Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.12M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
4: EX-31.3 Certification -- §302 - SOA'02 HTML 27K
5: EX-31.4 Certification -- §302 - SOA'02 HTML 27K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 25K
13: R1 Cover Page HTML 84K
14: R2 Condensed Consolidated Balance Sheets HTML 152K
15: R3 Condensed Consolidated Balance Sheets HTML 32K
(Parenthetical)
16: R4 Condensed Consolidated Statements of Operations HTML 158K
(Unaudited)
17: R5 Condensed Consolidated Statements of Comprehensive HTML 55K
Income (Loss)
18: R6 Condensed Consolidated Statements of Equity HTML 123K
(Unaudited)
19: R7 Condensed Consolidated Statements of Cash Flows HTML 119K
(Unaudited)
20: R8 Condensed Consolidated Statements of Partners' HTML 81K
Capital
21: R9 Basis of Presentation and Organization HTML 32K
22: R10 Summary of Significant Accounting Policies HTML 32K
23: R11 Significant Transactions HTML 47K
24: R12 Leases HTML 41K
25: R13 Debt HTML 53K
26: R14 Investment in Joint Ventures HTML 65K
27: R15 Commitments and Contingencies HTML 28K
28: R16 Earnings and Dividends per Share and per Unit HTML 76K
29: R17 Fair Value Measurements HTML 76K
30: R18 Derivative Financial Instruments and Hedging HTML 52K
Activities
31: R19 Variable Interest Entities HTML 43K
32: R20 Business Segments HTML 139K
33: R21 Summary of Significant Accounting Policies HTML 41K
(Policies)
34: R22 Summary of Significant Accounting Policies HTML 30K
(Tables)
35: R23 Significant Transactions (Tables) HTML 41K
36: R24 Leases (Tables) HTML 43K
37: R25 Debt (Tables) HTML 47K
38: R26 Investment in Joint Ventures (Tables) HTML 59K
39: R27 Earnings and Dividends per Share and per Unit HTML 74K
(Tables)
40: R28 Fair Value Measurements (Tables) HTML 74K
41: R29 Derivative Financial Instruments and Hedging HTML 45K
Activities (Tables)
42: R30 Variable Interest Entities (Tables) HTML 43K
43: R31 Business Segments (Tables) HTML 139K
44: R32 Basis of Presentation and Organization (Details) HTML 44K
45: R33 Summary of Significant Accounting Policies - HTML 33K
Reconciliation of Preferred OP Units (Details)
46: R34 Summary of Significant Accounting Policies - HTML 39K
Narrative (Details)
47: R35 Significant Transactions - Narrative (Details) HTML 68K
48: R36 Significant Transactions - Schedule of Acquisition HTML 60K
(Details)
49: R37 Leases - Lease Income for Operating Leases HTML 32K
(Details)
50: R38 Leases - Narrative (Details) HTML 26K
51: R39 Leases - Schedule of Aggregate Minimum Lease HTML 37K
Payments (Details)
52: R40 Debt - Schedule of Debt Instruments (Details) HTML 117K
53: R41 Debt - Narrative (Details) HTML 86K
54: R42 Investment in Joint Ventures - Narrative (Details) HTML 69K
55: R43 Investment in Joint Ventures - Ownership HTML 50K
Information (Details)
56: R44 Investment in Joint Ventures - Summary of Combined HTML 45K
Balance Sheets for Joint Venture Partners
(Details)
57: R45 Investment in Joint Ventures - Earnings or Losses HTML 37K
Sttributable to Investments in Unconsolidated
Joint Ventures (Details)
58: R46 Earnings and Dividends per Share and per Unit - HTML 63K
Reconciliations of Numerator and Denominator in
Calculations of Basic and Diluted Earnings (Loss)
per Share and per Unit (Details)
59: R47 Earnings and Dividends per Share and per Unit - HTML 27K
Narrative (Details)
60: R48 Fair Value Measurements - Summary of Fair Value HTML 58K
for Interest Rate Options (Details)
61: R49 Fair Value Measurements - Summary of Carrying HTML 64K
Value and Fair Value of Non-recourse Property Debt
(Details)
62: R50 Derivative Financial Instruments and Hedging HTML 81K
Activities - Narrative (Details)
63: R51 Derivative Financial Instruments and Hedging HTML 59K
Activities - Schedule of Balance Sheet Hedges
(Details)
64: R52 Variable Interest Entities - Schedule of VIEs HTML 36K
Consolidated by the AIR Operating Partnership
(Details)
65: R53 Variable Interest Entities - Assets and HTML 44K
Liabilities of VIEs (Details)
66: R54 Variable Interest Entities - Narrative (Details) HTML 29K
67: R55 Business Segments - Narrative (Details) HTML 37K
68: R56 Business Segments - Summary of Information for HTML 76K
Reportable Segments (Details)
69: R57 Business Segments - Reconciliation of Assets from HTML 39K
Segment to Consolidated (Details)
70: R58 Business Segments - Capital Additions Related to HTML 29K
Segments (Details)
73: XML IDEA XML File -- Filing Summary XML 132K
71: XML XBRL Instance -- airc-20230930_htm XML 2.28M
72: EXCEL IDEA Workbook of Financial Report Info XLSX 141K
9: EX-101.CAL XBRL Calculations -- airc-20230930_cal XML 178K
10: EX-101.DEF XBRL Definitions -- airc-20230930_def XML 885K
11: EX-101.LAB XBRL Labels -- airc-20230930_lab XML 1.53M
12: EX-101.PRE XBRL Presentations -- airc-20230930_pre XML 1.00M
8: EX-101.SCH XBRL Schema -- airc-20230930 XSD 173K
74: JSON XBRL Instance as JSON Data -- MetaLinks 429± 655K
75: ZIP XBRL Zipped Folder -- 0001628280-23-036818-xbrl Zip 397K
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: i1-39686 (Apartment Income REIT Corp.)
Commission File Number: i0-24497
(Apartment Income REIT, L.P.)
iAPARTMENT INCOME REIT CORP.
iAPARTMENT INCOME REIT, L.P.
(Exact name of registrant as specified in its charter)
iMaryland
(Apartment Income REIT Corp.)
i84-1299717
iDelaware (Apartment Income REIT, L.P.)
i84-1275621
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i4582 South Ulster Street, iSuite 1700
iDenver,
iColorado
ii80237/
(Address
of principal executive offices)
(Zip Code)
(ii303/) ii757-8101/
(Registrant’s
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iClass
A Common Stock (Apartment Income REIT Corp.)
iAIRC
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Apartment Income REIT Corp.: iYesx No o
Apartment Income REIT, L.P.: iYesx No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Apartment Income REIT Corp.: iYesx No o
Apartment Income REIT, L.P.: iYesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Apartment Income REIT Corp.:
Apartment Income REIT, L.P.:
iLarge
accelerated filer
x
Accelerated filer
o
iLarge accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
io
Non-accelerated
filer
o
Smaller reporting company
io
Emerging growth company
io
Emerging
growth company
io
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Apartment
Income REIT Corp.:
o
Apartment Income REIT, L.P.:
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
iApartment
Income REIT Corp.: Yes o No x
iApartment Income REIT, L.P.: Yes o No x
The number of shares of Apartment Income REIT Corp. Class A Common Stock outstanding as of November 1, 2023: i146,992,711
This filing combines the quarterly reports on Form 10-Q for the quarterly period ended September 30, 2023, of Apartment Income REIT Corp. (“AIR”), Apartment Income REIT, L.P. (“AIR Operating Partnership”), and their consolidated subsidiaries. The AIR Operating Partnership’s condensed consolidated financial statements include the accounts of the AIR Operating Partnership and its consolidated subsidiaries. Except as the context otherwise requires, “we,”“our,” and “us” refer to AIR, the AIR Operating Partnership, and their consolidated subsidiaries, collectively.
AIR is a self-administered and self-managed real estate investment trust (“REIT”). AIR Operating Partnership owns all of the assets and owes all of the
liabilities of the AIR enterprise and manages the daily operations of AIR’s business. AIR owns, through its wholly-owned subsidiaries, the general partner interest and special limited partner interest in the AIR Operating Partnership.
As of September 30, 2023, AIR owned approximately 91.2% of the legal interest and 93.6% of the economic interest in the common partnership units of the AIR Operating Partnership, respectively. The remaining 8.8% legal interest is owned by third parties. A portion of the 8.8% owned by third parties is subject to vesting. If the vesting requirements are not met, the 8.8% ownership will be reduced to no less than 6.4%. The legal ownership percentage is based on the outstanding Class A Common Stock of AIR (“Common Stock”) and common OP Units (as defined below), including unvested restricted stock and unvested LTIP units. The economic ownership
percentage includes any unvested restricted stock and unvested LTIP units to the extent they are considered participating securities, as defined by accounting principles generally accepted in the United States (“GAAP”). As the sole general partner of the AIR Operating Partnership, AIR has exclusive control of the AIR Operating Partnership’s day-to-day management.
As stated above, the AIR Operating Partnership holds all of AIR’s assets and manages the daily operations of AIR’s business. Pursuant to the AIR Operating Partnership agreement, AIR is required to contribute to the AIR Operating Partnership all proceeds from the offerings of its securities. In exchange for the contribution of such proceeds, AIR receives additional interests in the AIR Operating Partnership with terms substantially similar to the stock issued by AIR.
We believe combining the periodic reports of AIR
and the AIR Operating Partnership into this single report provides the following benefits:
•We present our business as a whole, in the same manner our management views and operates the business;
•We eliminate duplicative disclosure and provide a more streamlined and readable presentation because a substantial portion of the disclosures apply to both AIR and the AIR Operating Partnership; and
•We save time and cost through the preparation of a single combined report rather than two separate reports.
We operate AIR and the AIR Operating Partnership as one enterprise, the management of AIR directs the management and operations of the AIR Operating Partnership, and the members of the Board of Directors of AIR are identical to
those of the AIR Operating Partnership’s general partner.
We believe it is important to understand the few differences between AIR and the AIR Operating Partnership in the context of how AIR and the AIR Operating Partnership operate as a consolidated company. AIR has no assets or liabilities other than its investment in the AIR Operating Partnership, which is held directly and indirectly through certain intermediate holding companies (in which all of the common stock is owned by AIR). Also, AIR is a corporation that issues publicly traded equity from time to time, whereas the AIR Operating Partnership is a partnership that has no publicly traded equity. Except for the net proceeds from stock offerings by AIR, which are contributed to the AIR Operating Partnership in exchange for additional limited partnership interests with terms substantially similar to the stock sold in the offering, the AIR Operating Partnership generates
all remaining capital required by its business. These sources include the AIR Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility, the issuance of debt and equity securities, including additional partnership units, and proceeds received from the sale of apartment communities.
Equity, partners’ capital, and noncontrolling interests are the main areas of difference between the condensed consolidated financial statements of AIR and those of the AIR Operating Partnership. Interests in the AIR Operating Partnership held by entities other than AIR, which we refer to as OP Units, are classified within partners’ capital in the AIR Operating Partnership’s financial statements and as noncontrolling interests in AIR’s financial statements.
To help investors understand the differences between AIR and the AIR Operating
Partnership, this report provides separate condensed consolidated financial statements for AIR and the AIR Operating Partnership; a single set of condensed
consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, and earnings per share or earnings per unit, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity, where appropriate.
This report also includes
separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for AIR and the AIR Operating Partnership in order to establish that the requisite certifications have been made and that AIR and the AIR Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
The accompanying condensed consolidated financial statements include the accounts of Apartment Income REIT Corp. (“AIR”), Apartment Income REIT, L.P. (“AIR Operating Partnership”), and their consolidated subsidiaries. The AIR Operating Partnership’s condensed consolidated financial statements include the accounts of the AIR Operating Partnership and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
As
used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a partner in a limited partnership or a member of a limited liability company. Interests in the AIR Operating Partnership that are held by limited partners other than AIR are reflected in AIR’s accompanying condensed consolidated balance sheets as noncontrolling interests in the AIR Operating Partnership. Interests in partnerships consolidated by the AIR Operating Partnership that are held by third parties are reflected in AIR’s and AIR Operating Partnership’s accompanying condensed consolidated balance sheets as noncontrolling interests in consolidated real estate partnerships.
Except as the context otherwise requires, “we,”“our,” and “us” refer to AIR, the AIR Operating Partnership, and their consolidated subsidiaries, collectively.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The condensed consolidated
balance sheets of AIR, the AIR Operating Partnership, and their consolidated subsidiaries as of December 31, 2022, have been derived from their respective audited financial statements at that date, but do not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in AIR’s and the AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022. Except where indicated, the footnotes refer to AIR, the AIR Operating Partnership and their consolidated subsidiaries, collectively.
Reclassifications
Certain prior period balances in the condensed consolidated balance sheets, statements of operations, and statements of cash flows
have been combined or reclassified to conform to current period presentation pursuant to Rule 10-01(a)(2) of Regulation S-X of the SEC. These changes had no impact on net income (loss), cash flows, assets and liabilities, equity or partners’ capital previously reported.
Organization and Business
AIR is a self-administered and self-managed REIT. AIR owns, through its wholly-owned subsidiaries, the general partner interest and special limited partner interest in AIR Operating Partnership. AIR Operating Partnership conducts all of the business of AIR, which is focused on the ownership of stabilized 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.
We own and operate a portfolio of
stabilized apartment communities, diversified by both geography and price point, in i10 states and the District of Columbia. As of September 30, 2023, our portfolio included i75 apartment
communities with i26,623 apartment homes, in which we held an average ownership of approximately i81%. We also have ione
land parcel and ione indirect land interest that we lease to third parties.
Interests in the AIR Operating Partnership that are held by limited partners other than AIR are referred to as OP Units. OP Units include common partnership units, which we refer to as common OP Units, as well as preferred partnership units, which we refer to as preferred OP Units. As of September 30, 2023, after elimination of units held by consolidated subsidiaries, the AIR Operating Partnership had i156,840,617
common OP Units outstanding. As of September 30, 2023, AIR owned i146,973,055 of the common OP Units of the AIR Operating Partnership and AIR had an equal number of shares of its Class A Common Stock outstanding, which we refer to as Common Stock. AIR’s ownership of the total common OP Units outstanding represents a i91.2%
legal interest in the AIR Operating Partnership and a i93.6% economic interest.
Note 2 — iSummary
of Significant Accounting Policies
i
Principles of Consolidation
We consolidate variable interest entities (“VIEs”), in which we are considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. As of September 30, 2023 and December 31, 2022, AIR
consolidated ifive and iseven VIEs, respectively, including the AIR Operating Partnership.
/i
Redeemable
Preferred OP Units
The AIR Operating Partnership has various classes of preferred OP Units. Each class of preferred OP Units is currently redeemable at the holders’ option. The AIR Operating Partnership, at its sole discretion, may settle such redemption requests in cash or cause AIR to issue shares of its Common Stock with a value equal to the redemption price. The preferred OP Units are therefore presented within temporary equity in AIR’s condensed consolidated balance sheets and within temporary partners’ capital in the AIR Operating Partnership’s condensed consolidated balance sheets.
i
The following table
presents a rollforward of the AIR Operating Partnership’s preferred OP Units’ redemption value (in thousands):
The
AIR Operating Partnership has outstanding various classes of redeemable preferred OP Units. As of September 30, 2023 and December 31, 2022, the AIR Operating Partnership had i2,846,524 and i2,846,574
redeemable preferred OP Units issued and outstanding, respectively. Distributions per annum range from i1.92% to i8.75%
per class and $i0.48 to $i8.00 per unit, respectively.
/i
Use
of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the condensed consolidated financial statements and accompanying notes thereto. Actual results could differ from those estimates.
Note 3 — iSignificant Transactions
Apartment Community Acquisitions
During
the three months ended September 30, 2023, we acquired ione apartment community located in Raleigh, North Carolina and ione apartment community located in Durham, North
Carolina. During the nine months ended September 30, 2023, we acquired ione additional apartment community located in South Florida with i495 apartment homes
and i29,000 square feet of commercial space. iSummarized information regarding these acquisitions is set forth in the table below (dollars in thousands):
(1)Total
consideration for the apartment community acquisition in South Florida includes $i101.2 million of debt assumed and the issuance of $i22.4 million in common OP Units.
(2)Intangible assets and below-market lease liabilities for the South
Florida apartment community acquisition have a weighted-average term of i1.4 years and i0.5 years, respectively. Intangible assets and below-market lease liabilities for the North Carolina apartment community acquisitions have a weighted-average term
of i0.5 years.
Apartment Community Dispositions
During the three months ended September 30, 2023, we sold ione apartment
community with i195 apartment homes included in our Other Real Estate segment for net proceeds of $i19.9 million which approximates its carrying value. During the nine months ended September 30, 2023, we sold ithree
apartment communities with i257 apartment homes included in our Other Real Estate segment for net proceeds of $i52.1 million which approximates their carrying value.
During the three months ended September
30, 2022, we did inot sell any apartment communities. During the nine months ended September 30, 2022, we sold i12 apartment communities with i2,050
homes, i10 of which were included in our Same Store segment and two included in our Other Real Estate segment, for a gain on disposition of $i587.6 million.
At
the end of each reporting period, we evaluate whether any communities meet the criteria to be classified as held for sale. As of September 30, 2023, no communities were classified as held for sale.
iImpairment
Impairments are rare; however, in exiting the New York market, we impaired three properties in 2023 as further described below. Real estate and other long-lived assets to be held and used are individually evaluated for impairment when conditions exist that may indicate the carrying amount of a long-lived asset
may not be recoverable. Impairment indicators include significant fluctuations in rental and other property revenues less property operating expenses, occupancy changes, significant near-term lease expirations, current and historical cash flow losses, rental rates, and if applicable, a comparison of an asset’s carrying value to its estimated fair value. Upon determination that an impairment has occurred, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the community.
During the three months ended September 30, 2023, we did inot
recognize any impairment losses. During the nine months ended September 30, 2023, we evaluated the expected hold period of three apartment communities in our Other Real Estate reporting segment. Given management's assessment of the likelihood of the sale of these assets, which occurred during the nine months ended September 30, 2023, we reduced the carrying value of three properties to their estimated fair value and recognized a non-cash impairment loss on real estate of $i23.6 million. As of September 30,
2023, the three impaired properties have been sold.
During the three and nine months ended September 30, 2022, we did iino/t
recognize any impairment losses.
Share Repurchases
During the three months ended September 30, 2023, AIR repurchased i2.2 million shares for $i77.8
million, at an average price of $i34.57 per share. As of September 30, 2023, we are authorized by the AIR Board of Directors to repurchase an additional $i105.5
million of shares. We consider share buybacks as part of a balanced investment program.
Joint Venture Transactions
In the third quarter of 2023, we formed an unconsolidated joint venture with a global institutional investor (the "Core JV") and in the second quarter of 2023, we formed an unconsolidated joint venture (the "Value-Add JV") with a global asset manager. Please see Note 6 for discussion regarding our joint venture transactions.
Note 4 — iLeases
Tenant
Lessor Arrangements
The majority of lease payments we receive from our residents are fixed. We receive variable payments from our residents primarily for utility reimbursements. iOur total lease income was comprised of the following amounts for all operating leases (in thousands):
Generally,
our residential leases do not provide extension options and, as of September 30, 2023, have an average remaining term of 10.8 months. In general, our commercial leases have options to extend for a certain period of time at the tenant’s option. iAs of September 30, 2023, future minimum annual rental payments we are contractually obligated to receive under residential and commercial leases, excluding such extension options, are as follows (in thousands):
Fixed-rate property debt due May 2025 to January 2055 (1)
$
i2,244,776
$
i1,906,151
Variable-rate
property debt
i—
i88,500
Total
non-recourse property debt
i2,244,776
i1,994,651
Debt
issuance costs, net of accumulated amortization
(i13,538)
(i9,221)
Total
non-recourse property debt, net
$
i2,231,238
$
i1,985,430
Unsecured
debt:
Term loans due December 2024 to April 2026 (2)
$
i475,000
$
i800,000
Revolving
credit facility borrowings due April 2025 (3)
i25,750
i462,000
ii4.58/%
Notes payable due June 2027
i100,000
i100,000
ii4.77/%
Notes payable due June 2029
i100,000
i100,000
ii4.84/%
Notes payable due June 2032
i200,000
i200,000
Total
unsecured debt
i900,750
i1,662,000
Debt
issuance costs, net of accumulated amortization
(i3,754)
(i5,801)
Total
unsecured debt, net
$
i896,996
$
i1,656,199
Total
indebtedness
$
i3,128,234
$
i3,641,629
(1)In
the first quarter of 2023, AIR borrowed $i320 million using i10-year fixed rate financing, bearing interest at i4.9%.
Proceeds were used to refinance a floating rate loan and reduce borrowings by $i230 million on our revolving credit facility. The stated rates on our fixed-rate property debt are between i2.7% to i5.7%.
(2)The
term loans bear interest at a one-month Term Secured Overnight Financing Rate (“SOFR”) plus i1.00% and a SOFR adjustment of i10-basis points, based on our current credit rating. As of September 30, 2023,
the weighted-average interest rate for our term loans before consideration of in place interest rate swaps was i6.4%. As of September 30, 2023, $i350 million of our term loans are fixed via interest rate swaps at a weighted-average
interest rate of i4.3%. The blended weighted-average interest rate for our $i475 million term loans, after consideration of in place interest rate swaps, is i4.9%.
The term loans mature on the following schedule: $i125 million matures on December 15, 2024, with a ione-year extension option; $i150
million matures on December 15, 2025; and $i200 million matures on April 14, 2026. As of September 30, 2023, the weighted-average remaining term of the term loans was i2.3
years.
(3)As of September 30, 2023, we had capacity to borrow up to $i970.0 million under our revolving credit facility after consideration of undrawn letters of credit. The revolving credit facility bears interest at a one-month Term SOFR plus i0.89%,
based on our current credit rating, and a SOFR adjustment of i10-basis points. As of September 30, 2023, the weighted-average interest rate for our revolving credit facility was i6.3%.
/
During
the three months ended September 30, 2023, AIR refinanced our $i325 million of term loans with fixed rate property debt to lock in rates for debt with longer maturities. The amount included full repayment of $i150 million of our term loans with a maturity
of December 15, 2023 and partial repayment of $i175 million of term loans with a maturity of December 15, 2024. In conjunction with the prepayment, AIR accelerated recognition of $i0.8 million
of associated debt issuance costs, which is included in interest expense in our condensed consolidated statements of operations.
In advance of a joint venture closing during the period, AIR placed $i611.4 million in new fixed-rate property debt related to inine
properties, which was subsequently contributed to the Core JV. Additionally, ione property with $i33.0 million in fixed-rate property debt was also contributed to the Core JV, for a total of $i644.4 million
of debt contributed. As the Core JV is unconsolidated, this fixed-rate property debt is excluded from our condensed consolidated balance sheet as of September 30, 2023.
In April 2023, we established a secured credit facility that provides for up to $i1 billion of committed property level financing, on an as needed basis. The facility has minimal upfront costs, a i15-year
term, and provides AIR the opportunity to place up to 10-year non-recourse property debt financing. Pricing can be fixed rate or variable rate at AIR's choice and is based on the Fannie Mae grid. As of September 30, 2023, and after consideration of the secured credit facility, our share of cash and cash equivalents, and our share of restricted cash, total liquidity is approximately $i2.1 billion.
Under our credit agreement and unsecured notes payable, we have agreed to maintain certain financial covenants, as well as other covenants customary for similar credit arrangements. The financial covenants we are required to maintain include a maximum leverage ratio of no greater than i0.60 to 1.00; a fixed charge coverage ratio of no less than i1.50
to 1.00, a maximum secured indebtedness to total assets ratio of no greater than i0.40 to 1.00, a maximum unsecured leverage ratio no greater than i0.60 to 1.00, and a minimum unsecured interest coverage ratio no less than i1.50
to 1.00.
Note 6 — iInvestment in Joint Ventures
Joint Venture Transactions
In the third quarter of 2023, we formed the Core JV by contributing i10
properties included in our Same Store reporting segment located in Philadelphia, Washington, D.C. area, Denver area, Oceanside, and Kendall. The Core JV, in which we retain a i53% interest, closed with respect to (i) eight of the properties in July 2023, (ii) one property in August 2023, and (iii) one property in September 2023. The i10
properties, with a total fair value of $i1.1 billion and a carrying value of $i373.3 million, were contributed to the Core JV subject to $i644.4
million of non-recourse property debt, which represents a non-cash financing activity during the period. In advance of the joint venture closing, AIR placed $i611.4 million in new non-recourse property debt, which was subsequently contributed to the joint venture. As a result of the transaction, AIR received $i201.9
million in cash and recognized a gain of $i698.8 million, including the measurement of the fair value of our interest in the Core JV during the three months ended September 30, 2023. AIR will earn various fees for providing property management, construction, and corporate services to the joint venture.
Additionally, during the third quarter of 2023, AIR and our joint venture partner increased the investment in the Core JV to fund the joint venture's acquisition
of an eleventh property, a i456-unit property located in Bethesda, Maryland. The Core JV funded the acquisition with $i155.0 million in new debt, and capital contributions to the joint venture of $i95.0
million, for a purchase price of $i250.0 million.
In addition, during the second quarter of 2023, we formed the Value-Add JV by contributing the Huntington Gateway property, a i443-unit property located in Virginia. AIR is
the general partner and retains legal ownership of i30%, and AIR will receive i50% of the net cash flows from operations, and various fees for providing property management, construction, and corporate services to the joint venture. We recognized
a gain of $i0.5 million during the nine months ended September 30, 2023 in connection with this transaction.
Unconsolidated Joint Ventures
As of September 30, 2023, AIR has equity investments in three significant unconsolidated joint ventures: the Core JV, the Value-Add JV, and the Virginia JV (collectively, the "Joint Venture Entities"). We account for
these joint ventures utilizing the equity method of accounting and our ownership interests meet the definition of a VIE. However, we are not the primary beneficiary and do not consolidate these entities.
i
Virginia
JV
Value-Add JV (1)
Core JV
Initial formation date
October 2021
June 2023
July 2023
AIR Ownership
i20%
i30%
i53%
Outside
Entities Ownership
i80%
i70%
i47%
Number
of Apartment Communities
i3
i1
i11
Apartment
Units
i1,748
i443
i3,549
(1)A
global asset manager acquired a i70% legal ownership in the Huntington Gateway property, but AIR will receive i50% of the net cash flows from operations, and various fees for providing property management, construction, and corporate services to the joint venture.
The carrying value of AIR's investment in each joint venture is included in investment in unconsolidated real estate partnerships in our condensed consolidated balance sheets. AIR's exposure to the obligations of the VIEs is limited to the carrying value of the limited partnership interests and AIR's interest of the joint ventures' guarantor non-recourse liabilities. The following table summarizes certain relevant information with respect to our investments in unconsolidated joint ventures (in thousands):
(1)AIR's
investment in unconsolidated real estate partnerships in our condensed consolidated balance sheets includes $i31.6 million related to two immaterial unconsolidated investments and certain basis differences.
(1)AIR's
investment in unconsolidated real estate partnerships in our condensed consolidated balance sheets includes $i21.2 million related to two immaterial unconsolidated investments.
The Company recognizes earnings or losses from our investments in unconsolidated joint ventures consisting of our proportionate share of the net earnings or losses of the joint ventures. In addition, we earn various fees for providing property management, construction, and corporate services to the Joint Venture
Entities. The table below presents earnings or losses attributable to our investments in unconsolidated joint ventures, which is included in loss from unconsolidated real estate partnerships in our combined condensed consolidated statements of operations (in thousands):
In addition to the matters described below, we are a party to various legal actions and administrative proceedings arising in the ordinary course of business, some of which are covered by our general liability insurance program, and none of which we expect to have a material adverse effect on our condensed consolidated financial condition, results of operations, or cash flows.
Environmental
Various federal,
state, and local laws subject apartment community owners or operators to liability for management and the costs of removal or remediation of certain potentially hazardous materials that may be present in the land or buildings of an apartment community. Such laws often impose liability without regard to fault or whether the owner or operator knew of, or was responsible for, the presence of such materials. The presence of, or the failure to manage or remediate properly, these materials may adversely affect occupancy at such apartment communities as well as the ability to sell or finance such apartment communities. In addition, governmental agencies may bring claims for costs associated with investigation and remediation actions. Moreover, private plaintiffs may potentially make claims for investigation and remediation costs they incur or for personal injury, disease, disability, or other infirmities related to the alleged presence of hazardous materials. In addition to
potential environmental liabilities or costs associated with our current apartment communities, we may also be responsible for such liabilities or costs associated with communities we acquire or manage in the future or apartment communities we no longer own or operate.
We have determined that our legal obligations to remove or remediate certain potentially hazardous materials may be conditional asset retirement obligations (“AROs”), as defined by GAAP. Except in limited circumstances where the asset retirement activities are expected to be performed in connection with a planned construction project
or apartment community casualty, we believe that the fair value of our AROs cannot be reasonably estimated due to significant uncertainties in the timing and manner of settlement of those obligations. AROs that are reasonably estimable as of September 30, 2023, are immaterial to our condensed consolidated financial statements.
Note 8 — iEarnings and Dividends per Share and per Unit
i
Reconciliations
of the numerator and denominator in the calculations of basic and diluted earnings per share and per unit are as follows (in thousands, except per share and per unit data):
Basic
net income attributable to AIR common stockholders
$
i663,596
$
i1,760
$
i650,700
$
i574,363
Effect
of dilutive instruments
i1,570
i—
i4,710
i4,807
Dilutive
net income attributable to AIR common stockholders
$
i665,166
$
i1,760
$
i655,410
$
i579,170
Denominator
– shares:
Basic weighted-average common shares outstanding
i147,474
i153,811
i148,372
i155,488
Dilutive
common share equivalents outstanding
i2,571
i246
i2,320
i1,952
Dilutive
weighted-average common shares outstanding
i150,045
i154,057
i150,692
i157,440
Earnings
per share – basic
$
i4.50
$
i0.01
$
i4.39
$
i3.69
Earnings
per share – diluted
$
i4.43
$
i0.01
$
i4.35
$
i3.68
Earnings
per unit
Numerator:
Basic net income attributable to the AIR Operating Partnership’s common unitholders
$
i705,982
$
i1,897
$
i691,945
$
i611,416
Effect
of dilutive instruments
i1,570
i—
i4,710
i4,935
Dilutive
net income attributable to the AIR Operating Partnership’s common unitholders
$
i707,552
$
i1,897
$
i696,655
$
i616,351
Denominator
– units:
Basic weighted-average common units outstanding
i157,366
i163,866
i158,138
i165,578
Dilutive
common unit equivalents outstanding
i2,571
i246
i2,320
i1,951
Dilutive
weighted-average common units outstanding
i159,937
i164,112
i160,458
i167,529
Earnings
per unit – basic
$
i4.49
$
i0.01
$
i4.38
$
i3.69
Earnings
per unit – diluted
$
i4.42
$
i0.01
$
i4.34
$
i3.68
/
For
the three and nine months ended September 30, 2023 and 2022, dividends and distributions paid per share of Common Stock and per common unit were $i0.45 and $i1.35,
respectively.
The number of common share equivalent securities excluded from the diluted earnings per share calculation was approximately i4.0 million and i3.4
million for the three and nine months ended September 30, 2023, respectively. The number of common share equivalent securities excluded from the diluted earnings per share calculation was approximately i1.9 million for the three months ended September 30, 2022. There were ino
anti-dilutive securities for the nine months
ended September 30, 2022. These securities, which include preferred OP Units redeemable for Common Stock for the comparable period in 2022, were excluded from the earnings per share calculation as they were anti-dilutive.
Note 9 — iFair
Value Measurements
We estimate the fair value of certain assets and liabilities using pricing models that rely on observable market information, including contractual terms, market prices, and interest rate yield curves. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value, as described below:
•Level 1 – Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•Level 2 – Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
•Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
i
The following table summarizes investments measured at fair value on a recurring basis, which are presented in other assets, net, and accrued liabilities and other in our condensed consolidated
balance sheets (in thousands):
(1)During
the second quarter of 2023, the interest rate swap option asset and offsetting liability associated with the Parkmerced mezzanine investment was settled, resulting in equal decreases in other assets, net and accrued liabilities and other in the condensed consolidated balance sheets.
/
Financial Assets and Liabilities Not Measured at Fair Value
We believe that the carrying value of the consolidated amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximated their estimated fair value as of September 30, 2023 and December 31, 2022, due to their relatively
short-term nature and high probability of realization. The carrying value of our revolving credit facility and term loans, which we classify as Level 2 in the GAAP fair value hierarchy, approximated their estimated fair value as of September 30, 2023 and December 31, 2022, as they bear interest at floating rates which approximate market rates.
i
We classify the fair value of our non-recourse property debt, unsecured notes payable,
seller financing notes receivable, and preferred equity investment within Level 2 of the GAAP fair value hierarchy, as summarized in the following table (in thousands):
(1)During
the year ended December 31, 2022, we provided $i40.0 million of seller financing as partial consideration for the sale of our New England portfolio. The contractual interest rate on the note is i4.5%. The difference between
the stated rate and the market interest rate as of
the date of sale resulted in a discount recorded of $i8.5 million.
The seller financing note and related discount are included in other assets, net in our condensed consolidated balance sheets.
(2)In conjunction with the Value-Add JV transaction, AIR received a preferred equity investment within the joint venture. The contractual interest rate on the preferred equity investment is i7.25%. The difference between the stated rate and the effective interest rate as of the date of the transaction resulted in a discount recorded of $i5.9
million. The preferred equity investment and related discount are included in investment in unconsolidated real estate partnerships in our condensed consolidated balance sheets.
Note 10 — iDerivative Financial Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
Our objectives in using interest rate derivatives are to
add predictability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps and treasury locks as part of our interest rate management strategy. Interest rate swaps primarily involve the receipt of variable-rate and fixed-rate amounts from a counterparty in exchange for us making fixed-rate or variable-rate payments over the life of the agreements without exchange of the underlying notional amounts.
Changes in fair value of derivatives designated as cash flow hedges are recognized in accumulated other comprehensive income and subsequently reclassified into earnings as an increase or decrease to interest expense. During the three and nine months ended September 30, 2023, we reclassified gains of $i14.2 million
and $i23.7 million out of accumulated other comprehensive income into interest expense, respectively, inclusive of the Company's acceleration of the reclassification of amounts in accumulated other comprehensive income given that certain hedged forecasted transactions are not expected to occur. During the third quarter of 2023, the Company accelerated a gain of $i11.5 million
into earnings due to the early payoff of the hedged term loans previously designated. During the three and nine months ended September 30, 2022, we reclassified losses of $i0.7 million and $i2.7 million
out of accumulated other comprehensive income, net into interest expense, respectively. As of September 30, 2023, we estimate that during the next 12 months, we will reclassify into earnings approximately $i7.4 million of the unrealized gain in accumulated other comprehensive income.
Changes in fair value of derivatives not designated in a hedge relationship, or economic hedges, are recognized in gain on derivative instruments, net, in our condensed consolidated
statements of operations once realized. During the three and nine months ended September 30, 2023, we recorded gains of $i14.1 million and $i23.3 million,
respectively. During the three and nine months ended September 30, 2022, iino/
amounts were recognized related to derivatives not designated in a hedge relationship.
During the second quarter of 2023, we de-designated $i830 million of notional value pay-fixed, receive-floating interest rate swaps. As a result, the accumulated unrealized gains at time of de-designation of $i29.5
million was expected to be reclassified into earnings over the remaining term of the forecasted transactions. During the three months ended September 30, 2023, $i2.6 million of this balance was reclassified out of accumulated other comprehensive income into interest expense, and $i11.5 million
was accelerated into gain on derivative instruments, net, as described above. The remaining balance of $i15.4 million is included within accumulated other comprehensive income as of September 30, 2023 and will be reclassified into earnings over the remaining term of the forecasted transaction.
During the three months ended September 30, 2023, we terminated isix
interest rate swap positions not designated as hedging instruments. Three of the terminated instruments were pay-floating, receive-fixed interest rate swaps with a notional value of $i230 million, and three were offsetting pay-fixed, receive-floating interest rate swaps with a notional value of $i230 million.
Upon termination, AIR received $i11.1 million in cash.
As of September 30, 2023, AIR had a notional value of $i600 million of pay-fixed,
receive-floating interest rate swaps that are not designated as hedging instruments, and a notional value of $i50 million of forward starting interest rate swaps that are not designated as hedging instruments. These derivative instruments are partially offset by a notional value of $i250 million
of pay-floating, receive-fixed interest rate swaps that are not designated as hedging instruments. Accordingly, the changes in the fair value of these derivatives are recognized in gain on derivative instruments, net, in our condensed consolidated statements of operations. As a result of the $i250 million of pay-floating, receive-fixed interest rate swaps that are not designated as hedging instruments, we expect to receive monthly fixed interest income representing the spread between the offsetting pay-fixed and receive-fixed legs of our interest rate swap positions over a weighted-average term of i2.6
years.
Subsequent to September 30, 2023, AIR entered into a notional value $i125 million pay-fixed, receive-floating interest rate swap, which economically hedges the remaining $i125 million
of variable-rate term loans, which results in the $i475 million in term loans having an effective interest rate of i4.3%.
i
The
following table summarizes our derivative financial instruments (dollars in thousands):
Derivative Liabilities (included in Accrued Liabilities and Other)
Instruments
Amount
Fair Value
Derivatives designated as hedging instruments:
Treasury
rate locks
i1
$
i100,000
$
i319
$
i—
Interest
rate swaps, floating to fixed
i10
$
i830,000
$
i32,222
$
i—
/
Note
11 — iVariable Interest Entities
Consolidated Entities
AIR consolidates the AIR Operating Partnership, a VIE of which AIR is the primary beneficiary. AIR, through the AIR Operating Partnership, consolidates all VIEs for which it is the primary beneficiary. Substantially all of the assets and liabilities of AIR are those of the AIR Operating Partnership.
The AIR Operating Partnership consolidates (i) three VIEs that own interests in one or more apartment communities and are typically structured to generate
a return for their partners through the operation and ultimate sale of the communities and (ii) one VIE related to a lessor entity that owns an interest in a property leased to a third party. The AIR Operating Partnership is the primary beneficiary in the limited partnerships in which it is the sole decision maker and has a substantial economic interest.
i
The table below summarizes apartment community information regarding VIEs consolidated by the AIR Operating Partnership:
(1)During
the nine months ended September 30, 2023, the number of our VIEs with interests in apartment communities decreased due to our Core JV partner's acquisition of an indirect i47% interest through the Core JV in one consolidated limited partnership with i175
apartment homes, and our purchase of the remaining non-controlling interest in a consolidated limited partnership with i328 apartment homes, which was subsequently contributed to the Core JV during the third quarter.
/
Assets of the AIR Operating Partnership’s consolidated VIEs must first be used to settle the liabilities of such consolidated VIEs. These consolidated VIEs’ creditors do not have recourse to the general credit of the AIR
Operating
We have an interest in a partnership that owns Parkmerced Apartments, which meets the definition of a VIE. However, we are not the primary beneficiary and do not consolidate this partnership. As of September 30, 2023 and December 31, 2022, the investment balance of $i158.3 million and $i158.7 million,
respectively, is included in other assets, net, in our condensed consolidated balance sheets. Subsequent to the December 2020 separation, all risks and rewards of ownership are retained by the third party; however, as legal transfer has not occurred, there is an equal and offsetting liability included in accrued liabilities and other in our condensed consolidated balance sheets. Accordingly, there is no net effect on AIR’s stockholders’ equity or the AIR Operating Partnership’s partners’ capital.
Please see Note 6 for further discussion regarding our unconsolidated joint ventures.
Note 12 — iBusiness
Segments
We have itwo segments: Same Store and Other Real Estate. Our Same Store segment includes communities that are owned and managed by AIR and have reached a stabilized level of operations. Our Other Real Estate segment includes ifour
properties acquired in 2022, ifour properties previously leased to Aimco, and ifour properties acquired in 2023.
Our chief operating decision maker (“CODM”) uses proportionate property net
operating income (“NOI”) to assess the operating performance of our communities. Proportionate property NOI reflects our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements. In our condensed consolidated statements of operations, utility reimbursements are included in rental and other property revenues in accordance with GAAP.
As of September 30, 2023, our Same Store segment included i63 apartment communities with i22,794
apartment homes and our Other Real Estate segment included i12 apartment communities with i3,829 apartment homes.
The following tables present the total revenues, property operating expenses, proportionate property net
operating income (loss), and income (loss) before income tax expense of our segments on a proportionate basis, excluding amounts related to communities sold. iTo reflect how the CODM evaluates the business, prior period segment information has been recast to conform with our reportable segment composition as of September 30, 2023 (in thousands):
Same
Store
Other Real Estate
Proportionate and Other Adjustments (1)
Corporate and Amounts Not Allocated to Segments (2)
Other
operating expenses not allocated to segments (3)
i—
i—
i—
i300,720
i300,720
Total
operating expenses
i111,316
i5,799
i38,559
i321,725
i477,399
Proportionate
property net operating income (loss)
i299,736
i10,638
i54,628
(i276,552)
i88,450
Other
items included in income before income tax expense (4)
i—
i—
i—
i528,955
i528,955
Income
from before income tax expense
$
i299,736
$
i10,638
$
i54,628
$
i252,403
$
i617,405
(1)Represents
adjustments to: (i) include AIR’s proportionate share of the results of unconsolidated apartment communities, which is excluded in the related consolidated amounts, and (ii) exclude the noncontrolling interests in consolidated real estate partnerships’ proportionate share of the results of communities, which is included in the related consolidated amounts. Also includes the reclassification of utility reimbursements from revenues to property operating expenses for the purpose of evaluating segment results. Utility reimbursements are included in rental and other property revenues in our condensed consolidated statements of operations prepared in accordance with GAAP.
(2)Includes: (i) the operating results of apartment communities sold during the periods shown or held for sale at the end of the period, if any, (ii) property management revenues, which are not part of our segment performance measure, property
management expenses and casualty gains and losses, which are included in consolidated property operating expenses and are not part of our segment performance measure, and (iii) the depreciation of capitalized costs of non-real estate assets.
(3)Includes depreciation and amortization, general and administrative expenses, and other expenses, net, and may also include write-offs of deferred leasing commissions, which are not included in our measure of segment performance.
(4)Includes interest income, interest expense, loss on extinguishment of debt, gain on dispositions of real estate, provision for impairment loss, and loss from unconsolidated real estate partnerships.
(1)Includes
the assets not allocated to our segments including: (i) corporate assets; (ii) the mezzanine loan investment where the rights and obligations of ownership have been assigned to Aimco; and (iii) properties sold or classified as held for sale.
/i
For the nine months ended September 30, 2023 and 2022,
capital additions related to our segments were as follows (in thousands):
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. This Quarterly Report on Form 10-Q contains information that is forward-looking within the meaning of the federal securities laws, including, without limitation, statements regarding: the payment of dividends and distributions in the future; our ability to maintain current or meet projected occupancy, rental rate and property operating results; expectations regarding consumer demand, growth in revenue and strength of other performance metrics
and models; the effect of acquisitions and dispositions; expectations regarding acquisitions as well as sales and the formation of joint ventures and the use of proceeds thereof; the availability and cost of corporate debt; our ability to comply with debt covenants; and risks related to the provision of property management services to third parties and our ability to collect property management and asset management related fees.
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: 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, the level of unemployment, and recession; the amount, location, and quality of competitive new housing supply, which may be impacted by global supply chain disruptions; 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 interest rate changes and 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; and 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. Other risks and uncertainties are described in this Quarterly Report on Form 10-Q, as well as the section entitled “Risk Factors” in Item 1A of AIR’s and AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022, 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.
Certain financial and operating measures found herein and used by management are not defined under GAAP. These measures are defined and reconciled to the most directly comparable GAAP measures under the Non-GAAP Measures heading and include: NAREIT Funds from Operations, Pro forma Funds from Operations, Run-Rate Funds from Operations, Run-Rate Adjusted Funds from Operations, and the measures used to compute our leverage
ratios.
Executive Overview
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.
•Continuously improve our best-in-class property operations platform, the “AIR
Edge,” to generate above-market organic growth.
•Maintain an efficient cost structure to keep net general and administrative expenses 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.
•Form
private capital partnerships as a source of equity capital for accretive growth.
•Continue our commitment to corporate responsibility with transparent and measurable goals.
We own 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 September 30, 2023, our portfolio included 75 apartment communities with 26,623 apartment homes, in which we held an average ownership of approximately 81%. We also have one land parcel and one indirect land interest that we lease to third parties.
Our business is organized around four areas of strategic focus: operational excellence; portfolio management; balance sheet; and team and culture. The results from the execution of our strategy
are further described in the sections that follow.
Operational Excellence
In the third quarter of 2023, Pro forma FFO increased 10.3% year-over-year as a result of same store revenue growth of 6.8% which drove higher net operating income of 6.3%, primarily driven by an increase of 5.6% in residential rents.
Portfolio Performance
Approximately 20% of AIR’s capital is invested in acquisitions made since 2021. Acquisition properties experience a rate of NOI growth during the first few years of AIR management that is much higher than the same store portfolio rate. Two-thirds of these investments were made prior to July 2022; therefore, comparative information is available. These properties' year-over-year NOI growth was up 17.4%, increasing year-over-year NOI growth rate of the total Acquisition
and Same Store portfolios by 170 basis points to 7.2%.
Third Quarter 2023 Paired Trades
As previously announced, AIR contributed 10 properties to the Core JV, retaining a 53% interest. In exchange for the 47% interest sold, AIR received $505 million of gross consideration. AIR also completed its strategic exit from New York City through the sale of a property for $21 million in gross proceeds.
In turn, AIR improved its portfolio through reinvesting $287 million in three new properties. In comparison to the property interests sold, the acquired properties:
•have 11% higher average rents at $2,751 per month;
•were constructed in the last two years (in contrast to 26 years for the interests sold); and
•require
annual capital replacement spending that is $2,600 per unit lower than the interests sold.
AIR used the remaining proceeds to:
•repurchase 2.2 million shares for $77.8 million (reflecting an average price of $34.57 per share, and a forward NOI yield of approximately 6.3%).
•reduce leverage, with an average interest cost of 6.1%, by approximately $161 million.
Balance Sheet and Liquidity
During the third quarter of 2023, AIR refinanced $154 million of borrowings on AIR's revolving credit facility and $325 million of term loans maturing in 2023 and 2024, with new fixed rate property debt. The new debt has a weighted-average life of 5.3 years and a weighted-average interest rate of
5.2%; 30-basis points greater than the short-term debt repaid.
Today, AIR has:
•Near-term exposure to rising interest rates limited to:
▪$79 million on our share of the Virginia JV debt due to the maturity in January 2024 of the in-place interest rate cap; plus
▪$26 million on our revolving credit facility
•No debt maturities until the second quarter of 2025;
•$5.3 billion of properties unencumbered by non-recourse debt; and
•Limited refunding risk with the ability to fund all maturities through 2027 from cash on hand, and a 10-year commitment to make $1 billion of property loans with up to 10-year maturities.
At year-end, AIR anticipates Net Leverage to Adjusted EBITDAre to be below 6.0x; consistent with its target range of 5.0x to 6.0x. As of September 30, 2023, AIR's leverage is temporarily elevated due to the timing of third quarter acquisitions.
Dividend and Equity Capital Markets
On October 30, 2023, the AIR Board of Directors declared
a quarterly cash dividend of $0.45 per share of Common Stock, payable on November 30, 2023 to shareholders of record on November 17, 2023. In setting the 2023 dividend rate, the Board of Directors targeted a 75% payout ratio of Pro forma FFO, in 2023 equivalent to approximately 86% of Run-Rate AFFO.
Team and Culture
Our team and culture are keys to our success. We have a relentless focus on productivity and innovation. We continuously seek to reduce costs through the use of additional automation and continued technological investment, and by avoiding costs, for example by retention of residents. We apply this same focus to our general and administrative expenses, expecting these costs to be lower, as a percentage of the gross asset value of our investments, than are our peers.
We
are defined by a commitment to our mission, vision, and values. We strive to provide an exceptional living experience for residents and a great place to work for teammates, to be a good neighbor in the communities we serve, and a good steward for our investors. We are accountable to teammates in return for their hard and meaningful work of providing homes for others. We see our workforce as a team, and not employees only. Our view is relational, and not transactional, reflecting a longer view of the benefits of a cohesive and caring team.
Our intentional focus on a collaborative and productive culture based on respect for others and personal responsibility is reinforced by a preference for promotion from within. We focus on succession planning and talent development to produce a strong, stable team that is the enduring foundation of our success. The Compensation and Human Resources Committee of the Board of Directors is responsible
for succession planning in all leadership positions, both in the short-term and the long-term, with particular focus on CEO succession.
Our focus on our team and culture is widely recognized. In 2023, AIR was named a Kingsley Excellence Elite Five multifamily company and a winner of the 2023 Kingsley Excellence Awards for customer service for the second year in a row. Of the winners, AIR ranked second among all operators, and first among publicly traded REITs. AIR is committed to world-class customer service, which we deliver through listening to, learning from, and responding to our residents every day. We also benefit from the support of great leadership, contributions from exceptional teammates, and a strong culture. These strengths are confirmed by such awards as AIR's 2023 Top Workplaces USA Award (the second consecutive year), a 10-time winner of Top Workplace in Colorado (by the Denver Post), Top Workplace in Philadelphia
(by The Philadelphia Inquirer), and in South Florida (by the Sun Sentinel) as well as two time winner of Built in 2023 Best Places to Work in Colorado, Los Angeles, Miami, and Washington, D.C., and the Denver Business Journal Healthiest Employer in Colorado for the third year in a row. We take seriously our responsibility to care for our customers, our neighbors, and each other as teammates. We are grateful for these recognitions and consider them confirmation of our success.
We are committed to transparency, and continuous improvement, as measured by Global Real Estate Sustainability Benchmark (“GRESB”). Strong progress was made by AIR in 2023 in advancing its commitments to responsibility beyond governance, achieving a GRESB score of 82 out of 100, placing AIR in the top 20% of residential companies in the Americas. We also published our 2022-2023 Corporate Responsibility Report highlighting our commitment to community
and continued progress on our goals.
Results of Operations
Because our operating results depend primarily on income from our apartment communities, the supply of and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our apartment communities and the pace and price at which we acquire and dispose of our apartment communities affects our operating results.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements included in Item 1.
Net income attributable to common stockholders per common share, on a dilutive basis was $4.43 and $4.35 for the three and nine months ended September 30, 2023, respectively, compared to $0.01 and $3.68 for the three and nine months ended September 30, 2022, respectively, due primarily to:
•Same Store revenue growth of 6.8% which resulted in higher net operating income ("NOI") of 6.3%, primarily driven by an increase of 5.6% in residential rents for the three months ended September 30, 2023 compared to 2022. Additionally, acquisitions are growing faster than Same Store. For example, the Class of 2022 had revenue growth
of 9.9%, which resulted in higher NOI of 20.1% for the three months ended September 30, 2023 compared to 2022,
•Higher gains on dispositions of real estate,
•Gains on derivative instruments, and
•Lower loss on extinguishment of debt, offset partially by
•Lower interest income from the note receivable from Aimco, which was repaid in the second and third quarters of 2022, and the $17.4 million prepayment penalty received from Aimco in connection with these repayments, and
•Higher interest expense due to higher interest rates and higher outstanding property debt balances.
Pro
forma FFO per share was $0.64 and $1.76 for the three and nine months ended September 30, 2023, respectively, compared to $0.58 and $1.81 for the three and nine months ended September 30, 2022, respectively, due primarily to the below factors.
•Same Store revenue growth of 6.8% which resulted in higher NOI of 6.3% primarily driven by an increase of 5.6% in residential rents for the three months ended September 30, 2023 compared to 2022. Additionally, acquisitions are growing faster than Same Store. For example, the Class of 2022 had revenue growth of 9.9% which resulted in higher NOI of 20.1% for the three month ended September 30, 2023 compared to 2022, and
•Gains
on derivative instruments as noted above, offset partially by
•A decrease in interest income as noted above, and
•An increase in interest expense as noted above.
For the three and nine months ended September 30, 2023, Pro forma FFO includes $0.05 per share of non-recurring items including derivative gains that were accelerated through the repayment of certain previously hedged term loans, partially offset by higher than anticipated casualty and legal costs. After consideration of these non-recurring items Run-Rate FFO per share was $0.59 and $1.72 for the three and nine months ended September 30, 2023, respectively.
For the three and nine months ended
September 30, 2022, Pro forma FFO includes $0.03 and $0.22 per share, respectively, of non-recurring items including the impact from the Aimco note receivable prepayment. After consideration of these non-recurring items Run-Rate FFO per share was $0.55 and $1.59 for three and nine months ended September 30, 2022, respectively.
Additionally, Run-Rate AFFO per share was $0.52 and $1.51 for three and nine months ended September 30, 2023, respectively, compared to $0.50 and $1.42 for three and nine months ended September 30, 2022, respectively. Our 2023 capital allocation decisions have resulted in paired trades in which we have purchased apartment communities with an anticipated higher rate of NOI growth and lower recurring capital
needs and sold partial interests in apartment communities with lower anticipated rates of NOI growth and higher capital needs.
Results of Operations for the Three and Nine Months Ended September 30, 2023, Compared to 2022
Property Operations
We have two segments: Same Store and Other Real Estate. Our Same Store segment includes communities that are owned and managed by AIR and have reached a stabilized level of operations. Our Other Real Estate segment includes four properties acquired in 2022, four properties previously leased to Aimco, and four properties acquired in 2023.
As of September 30, 2023, our Same Store segment included 63 apartment communities with 22,794 apartment homes and our Other
Real Estate segment included 12 apartment communities with 3,829 apartment homes.
Our proportionate share of financial information includes our share of unconsolidated real estate partnerships and excludes the noncontrolling interest partners’ share of consolidated real estate partnerships. We believe proportionate information benefits the users of our financial information by providing the amount of revenues, expenses, assets, liabilities, and other items attributable to our stockholders.
We
use proportionate property NOI to assess the operating performance of our communities. Proportionate property NOI reflects our share of rental and other property revenues, excluding utility reimbursements, less direct property operating expenses, net of utility reimbursements. In our condensed consolidated statements of operations, utility reimbursements are included in rental and other property revenues in accordance with GAAP.
We do not include offsite costs associated with property management, casualty gains or losses, or the results of apartment communities sold or held for sale in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below.
Please see Note 12 to the condensed
consolidated financial statements in Item 1 for further discussion regarding our segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses.
Three
Months Ended September 30,
Historical Change
(dollars in thousands)
2023
2022
$
%
Rental and other
property revenues, before utility reimbursements:
Same Store
$
151,619
$
142,009
$
9,610
6.8
%
Other
Real Estate
29,543
14,025
15,518
nm
Total
181,162
156,034
25,128
16.1
%
Property
operating expenses, net of utility reimbursements:
Same Store
40,353
37,349
3,004
8.0
%
Other
Real Estate
8,158
4,783
3,375
nm
Total
48,511
42,132
6,379
15.1
%
Proportionate
property net operating income:
Same Store
111,266
104,660
6,606
6.3
%
Other
Real Estate
21,385
9,242
12,143
nm
Total
$
132,651
$
113,902
$
18,749
16.5
%
For
the three months ended September 30, 2023, compared to 2022, excluding changes attributable to changes in ownership, our Same Store proportionate property NOI increased by 6.3%. This increase was attributable primarily to a $9.6 million, or 6.8%, increase in rental and other property revenues due to a 5.6% increase in residential rental rates, and a 1.2% increase in other rental income, partially offset by a 0.6% decrease in ADO.
Other Real Estate proportionate property NOI for the three months ended September 30, 2023, compared to 2022, increased by $12.1 million, due primarily to contribution from four properties acquired in 2023, four properties acquired in 2022, and NOI contribution from the four properties acquired on September
1, 2022, when their respective master leases were canceled.
Rental and other
property revenues, before utility reimbursements:
Same Store
$
445,881
$
411,052
$
34,829
8.5
%
Other
Real Estate
86,104
16,437
69,667
nm
Total
531,985
427,489
104,496
24.4
%
Property
operating expenses, net of utility reimbursements:
Same Store
117,014
111,316
5,698
5.1
%
Other
Real Estate
28,010
5,799
22,211
nm
Total
145,024
117,115
27,909
23.8
%
Proportionate
property net operating income:
Same Store
328,867
299,736
29,131
9.7
%
Other
Real Estate
58,094
10,638
47,456
nm
Total
$
386,961
$
310,374
$
76,587
24.7
%
For
the nine months ended September 30, 2023, compared to 2022, excluding changes attributable to changes in ownership, our Same Store proportionate property NOI increased by 9.7%. This increase was attributable primarily to a $34.8 million, or 8.5%, increase in rental and other property revenues due to an 8.1% increase in residential rental rates, and an 0.8% increase in other residential income, partially offset by a 0.7% decrease in ADO.
Other Real Estate proportionate property NOI for the nine months ended September 30, 2023, compared to 2022, increased by $47.5 million, due primarily to contribution from four properties acquired in 2023, four properties acquired in 2022, and NOI contribution from the four properties acquired on September
1, 2022, when their respective master leases were canceled.
Non-Segment Real Estate Operations
Operating income amounts not attributed to our segments include offsite costs associated with property management, casualty losses, and the results of apartment communities sold or held for sale, which we do not allocate to our segments for purposes of evaluating segment performance.
For the three and nine months ended September 30, 2023, compared to 2022, non-segment real estate operations decreased by $1.2 million and $21.8 million, respectively, due primarily to $5.9 million and $22.1 million of lower NOI attributable to sold properties due to decreased disposition activity, with dispositions of nine additional properties during 2022 compared to 2023.
Additionally,
for the three months ended September 30, 2023, the decrease in non-segment real estate operations was offset partially by $4.7 million of lower casualty losses due to receipt of third-party casualty recoveries in 2023.
Depreciation and Amortization
For the three months ended September 30, 2023, compared to 2022, depreciation and amortization expense decreased $11.4 million, or 12.6%, due primarily to the reduction in depreciation associated with sold properties, offset partially by properties acquired subsequent to September 30, 2022.
For the nine months ended September 30, 2023, compared to 2022, depreciation and amortization expense increased
$10.3 million, or 4.1%, due primarily to properties acquired subsequent to September 30, 2022, offset partially by the reduction in depreciation associated with sold properties.
General and administrative expenses
For the three months ended September 30, 2023, compared to 2022, general and administrative expenses decreased $2.0 million, or 26.1%, due primarily to lower personnel costs.
For the nine months ended September 30, 2023, compared to 2022, general and administrative expenses were relatively flat.
Other expenses, net, includes costs associated with our risk management activities, partnership administration expenses, and certain non-recurring items.
For the three and nine months ended September 30, 2023, compared to 2022, other expenses, net, increased by $3.2 million and $8.6 million, respectively, due primarily to higher legal expenses, and one-time severance payments. Additionally, for the nine months ended September 30, 2023, other expenses, net further increased due to incremental ground lease expense associated with an acquired property.
Interest Income
For the three and nine months ended September
30, 2023, compared to 2022, interest income decreased by $6.7 million, or, 69.6%, and $42.6 million, or 87.4%, respectively, due primarily to $17.4 million of lower interest income associated with the 2022 prepayment of our notes receivable from Aimco. Interest income decreased further due to lower interest income associated with properties leased to Aimco through September 1, 2022, when the leases were canceled.
Interest Expense
For the three months ended September 30, 2023, compared to 2022, interest expense decreased $9.8 million, or 29.9%, due primarily to the the impact of hedged derivative activity on interest expense, lower balances on our revolving credit facility, and repayment of $325 million of term loans.
For the nine months
ended September 30, 2023, compared to 2022, interest expense increased $15.8 million, or 19.6%, due primarily to higher rates on our term loans and revolving credit facility, interest expense associated with our senior unsecured notes issued in the second quarter of 2022, and higher outstanding property debt balances; offset partially by the impact of hedged derivative activity on interest expense, lower balances on our revolving credit facility, and repayment of $325 million of term loans.
Loss on Extinguishment of Debt
During the three months ended September 30, 2023 and 2022, we did not incur a loss on extinguishment of debt.
For the nine months ended September
30, 2023, compared to 2022, loss on extinguishment of debt decreased by $21.6 million, due to higher prepayment penalties incurred from the early payment of property debt in 2022.
Gains on Dispositions and Impairments of Real Estate
During the three months ended September 30, 2023, we recognized a $692.9 million gain on dispositions of real estate and impairments of real estate due primarily to the gain associated with sale of a partial interest in 10 properties in connection with the Core JV.
During the nine months ended September 30, 2023, we recognized a $675.5 million gain on dispositions and impairments of real estate due primarily to:
•$698.8 million of gain on
dispositions of real estate from the sale of 10 properties in connection with the Core JV;
•$0.5 million of gain in connection with the formation of the Value-Add JV; offset partially by
•A non-cash impairment loss on real estate of $23.6 million due to the evaluation of the expected hold period of three apartment communities included in our Other Real Estate reporting segment, which are now sold.
During the three months ended September 30, 2022, there were no apartment communities sold. During the nine months ended September 30, 2022, we recognized $587.6 million of gain on dispositions of real estate related to the sale of 12 apartment communities. During the three and nine months ended September
30, 2022, we did not recognize any real estate impairment losses.
Gain on Derivative Instruments
During the three and nine months ended September 30, 2023, we recognized $14.1 million and $23.3 million, respectively, of gains on derivative instruments that are not designated as cash flow hedges primarily related to mark-to-
market valuation changes and cancellation of certain interest swaps and treasury locks during the period. During the three and nine months ended
September 30, 2022, we did not recognize any gains on derivative instruments.
Loss from Unconsolidated Real Estate Partnerships
For the three and nine months ended September 30, 2023, compared to 2022, loss from unconsolidated real estate partnerships increased $10.3 million and $9.3 million, respectively. During the third quarter of 2023, our unconsolidated joint ventures generated NOI of $11.1 million. This incremental NOI was offset by higher depreciation expense due to valuing the properties in the Core and Value-Add JV's at fair market value.
Income Tax Expense
Certain of our operations, including property management, are conducted through taxable REIT subsidiaries (“TRS entities”).
Our income tax expense calculated in accordance with GAAP includes income taxes associated with the income or loss of our TRS entities for which the tax consequences have been realized or will be realized in future periods. Income taxes related to these items, as well as changes in valuation allowance, are included in income tax expense in our condensed consolidated statements of operations.
For the three and nine months ended September 30, 2023, compared to 2022, income tax expense increased $4.5 million and $4.9 million, respectively, due primarily to the recognition of an income tax liability resulting from the formation of the Core JV.
Critical Accounting Estimates
We
prepare our condensed consolidated financial statements in accordance with GAAP, which requires us to make estimates and assumptions. We believe that the critical accounting policies that involve our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements relate to the impairment of our long-lived assets.
Our critical accounting estimates are described in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of AIR’s and the AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022. There have been no other significant changes in our critical accounting estimates from those reported in our Form 10-K and we believe that the related judgments and assessments have been consistently
applied and produce financial information that fairly depicts the financial condition, results of operations, and cash flows for all periods presented.
Non-GAAP Measures
Certain key financial indicators we use in managing our business and in evaluating our financial condition and operating performance are non-GAAP measures. Key non-GAAP measures we use are defined and described below, and for those non-GAAP measures used or disclosed within this quarterly report, we provide reconciliations of the non-GAAP measures to the most directly comparable financial measure computed in accordance with GAAP.
NAREIT Funds From Operations, Pro forma Funds From Operations, Run-Rate FFO and Run-Rate Adjusted Funds From Operations
Many
of our investors focus on multiples of Funds From Operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), referred to herein as “NAREIT FFO.” These investors also focus on NAREIT FFO, as adjusted for non-cash, unusual, or non-recurring items. We refer to this metric as Pro forma Funds From Operations (“Pro forma FFO”) and use it as a measure of operational performance.
NAREIT FFO is a non-GAAP measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate assets generally appreciate over time or maintain residual value to a much greater extent than do other depreciable assets such as machinery, computers, or other personal property. NAREIT defines FFO as
net income computed in accordance with GAAP, excluding: (i) depreciation and amortization related to real estate; (ii) gains and losses from sales and impairment of depreciable assets and land used in our primary business; and (iii) income taxes directly associated with a gain or loss on the sale of real estate; and adjustments for our share of FFO of unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated on the same basis to determine NAREIT FFO. We calculate NAREIT FFO attributable to AIR common stockholders (diluted) by subtracting
dividends on Preferred Stock and preferred units and amounts allocated from NAREIT FFO to participating securities.
In addition to NAREIT FFO, we use Pro forma FFO, Run-Rate FFO and Run-Rate Adjusted Funds From Operations (“AFFO”) to measure short-term and current period performance. Pro forma FFO represents NAREIT FFO as defined above, excluding certain amounts that are unique or occur infrequently. Run-Rate FFO represents Pro forma FFO as defined above, excluding certain amounts that are unique or occur infrequently. Run-Rate AFFO represents Pro forma FFO as defined above, reduced by Capital Replacements, and is a measure of current period performance.
NAREIT FFO, Pro forma FFO, Run-Rate FFO and Run-Rate AFFO should not be considered alternatives to net income determined in accordance with GAAP, as indications of our performance. Although we use these non-GAAP measures for
comparability in assessing our performance compared to other REITs, not all REITs compute these same measures and those who do may not compute them in the same manner. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs.
Net income attributable to AIR common stockholders
$
663,596
$
1,760
$
650,700
$
574,363
Adjustments:
Real
estate depreciation and amortization, net of noncontrolling partners’ interest
87,169
85,057
260,930
240,436
Gain on dispositions and impairments of real estate, net of noncontrolling partners’ interest
(690,992)
—
(673,520)
(587,453)
Income
tax adjustments related to gain on dispositions and other tax-related items
4,400
(348)
4,400
(1,448)
Common noncontrolling interests in AIR OP’s share of above adjustments and amounts allocable to participating securities
38,773
(5,250)
25,962
21,327
NAREIT
FFO attributable to AIR common stockholders
$
102,946
$
81,219
$
268,472
$
247,225
Adjustments:
Gain
on derivative instruments (1)
(12,436)
—
(21,688)
—
Non-cash straight-line rent (2)
3,068
3,660
9,248
4,944
Business
transformation and transition related costs (3)
897
1,419
1,420
3,881
Loss on extinguishment of debt (4)
—
—
2,008
23,636
Casualty
losses and other (5)
(272)
4,389
1,855
4,635
Common noncontrolling interests in AIR OP’s share of above adjustments and amounts allocable to participating securities
541
(581)
454
(1,887)
Pro
forma FFO attributable to AIR common stockholders
$
94,744
$
90,106
$
261,769
$
282,434
Cash swap acceleration income, net of common noncontrolling interests in AIR OP and participating securities
(10,854)
—
(10,854)
—
Aimco
note prepayment, net of common noncontrolling interests in AIR OP and participating securities
—
(4,673)
—
(34,456)
Casualty and Legal expense in excess of run-rate, net of common noncontrolling interests in AIR OP and participating securities
2,665
—
4,628
—
Run
Rate FFO attributable to AIR common stockholders
$
86,555
$
85,433
$
255,543
$
247,978
Capital Replacements, net of common noncontrolling interests in AIR OP and participating securities
(7,476)
(6,706)
(26,449)
(22,912)
Leasing
Commissions, net of common noncontrolling interests in AIR OP and participating securities
(1,712)
(1,632)
(5,029)
(4,227)
Run-Rate AFFO attributable to AIR common stockholders
$
77,367
$
77,095
$
224,065
$
220,839
Weighted-average
common shares outstanding – basic
147,474
153,811
148,372
155,488
Dilutive common share equivalents
299
246
143
269
Total
shares and dilutive share equivalents
147,773
154,057
148,515
155,757
Net income attributable to AIR per share – diluted
$
4.43
$
0.01
$
4.35
$
3.68
NAREIT
FFO per share – diluted
$
0.70
$
0.53
$
1.81
$
1.59
Pro forma FFO per share – diluted
$
0.64
$
0.58
$
1.76
$
1.81
Run-Rate
FFO per share - diluted
$
0.59
$
0.55
$
1.72
$
1.59
Run-Rate AFFO per share - diluted
$
0.52
$
0.50
$
1.51
$
1.42
(1)During
2023, in anticipation of future financing transactions, we entered into treasury locks that did not qualify for hedge accounting under GAAP. Changes in the fair value of these instruments are included in net income attributable to AIR common stockholders. Any non-cash changes in fair value are excluded in the determination of Pro forma FFO.
(2)In 2018 and 2022, we assumed 99-year ground leases with scheduled rent increases. Due to the terms of the leases, GAAP rent expense will exceed cash rent payments until 2076 and 2079, respectively. We include the cash rent payments for these ground leases in Pro forma FFO but exclude the incremental straight-line non-cash rent expense. The rent expense for these leases is included in other expenses, net, in our condensed consolidated statements of operations.
(3)During 2023 and 2022, we incurred
consulting, placement, legal, and other transformation related costs as we fully implement AIR’s business model, including projects intended to increase efficiency and reduce costs in future periods. As we engage in and finalize our
finance transformation initiative that modernizes our systems and processes, including a new ERP system, we expect to continue to incur these costs throughout 2023. We excluded these costs from Pro forma FFO because we believe they are not related to ongoing operating performance.
(4)During 2023 and 2022, we
incurred debt extinguishment costs related to the prepayment of debt. In 2023, these costs are related to the prepayment of high-cost, floating-rate debt. We excluded these costs from Pro forma FFO because we believe they are not representative of future cash flows.
(5)During 2023, we incurred significant casualty losses related to fire damage at our Palazzo East at Park La Brea apartment community. During 2021, we incurred significant casualty losses due to Hurricane Ida-induced flooding in downtown Philadelphia causing damage to our Park Towne Place apartment community, whose clean-up costs extended into 2022. During the third quarter of 2023, we recorded a net gain upon receipt of third-party funds, upon closing the 2021 Park Towne Place claim. AIR excludes individually significant casualty losses from the computation of FFO when the expected gains or losses are atypical and costs are greater than
$1 million. Individual casualty losses less than $1 million are included in FFO. In 2023, these "normal" casualty losses are expected to exceed historical averages and AIR's expectation entering the year by $1.7 million. AIR has excluded casualty losses that exceeded our beginning of year expectations in the determination of Run-Rate FFO.
Please see the Results of Operations section for discussion of the factors affecting our Pro forma FFO for 2023.
Leverage Ratios
We target Net Leverage to Adjusted EBITDAre between 5.0x and 6.0x. We also focus on Proportionate Debt to Adjusted EBITDAre. We believe these ratios, which are based in part on non-GAAP financial information, are commonly used by investors and analysts to assess the relative financial risk associated with balance sheets of companies within the same industry, and they are
believed to be similar to measures used by rating agencies to assess entity credit quality.
Our leverage ratios for the three months ended September 30, 2023, are presented below:
Annualized Current Quarter
Proportionate Debt to Adjusted EBITDAre
6.2x
Net Leverage to Adjusted EBITDAre
6.3x
Proportionate
Debt, as used in our leverage ratios, is a non-GAAP measure and includes our share of the long-term, non-recourse property debt, outstanding borrowings under our revolving credit facility, term loans, and unsecured notes. Proportionate Debt excludes unamortized debt issuance costs because these amounts represent cash expended in earlier periods and do not reduce our contractual obligations. We reduce our recorded debt by the amounts of cash and restricted cash on-hand, excluding tenant security deposits included in restricted cash, assuming the remaining amounts of cash and restricted cash would be used to reduce our outstanding leverage.
We believe Proportionate Debt is useful to investors as it is a measure of our net exposure to debt obligations. Proportionate Debt, as used in our leverage ratios, is calculated as set forth in the table below.
Preferred equity represents the redemption
amounts for AIR’s Preferred Stock and the AIR Operating Partnership’s Preferred Partnership Units and, although perpetual in nature, are another component of our overall leverage.
Debt issuance costs related to non-recourse property debt and term loans
17,292
Proportionate share adjustments related to debt obligations
60,530
Cash and restricted cash
(134,170)
Tenant
security deposits included in restricted cash
11,890
Proportionate share adjustments related to cash and restricted cash
10,791
Proportionate Debt
3,094,567
Perpetual Preferred Stock
2,000
Preferred noncontrolling interests in AIR Operating Partnership
77,140
Net Leverage
$
3,173,707
We
calculated Adjusted EBITDAre used in our leverage ratios based on annualized current quarter amounts. EBITDAre and Adjusted EBITDAre are non-GAAP measures, which we believe are useful to investors, creditors, and rating agencies as a supplemental measure of our ability to incur and service debt because they are recognized measures of performance by the real estate industry and facilitate comparison of credit strength between AIR and other companies. EBITDAre and Adjusted EBITDAre should not be considered alternatives to net income as determined in accordance with GAAP as indicators of liquidity. There can be no assurance that our method of calculating EBITDAre and Adjusted EBITDAre is comparable with that of other real estate investment trusts. NAREIT defines EBITDAre as net income computed in accordance with GAAP, before interest expense, income taxes, and depreciation and amortization expense, which we have further adjusted for:
•gains
and losses on dispositions of depreciated property;
•impairment write-downs of depreciated property; and
•adjustments to reflect our share of EBITDAre of investments in unconsolidated entities and consolidated entities with non-controlling interests.
EBITDAre is defined by NAREIT and provides for an additional performance measure independent of capital structure for greater comparability between real estate investment trusts. We define Adjusted EBITDAre as EBITDAre adjusted for the effect of the following items for the reasons set forth below:
•the amount by which GAAP rent expense exceeds cash rent payments for two long-term ground leases until 2076 and 2079 is excluded. The excess of GAAP rent expense over the cash payments
for these leases does not reflect a current obligation that affects our ability to service debt; and
•applicable Pro forma FFO adjustments to NAREIT FFO under the heading “NAREIT Funds From Operations and Pro forma Funds From Operations,” excluding items that are not included in EBITDAre, to exclude certain amounts that are unique or occur infrequently.
Net income attributable to noncontrolling interests in consolidated real estate partnerships
(2,525)
EBITDAre adjustments attributable to noncontrolling interests and unconsolidated real estate partnerships
13,437
EBITDAre
$
135,069
Pro
forma FFO and other adjustments, net (1)
177
Quarterly Adjusted EBITDAre
$
135,246
Adjusted EBITDAre, before removal of annualization impact for non-recurring items
$
540,984
Removal of annualization impact for non-recurring items (2)
(38,313)
Adjusted EBITDAre
$
502,671
(1)Includes
pro forma adjustments to NAREIT FFO under the heading NAREIT Funds From Operations and Pro forma Funds From Operations, excluding items that are not included in EBITDAre such as prepayment penalties, net. EBITDAre has also been adjusted by $0.9 million to reflect the disposition of two properties and the Core Joint Venture, as if the transactions closed on July 1, 2023, and an adjustment of $11.5 million non-cash gain on derivative instruments.
(2)Third quarter 2023 EBITDAre benefits from $12.8 million of items that are not expected to recur in the future. As such, they were not annualized in the computation of Adjusted EBITDAre.
Liquidity and Capital Resources
Liquidity
Liquidity
is the ability to meet present and future financial obligations. Our primary source of liquidity is cash flows from operations. Additional sources are proceeds from dispositions of apartment communities, proceeds from refinancing existing property debt, borrowings under new property debt, borrowings under our credit facilities, and proceeds from equity offerings. As of September 30, 2023, our available liquidity was $2.1 billion, which consisted of:
•$95.7 million of our share of cash and cash equivalents;
•$15.8 million of our share of restricted cash, excluding amounts related to tenant security deposits, which consists primarily of escrows held by lenders for capital additions, property taxes, and insurance;
•$970.0 million
of available capacity to borrow under our revolving credit facility after consideration of letters of credit; and
•$1.0 billion of committed property level financing through our secured credit facility with Fannie Mae.
Additional liquidity may also be provided through future secured and unsecured financings.
Uses for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital expenditures, dividends paid to stockholders, distributions paid to noncontrolling interest partners, acquisitions of apartment communities, and repurchases of equity securities. We use our cash and cash equivalents and cash provided by operating activities to meet short-term liquidity needs. In the event that our cash and cash equivalents and cash provided by operating activities are not sufficient
to meet our short-term liquidity needs, we have additional means, such as short-term borrowing availability and proceeds from apartment community sales and debt refinancing. We may use our revolving credit facility for working capital and other short-term purposes, such as funding investments on an interim basis. We expect to meet our long-term liquidity requirements, including apartment community acquisitions, primarily through secured and unsecured borrowings, the issuance of equity securities (including OP Units), the sale of apartment
communities, and cash generated from operations. Additionally, we expect
to meet our liquidity requirements associated with our debt maturities.
There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of AIR’s and the AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022.
Leverage and Capital Resources
The availability of credit and its related effect on the overall economy may affect our liquidity and future financing activities, both through changes in interest rates and access to financing. Any adverse changes in the lending environment could negatively affect our liquidity. We believe
we have mitigated much of this exposure by reducing our short and intermediate-term maturity risk through refinancing such loans with long-dated debt.
If financing options become unavailable for our future debt needs, we may consider alternative sources of liquidity, such as reductions in capital spending, or proceeds from apartment community dispositions.
The combination of secured and unsecured debt, preferred OP Units, and redeemable noncontrolling interests in a consolidated real estate partnership comprise our total leverage. The weighted-average remaining term to maturity for our total leverage was 6.9 years as of September 30, 2023, inclusive of extension options, with a weighted-average interest rate of 4.3%. We have sufficient committed credit to repay all debt coming due through 2027.
Under
our credit agreement and unsecured notes payable, we have agreed to maintain certain financial covenants, as well as other covenants customary for similar credit arrangements. The financial covenants we are required to maintain include a maximum leverage ratio of no greater than 0.60 to 1.00; a fixed charge coverage ratio of no less than 1.50 to 1.00, a maximum secured indebtedness to total assets ratio of no greater than 0.40 to 1.00, a maximum unsecured leverage ratio no greater than 0.60 to 1.00, and a minimum unsecured interest coverage ratio no less than 1.50 to 1.00. We believe we were in compliance with these covenants as of September 30, 2023 and expect to remain in compliance during the next 12 months.
Changes in Cash, Cash Equivalents, and Restricted Cash
The following discussion relates to changes in consolidated cash,
cash equivalents, and restricted cash due to operating, investing, and financing activities, which are presented in our condensed consolidated statements of cash flows in Item 1 of this report.
Operating Activities
For the nine months ended September 30, 2023, net cash provided by operating activities was $301.7 million. Our operating cash flow is affected primarily by rental rates, occupancy levels, operating expenses related to our portfolio of apartment communities, and changes in working capital items. Cash provided by operating activities for the nine months ended September 30, 2023, decreased by $49.7 million compared to the same period in 2022, due primarily to lower net operating income associated with sold apartment communities, partially offset by increased contribution from
properties recently acquired.
Investing Activities
For the nine months ended September 30, 2023, our net cash used in investing activities of $270.0 million consisted primarily of purchases of real estate and capital expenditures, offset partially by proceeds from dispositions of real estate and distributions from unconsolidated real estate partnerships. Net cash provided by investing activities of $252.9 million for the same period in 2022 consisted primarily of proceeds from dispositions of real estate and proceeds from the partial repayment of the notes receivable from Aimco, which was repaid in the second and third quarters of 2022, offset partially by purchases of real estate and capital expenditures.
Capital additions totaled $128.4 million
and $111.2 million during the nine months ended September 30, 2023 and 2022, respectively. We generally fund capital additions with cash provided by operating activities and cash proceeds from sales of apartment communities.
We categorize capital spending for communities in our portfolio broadly into five primary categories:
•capital replacements, expenditures that are necessary to help preserve the value of and maintain functionality at the
communities;
•capital enhancements, which may include kitchen and bath remodeling, energy conservation projects, and investments in more durable, longer-lived materials designed to position assets for higher rental levels in their respective markets;
•initial capital expenditures, which represent capital additions contemplated in the underwriting at our recently acquired communities. These amounts are considered in the underwriting of the acquisition and are therefore included with the purchase price when determining expected returns;
•casualty, which represents capitalized costs incurred in connection with the restoration of an apartment community after a casualty event; and
•other, which represents
capitalized costs in connection with tenant improvements, entitlement, and planning.
We exclude the amounts of capital spending related to apartment communities sold or classified as held for sale at the end of the period from the foregoing measures in order to view the spend for the continuing portfolio.
A summary of the capital spending for these categories, along with a reconciliation of the total for these categories to the capital expenditures reported in the accompanying condensed consolidated statements of cash flows, are presented below (in thousands):
Plus:
additions related to apartment communities sold and held for sale
12,674
37,962
Consolidated capital additions
$
141,048
$
149,152
Plus: net change in accrued capital spending
(193)
1,963
Total capital
expenditures per condensed consolidated statements of cash flows
$
140,855
$
151,115
For the nine months ended September 30, 2023 and 2022, we capitalized $1.0 million and $1.1 million of interest costs, respectively, and $12.7 million and $12.6 million of indirect costs, respectively.
Financing Activities
Net cash used in financing activities of $199.0 million for the nine months ended September
30, 2023 consisted primarily of net repayments on our revolving credit facility, the repayment of term loans, payment of dividends, and repurchases of Common Stock and OP Units, offset partially by net proceeds from non-recourse property debt. Net cash used in financing activities of $582.5 million for the nine months ended September 30, 2022 consisted primarily of repayments of non-recourse debt and term loans, payment of dividends and distributions, and repurchases of Common Stock and OP Units, offset partially by proceeds from the issuance of unsecured notes payable.
Future Capital Needs
We expect to fund any future acquisitions, debt maturities, and other capital spending principally with proceeds from apartment
community sales (including the formation of joint ventures), secured and unsecured borrowings, the issuance of equity securities (including OP Units), and operating cash flows. We believe, based on the information available at this time, that we have sufficient cash on hand and access to additional sources of liquidity to meet our operational needs for 2023 and beyond.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our chief
market risks are refunding risk, that is the availability of property debt, corporate debt, or other cash sources to refund maturing debt, and repricing risk, that is the possibility of increases in base interest rates and credit risk spreads. We use short-term debt financing and working capital primarily to fund short-term uses and generally expect to refinance such borrowings with cash from operating activities, proceeds from apartment community sales, long-term debt, or equity financings. Our objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in interest rate movements. We use derivative financial instruments, principally interest rate swaps and treasury rate locks, to reduce our exposure to interest rate risk. We do not hold or issue derivatives for speculative purposes and closely monitor the credit quality of the institutions with which we transact.
As of September 30,
2023, on a consolidated basis, we had $475.0 million of outstanding borrowings on our term loans, and $25.8 million of variable-rate borrowings under our revolving credit facility. After consideration of our interest rate swap derivatives, which reduce our total variable rate exposure by $350 million, we estimate that a change in the floating rate of 100-basis points with constant credit risk spreads would increase or decrease interest expense by $1.5 million, net, on an annual basis.
As of September 30, 2023, we had $134.2 million of cash and cash equivalents and restricted cash, a portion of which bears interest at variable rates, which may partially mitigate the effect of an increase in variable rates on our variable-rate debt discussed above.
As of September 30, 2023, we had
one undesignated forward starting interest rate swap with a notional value of $50.0 million that was entered into in anticipation of future debt. We estimate that a change in the floating rate of 100-basis points with constant credit risk spreads would increase or decrease interest expense by $0.5 million, net, on an annual basis.
We estimate the fair value of debt instruments as described in Note 9 to the condensed consolidated financial statements in Item 1. The estimated fair value of total indebtedness, including our non-recourse property debt, term loans, revolving credit facility, and unsecured notes payable, was approximately $2.8 billion as of September 30, 2023.
ITEM
4. CONTROLS AND PROCEDURES
AIR
Disclosure Controls and Procedures
AIR’s management, with the participation of AIR’s chief executive officer and chief financial officer, has evaluated the effectiveness of AIR’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, AIR’s chief executive officer and chief financial officer have concluded that, as of the end of such period, AIR’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There has been no change in AIR’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the third quarter of 2023 that has materially affected, or is reasonably likely to materially affect, AIR’s internal control over financial reporting.
The AIR Operating Partnership
Disclosure Controls and Procedures
The AIR Operating Partnership’s management, with the participation of the chief executive officer and chief financial officer of AIR, who are the equivalent of the AIR Operating Partnership’s chief executive officer and chief financial officer, respectively, has evaluated the effectiveness of the AIR Operating Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the chief executive officer and chief financial officer of AIR have concluded that, as of the end of such period, the AIR Operating
Partnership’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There has been no change in the AIR Operating Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2023 that has materially affected, or is reasonably likely to materially affect, the AIR Operating Partnership’s internal control over financial reporting.
As of the date of this report, there have been no material changes from the risk factors in AIR’s and the AIR Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
AIR
Unregistered Sales of Equity Securities
From
time to time, we may issue shares of Common Stock in exchange for OP Units. Such shares are issued based on an exchange ratio of one share for each common OP Unit. We may also issue shares of Common Stock in exchange for limited partnership interests in consolidated real estate partnerships. During the three months ended September 30, 2023, we did not issue any shares of Common Stock in exchange for OP Units or limited partnership interests in consolidated real estate partnerships.
Repurchases of Equity Securities
AIR’s Board of Directors has authorized a share repurchase program of its outstanding capital stock for $500 million. This authorization has no expiration date. These repurchases may be made from time to time in the open market or in privately negotiated transactions. As of September 30,
2023, there was $105.5 million remaining available for future share repurchases under this authorization.
Fiscal period
Total Number of Shares Repurchased
Average Price Paid per
Unit
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs
Maximum Dollar Value of Shares that May Yet Be Repurchased Under Plans or Programs (in thousands) (1)
The AIR Operating Partnership did not issue nor repurchase any unregistered OP Units during the three months ended September 30, 2023.
Repurchases of Equity Securities
The AIR Operating Partnership’s Partnership Agreement generally provides that after holding common OP Units for one year, limited partners other than AIR have the right to redeem their common OP Units for cash or, at our election, shares of AIR Common Stock on a one-for-one basis (subject to customary antidilution adjustments). During the three months ended September 30, 2023, no common OP Units were redeemed in exchange for Common Stock.
The following table summarizes the AIR Operating Partnership’s repurchases or redemptions of common OP Units in exchange for cash during the three months ended September 30, 2023:
Fiscal period
Total Number of Units Repurchased
Average Price Paid per
Unit
Total Number of Units Repurchased as Part of Publicly Announced Plans or Programs
Maximum Number of Units that May Yet Be Repurchased Under Plans or Programs (1)
(1)The
terms of the AIR Operating Partnership’s Partnership Agreement do not provide for a maximum number of OP Units that may be repurchased, and other than the express terms of its Partnership Agreement, the AIR Operating Partnership has no publicly announced plans or programs of repurchase.
Dividend and Distribution Payments
As a REIT, AIR is required to distribute annually to holders of its Common Stock at least 90% of its “real estate investment trust taxable income,” which, as defined by the Code and United States Department of Treasury regulations, is generally equivalent to net taxable ordinary income. Our credit agreement includes customary covenants, including a restriction on dividends and distributions and other restricted payments, but permits dividends and distributions during any four consecutive fiscal quarters in an aggregate amount of up to 95% of AIR’s FFO for
such period, subject to certain non-cash adjustments, or such amount as may be necessary to maintain AIR’s REIT status.
The
following materials from AIR’s and the AIR Operating Partnership’s combined Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of operations; (iii) condensed consolidated statements of comprehensive income; (iv) condensed consolidated statements of equity and partners’ capital; (v) condensed consolidated statements of cash flows; and (vi) notes to condensed consolidated financial statements.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
