya Capital has established that cheap REITs tend to stay cheap.
What could go wrong?
If Seeking Alpha Premium is right and I am wrong, AIRC is in serious danger of a dividend cut. If that happens, share prices will probably tumble further.
The Seeking Alpha Quant Ratings system rates AIRC a Sell. It assigned that rating on June 8, when the price was at $36.41. So indeed, shares have sold off by 10.0% in that 75-day period, which lends credence to the continued Sell rating.
The company has entered into 4 joint ventures. If any of the joint venture partners proves unstable or dishonest, or for any reason is unable to carry out their end of the bargain, AIRC's profitability could suffer.
Investor's bottom line
High growth, above-average dividend, and below-average price usually add up to a Strong Buy rating. However, although I don't think the dividend cut snake will strike, the fact that Seeking Alpha Premium considers it to be fully coiled is reason enough for caution. The further fact that the stock is trading near its all-time lows and seeking a bottom is further reason. This is a very inopportune time to Sell, and the company does pay a dividend that is nearly double the inflation rate, so to me, this all adds up to a Hold rating.
Seeking Alpha Premium
Of the 11 Wall Street analysts covering AIRC, 5 rate the company a Strong Buy, 1 a Buy, and 5 a Hold. The average price target is $41.10, implying upside of 25.4%.
However, Zacks, TipRanks, and Ford Equity Research are all Neutral on AIRC, and The Street and the Seeking Alpha Quant Ratings system say Sell.
Once again, it's down to you, constant stranger. The opinion that matters most is yours.
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This article was written by
Philip Eric Jones is a financial writer, educator, artist, and inspirational speaker. He writes about investing for retirement with a focus on Growth stocks and REITs.
He is a contributor to the investing group Hoya Capital Income Builder. The service features a team of analysts focusing on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Learn More.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of CPT, VNQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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