Apartment Income REIT Corp. (AIRC) on Q2 2021 Results - Earnings Call Transcript

Operator: Good day, and welcome to the AIR Communities Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask question. . Please note, today's event is being recorded. I would now like to turn the conference over to Lisa Cohn. Please go ahead, ma'am. Lisa Cohn: Thank you. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2021 expectations. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings. Actual results may differ materially from what may be discussed today. We will also discuss certain non-GAAP financial measures such as funds from operations. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on AIR's website. Terry Considine : Thank you, Lisa, and thank each of you on this call for your interest in AIR. This is good. The most important fact of today's apartment market is that strong consumer demand is driving higher rent and higher occupancy. The most important question for apartment investors is how much of a higher top line will reach my bottom line. And AIR with best-in-class margins, flat controllable operating expenses and low G&A provides peer-leading efficiency in the flow-through of revenue through FFO and cash dividends. AIR is on track to accomplish and exceed its 2021 goals. East property operating team was superb again. Notwithstanding bad debt resulting from California laws and local ordinances, property revenue grew year-over-year in June and is accelerating to be up year-over-year for the full year. Controllable operating expenses are on track to be down for the full year again resulting in a return to full year NOI growth. AIR purchased City Center, upgrading our portfolio and showing the power of great operations. AIR issued $300 million of equity to reduce leverage with a $600 million balance expected by year-end from selling properties into a rising market. The result was a beat to first half FFO guidance up by 7% and increase to second half FFO guidance, up by 7%, and a raise to quarterly dividend up by 2%. AIR is well-positioned for an excellent second half. 2022 is shaping up to be even better. Portfolio quality is excellent and well-diversified. Loss to lease promises substantial rent growth. The dilution of leverage reduction will be behind us. As always, the key is the AIR team and its focus on operational excellence. To my colleagues in Denver and my teammates in the field, well done, and 10,000 thanks. Now to explain what we did, how we did it, and what we see ahead, I'd like to turn the call to Keith Kimmel, Head of Property Operations. Keith? Keith Kimmel: Thanks, Terry. The second quarter was good. More importantly, our leading indicators point towards a continued rapid recovery in the second half of this year and an excellent 2022. We operate with a strategy to sell for maximized contribution to margin over a horizon of 12 to 18 months. That long-term perspective allows us to look beyond the moment to spot changes in market dynamics well in advance and adjust our approach accordingly. Our outlook for the business has improved over the past 4 quarterly calls. First, calling upon last October. Next, identifying green shoots in January and then pointing to a rebound in April. Today, we see acceleration. The second quarter was good. Terry Considine : I'm told that the sound quality being received is such that we should start over. And that's a little awkward, but that's the advice of Rocco, who's a sound professional. Operator: This is the operator. We're going to drop the main speaker line here and have a dial back in. It looks like we're having some audio issues right now. So I'm going to put us on hold music, and we'll be right back with you as soon as they reconnect. Thanks, everyone, and apologies for the delay. Lisa Cohn : Thank you. This is Lisa Cohn, and I feel like Bill Murray in Groundhog Day. Good day. During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2021 expectations. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings. Actual results may differ materially from what may be discussed today. We will also discuss certain non-GAAP financial measures such as FFO. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on AIR's website. Prepared remarks today come from Terry Considine, our CEO; Keith Kimmel, our President in Charge of Property Operations; Paul Beldin, our Chief Financial Officer. And other members of management are present and will be available during our question-and-answer session, which will follow our prepared remarks. I will now turn the call to Terry Considine. Terry? Terry Considine : Thank you, Lisa, and thank each of you on this call for your interest in AIR. This is good, and it's proof of a very good quarter when the most dramatic glitch is poor sound quality on our call. The most important fact of today's apartment business is that strong consumer demand is driving higher rents and higher occupancy. And the most important for apartment investors is how much of a higher top line will reach my bottom line. AIR with best-in-class margins flat controllable operating expenses and low G&A provides peer-leading efficiency in the flow-through of revenue to FFO and cash dividends. AIR is on track to accomplish and exceed its 2021 goals. Keith's Property Operations team was superb, again. Notwithstanding bad debt resulting from California laws and local ordinances, property revenue grew year-over-year in June and is accelerating to be up year-over-year for the full year. Keith Kimmel : Thanks, Terry. The second quarter was good. More importantly, our leading indicators point towards a continued rapid recovery in the second half of this year and an excellent 2022. We operate with a strategy to sell for maximized contribution to margin over a horizon of 12 to 18 months. That long-term perspective allows us to look beyond the moment to spot changes in market dynamics well in advance and adjust our approach accordingly. Our outlook for the business has improved over the past 4 quarterly calls. First, calling upon last October. Next, identifying green shoots in January and then pointing to a rebound in April. Today, we see acceleration. The second quarter was good. The recent performance will discuss the third and fourth quarters will be record-setting. And we will be making decisions today to ensure 2022 continues to build on that performance. What do I see that makes me increasingly optimistic? Leasing is running at a record pace. The volume of leasing in the second quarter is the highest we've ever reported. 65% ahead of 2020 and 10% ahead of the previous best in the second quarter of 2019. Occupancy is poised to accelerate. One key leading indicator is the percentage of units which are leased, which includes today's occupancy and all scheduled future move-in and move-out activity. Today, we are 95% leased, 8% ahead of the same day last year and 4% ahead of 2019. Our lease percentage in 2019 was a precursor to the 97.4% occupancy in the fourth quarter driving our bullish outlook for the balance of this year. Pricing is rapidly improving. Paul Beldin : Thank you, Keith. Today, I will discuss 5 topics: First, AIR's strong balance sheet, including our measured strategy, reduced leverage by $900 million over the course of the year. Second, our recent acquisition of City Center on 7th. Third, our expectations for the remainder of 2021. Fourth, our announced dividend increase. And fifth, our optimism for continued improvement in 2022. First, AIR's balance sheet is strong and flexible. As part of the separation transaction, we set a leverage target of debt-to-EBITDA of 5.5:1 and a completion date of year-end 2022. In April, we decided to accelerate our delevering by 12 months to year-end 2021. Our plan is to achieve this result in 3 phases: First, during the second quarter, we used the proceeds from our equity issuance to repay $318 million of property debt with a weighted average interest rate of 4.6%. In doing so, we incurred $34 million of prepayment penalties. The prepayment penalties are justified through future interest savings. Second, during the third quarter, we expect to contract for property sales, primarily from our New York City and Chicago portfolios, providing additional proceeds in excess of $300 million. Marketing these properties is well underway. Demand is strong with numerous would be buyers and attractive pricing. Closings are expected before year-end with proceeds applied to reduce property debt. Third, during the fourth quarter, we expect to raise an additional $300 million or more from the sale of properties outright or in joint ventures. Our marketing here is also underway with similar high interest and attractive pricing. In sum, we are on track to remain -- raise the remaining $600 million necessary to reduce AIR leverage to our target level. Next, I'd like to spend a moment discussing our recent acquisition of City Center on 7th in Pembroke Pines, Florida. City Center has 700 apartment homes with average in-place rents -- monthly rents just under $1,900. We purchased City Center 6 weeks ago for $223 million and anticipate completing the paired trade by selling an additional $175 million of properties in the fourth quarter. We expect a 4.2% yield during our first year of ownership and expect this yield to approach 6% over the next few years due to the effectiveness of Keith's operating platform, investment of an additional $10 million in property upgrades and refreshment, and strong local demand. The transaction will slightly increase leverage to EBITDA at year-end, but we expect that rising EBITDA will put us on target soon thereafter. This transaction is important to portfolio management. By year-end, we expect to have reduced our capital allocation to New York City and Chicago and increased our allocation to South Florida by 200 basis points to approximately 10%. The expected result is faster growth because of the strength of the South Florida market and more predictable taxes and regulation. Now turning to full year 2021 guidance. For a second time this year, we are increasing our expectations for FFO, same-store revenue and NOI and lowering our expectations for expenses. We now expect full year FFO per share between $2.09 and $2.15. At the midpoint, this is an increase of 7% from the guidance we gave 6 months ago. With year-to-date FFO of $1.02, our guidance implies 8% acceleration in the second half of the year. This acceleration is primarily attributable to the revenue and NOI growth embedded in our guidance for same-store operations. During the second half of the year, at the midpoint, we expect revenue growth of about 6%. We are confident in our revenue growth expectations because most of the growth is based on facts in existence today, including maintaining July's expected average daily occupancy of 95.8%, the earn-in of existing leases and incremental commercial income from tenants who have resumed rent payments. The remaining expected growth of approximately 200 basis points is based on continued improvements in average daily occupancy, lower bad debt expense including government assistance payments continuing at a level similar to the $700,000 received in the second quarter and the contribution from 3,700 leases remaining to be executed at rates expected to be 6% to 8% above expiring lease. Next, on July 27, the AIR Board of Directors declared a quarterly cash dividend of $0.44 per share, a 2% increase from the dividend paid in May. This increase is due to higher revenue. It was also due to the AIR business model, which features peer-leading efficiency in conversion of higher top line to the bottom line, providing a flow-through rate to shareholders 10% higher than peer average. I'll conclude with 4 quick comments about next year: First, we have the opportunity for substantial revenue growth in 2022 from the earn-in of the current 10% loss to lease, continued improvements in average daily occupancy and lower bad debt expense. Second, more of our revenue will convert to FFO and dividends because of AIR's peer-leading flow-through rates. Third, we expect increasing contribution from the acquisition of City Center. And fourth, we expect a significant reduction in interest expense from lower borrowings at lower rates. When you add it all together, we can see that 2022 is shaping up to be a very good year. With that, we will now open the call for questions. Please limit your questions to 2 per time in the queue. Rocco, I'll turn it over to you for the first question. Operator: . Today's first question comes from Alex Kalmus with Zelman & Associates. Alex Kalmus : In the supplement you discussed the Moody's rating and how that could potentially change later in the year after you execute some of your deleveraging. What incremental benefits do you think you'll achieve in that process versus what you already have with the S&P investment-grade rating? Terry Considine : Yes, Alex, thank you for that question. What we desire with the potential of a Moody's rating is continued optionality. And by having both an investment-grade rating from Moody's and S&P, it provides us greater opportunity to the debt public capital markets. And as you know, today, bond pricing is quite attractive. And many of our activities during the course over the past 6 months since the establishment of AIR have been leading us towards a path of providing that optionality, most notably an increase in our pool of properties that are unencumbered by debt that has increased by 50% just in the past 6 months. Alex Kalmus : Got it. And turning to the dispositions. You gave some numbers, but just curious how the weightings will look like in 3Q and 4Q? And what do you think that will do to the portfolio in terms of percentage of asset class? Do you expect to have a little more weighting in A or B or C post dispositions? Terry Considine : Alex, I'll start with that, and if somebody else wants to jump in, please feel free. The impact to the third quarter will actually be not consequential because the only real change between now and then is the acquisition of City Center. The transactions we've been discussing are expected to close in the fourth quarter. So if we project to year-end, as I mentioned in the prepared remarks, our allocation to New York and Chicago will come down. The Chicago portfolio is kind of a B+, A- portfolio, the New York portfolio is a C+. And so you'll see some shifts in our weightings from that factor. But I think longer term, what we want to do is remain diversified. We want to remain diversified in both price points and in geography. And we think the steps that we are undertaking will help accomplish that goal. Operator: And our next question today comes from Nick Joseph at Citi. Nick Joseph : As you think about redeploying those proceeds from the asset sales, what is the coupon on the debt that you're planning to repay? And then what are the prepayments and all these associated with it? Paul Beldin : Yes, Nick, what we're planning today to primarily repay property debt with the proceeds from the sales to reduce our leverage, again, to help reduce our nonrecourse property level debt down to levels that are more in line with the Moody's targets. The average cost of that debt, we haven't finalized each piece of paper that we're going to repay, but I would tell you it's going to come down from the 4.6% that we repaid in the second quarter. It will be more likely in the mid-3 range. And so there will be prepayment penalties associated with that. The exact amount, again, will kind of determine -- will be determined by the actual pieces repaid. But what I will tell you as we've run the numbers, we expect that the interest that will be saved in future years is greater than the prepayment penalty on an NPV basis. Nick Joseph : Are you able to provide a range on it? I think last quarter, you had at least given kind of a range for the potential prepayment penalties? Paul Beldin : Not at this point, Nick. In April, when we spoke, we had already identified the specific pieces of debt that we're going to be repaid. Nick Joseph : And then as you think about your South Florida portfolio, are there any additional engineering studies or reinspections that are needed just given kind of the tragedy that happened down there? Lisa Cohn : Thanks for the question. We routinely work with structural engineers and architects and others as we're doing any work on our properties as well as any work that's being done on adjacent properties and routinely inspect our properties for their 40-year inspections and additionally. And so we have no known issues. We are just in an abundance of caution. I'm going to go back and take another look both to ensure that we haven't missed anything, which I don't think we have, but also just for peace of mind for our residents and teammates who work in those buildings. Operator: And our next question today comes from John Kim at BMO Capital Markets. John Kim : Just wanted to ask for more color on the rental uplift you had at City Center. How much of this was due to the market strength versus the AIR initiatives? And what do you think you did that the prior owner didn't? Terry Considine : I found that question hard to hear because of fluctuation in sound. Would you mind repeating it, please? John Kim : Sure. Just some more color on City Center. And what you may have done that the prior owner didn't to get that rental uplift? And how much of that conversely was due to the market strength? Keith Kimmel : John, it's Keith. I'll take it for you. Really, John, it became belief. We just -- we have a team who operates our buildings who doesn't put a ceiling on the opportunities in front of them. And what I would say is that what we did is when we walked on to the property and we looked how we were performing at our other communities in and around the South Florida area, we could see that there was opportunity to push it much, much further. We also think that there could be even more upside as we actually make improvements to the community. So this was literally a day 1 walk on-site, bring in our team and increase it. And then, of course, not to be missed, the South Florida market is very, very red hot. There's lots of people that are moving there and there's lots of benefits of living in Florida that is augmenting the performance. John Kim : Okay. And on the new lease change that you had in July, you mentioned it was led by Miami and San Diego, but it was really broad-brushed across your portfolio. Can you remind us how much of that uplift was due to rents versus the reduction of concessions? Keith Kimmel : John, really what has happened is that we have actually moved beyond that because what has happened is, we've had a reversion to the mean of those asking rents that were pre-COVID, and now we have exceeded what would have been the historic trend lines. So what we're really seeing is not only a recovery but an acceleration that is happening as the business is getting even better. And so while, of course, lots of people talk about concessions and coming back, what we really are focused on is we've gone past that mark, and we're seeing growth and strength that goes well beyond that. John Kim : And what is your expectation for August and September? Keith Kimmel : To be better than July. John Kim : For both? Keith Kimmel : Indeed. Operator: Our next question today comes from John Pawlowski with Green Street. John Pawlowski : Maybe just one follow-up on the Florida acquisition. Is that 160 bps yield expansion? Should we think about that like a year 3 yield? Or what's the time to put the capital into the building and achieve that uplift? Paul Beldin : John, thank you for the question. And your thoughts on timing is right on line with our plan and how we're going to be executing it. We are starting the refreshment and improvement process as soon as we're able to mobilize and implement the plan, so that's starting very soon. But the completion of that work and then the full earning of that work as reflected in our results will end up being in our numbers in the third year. But I guess I would point out -- John, I'm sorry -- I just left out a portion of something I should have said, is that our going-in yield today at 4.2% is quite strong on a relative cap rate basis. But we're going to see that expand in year 2 and eventually end up at that close to 6% range in the third year. So you'll see a nice expansion in both years and year 3. It's not just a hockey stick in the third year. John Pawlowski : Understood. I joined the call late, so apologies if I missed this. As you stand here today, do you anticipate additional acquisitions this year? Terry Considine : John, this is Terry. And we're always looking for opportunities for accretive uses of shareholder capital. John Pawlowski : All right. Last one for me. Terry, when can we expect to hear additions to the Board or new Board members joining. Terry Considine : I think, soon. John Pawlowski : Soon as in months or couple of years or...? Terry Considine : Soon. Soon, John. Operator: . Our next question today comes from Richard Anderson at SMBC. Richard Anderson : So the strength that we're seeing in the Sunbelt reminds me of mid-2000 in Essex in California and the hyper-growth that was coming out of that market back then. And like everything else, nothing lasts forever. But I'm wondering if maybe the rules are a little bit different this time, if COVID has created a permanent stigma on some of the coastal markets, namely California, and that the ability to push rents, particularly in the Sunbelts is more of a permanent condition in your mind? Or do you think there will be more of a reversion to the mean between Sunbelt and coastal gateway within the next few years or so? Terry Considine : Rich, it's Terry. I'll try and take a cut at it. There's -- we're comparing 2 different markets with 2 different dynamics. The Sunbelt market is today fantastic. But it's in a context where money is free. And the increases in profitability will attract competitive new supply. You can see the record level of completions over 27,000, I think, it is in Dallas and Houston. And so that will be the dynamic there that there'll be tremendous economic growth and employment growth. But over time, the rental growth will be governed by the cost of competitive new supply. In the coastal market or specifically in California, which was your question, the demand is great. It's existing today. It's unsatisfied today. And there's a period of time where building can be absorbed by existing demand, and it remains hard to build. And so the competitive new supply will be more constrained. It is certainly correct that California is less of a golden state than it was a decade ago or 2 decades ago, and that it's dealing with difficult social and political issues, and it's something that gives us -- makes us want to keep an eye on it. Richard Anderson : Okay. Great. And then, Keith, to your -- or maybe Paul, to your comments about 2022, specifically on the earn-in. It seems to me the upside in 2022 might be more impressive in the first half of the year as opposed to the second half of the year, assuming the earn-in kind of only plays a role in the first part -- the first half of the year. Is that the right way to think about it? For the full year 2022 to be sort of equally impressive, you just need market rent growth to continue to, at this stage or greater for this back half of next year to Q3. Is that a fair way to think about it? Paul Beldin : Rich, it definitely is a good way to think about it because as we're gaining momentum in these rates and transactions that are occurring now when you kick off a new year, they will start earning in against what would have been a lower comp. But the truth is, is that, when we look at that loss to lease, it is spread over our portfolio. And so there will be opportunities throughout the entire year for us to reprice. And our expectation is that we will continue to see rate growth on trend that will go through the balance of 2022 in addition. Operator: Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks. Terry Considine : Well, Rocco, thank you very much for hosting us today. For those of you who have questions for AIR, we thank you for your interest. If you have further questions, please feel free to call Paul or me and we'll be happy to give you our best answers. Thank you so much. Operator: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
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AIRC Earnings Report Preview: Key Financials and Workplace Culture Impact

  • AIRC is expected to report an EPS of $0.58 and revenue of $197.84 million for the quarter.
  • AIRC's strong workplace culture, recognized by The Denver Post, could positively influence its financial performance.
  • Key financial ratios, such as P/E ratio of 8.72 and P/S ratio of 6.97, highlight investor confidence and valuation.

On Monday, May 13, 2024, before the market opens, NYSE:AIRC, also known as Apartment Income REIT Corp. or AIR Communities, is set to unveil its earnings report for the quarter. Analysts on Wall Street are predicting an earnings per share (EPS) of $0.58, with the quarter's revenue expected to be around $197.84 million. AIRC operates in the real estate sector, focusing on apartment income and has recently been recognized for its outstanding workplace environment, which could have a positive impact on its financial performance.

AIRC's recent accolade as a Top Workplace in Colorado by The Denver Post for the eleventh time underscores the company's commitment to creating a positive work culture. This recognition is based on feedback from team members and reflects AIRC's dedication to providing a supportive environment that values professional development, leadership training, and team appreciation. Such a strong workplace culture could play a crucial role in driving the company's performance and, in turn, influencing its financial outcomes, as reported in the upcoming earnings.

Financially, AIRC exhibits a price-to-earnings (P/E) ratio of approximately 8.72, which suggests that investors are willing to pay $8.72 for every dollar of AIRC's earnings. This ratio is a critical measure of the company's valuation, indicating investor confidence in its future growth prospects. Additionally, the price-to-sales (P/S) ratio stands at about 6.97, highlighting the value investors place on the company's sales. These metrics are essential for understanding how the market values AIRC relative to its earnings and sales.

Moreover, the enterprise value to sales (EV/Sales) ratio of roughly 6.86 and the enterprise value to operating cash flow (EV/OCF) ratio of approximately 15.38 provide further insight into AIRC's valuation in relation to its sales and operating cash flow, respectively. These ratios are indicative of how the market perceives the company's overall financial health and efficiency in generating cash flow from its operations. Lastly, an earnings yield of around 11.47% offers an insight into the potential return on investment from the company's earnings, which is a critical factor for investors assessing the attractiveness of AIRC's stock.

As AIRC prepares to release its quarterly earnings report, investors and analysts will be keenly watching these financial metrics and the impact of the company's strong workplace culture on its financial performance. The combination of a positive work environment and solid financial ratios could position AIRC favorably in the eyes of investors and potentially influence the company's stock price following the earnings announcement.