Apartment me REIT (AIRC) - 2023 Q2 - Quarterly Report

EXPLANATORY NOTE This filing combines the quarterly reports of Apartment Income REIT Corp. (AIR) and Apartment Income REIT, L.P. (AIR Operating Partnership) and their consolidated subsidiaries. AIR is a self-administered and self-managed REIT, with AIR Operating Partnership owning all assets and managing daily operations. AIR holds approximately 91.3% legal interest and 93.1% economic interest in the AIR Operating Partnership as of June 30, 2023. The combined report aims to present the business as a whole, eliminate duplicative disclosure, and save costs Explanatory Note Details This filing combines the quarterly reports of Apartment Income REIT Corp. (AIR) and Apartment Income REIT, L.P. (AIR Operating Partnership) and their consolidated subsidiaries. AIR is a self-administered and self-managed REIT, with AIR Operating Partnership owning all assets and managing daily operations. AIR holds approximately 91.3% legal interest and 93.1% economic interest in the AIR Operating Partnership as of June 30, 2023. The combined report aims to present the business as a whole, eliminate duplicative disclosure, and save costs - The report combines filings for Apartment Income REIT Corp. (AIR) and Apartment Income REIT, L.P. (AIR Operating Partnership) to present the business as a single enterprise, streamline disclosures, and reduce costs[7][11][14] - AIR is a self-administered and self-managed REIT, with AIR Operating Partnership holding all assets and managing daily operations[8][10] AIR's Ownership in AIR Operating Partnership (as of June 30, 2023) | Ownership Type | Percentage | | :------------- | :--------- | | Legal Interest | 91.3% | | Economic Interest | 93.1% | PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements for Apartment Income REIT Corp. (AIR) and Apartment Income REIT, L.P. (AIR Operating Partnership) for the quarter ended June 30, 2023, along with comparative periods. It includes balance sheets, statements of operations, comprehensive income (loss), equity/partners' capital, and cash flows, followed by detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items ITEM 1. FINANCIAL STATEMENTS (Unaudited) This section presents the unaudited condensed consolidated financial statements for Apartment Income REIT Corp. (AIR) and Apartment Income REIT, L.P. (AIR Operating Partnership) for the quarter ended June 30, 2023, along with comparative periods. It includes balance sheets, statements of operations, comprehensive income (loss), equity/partners' capital, and cash flows, followed by detailed notes explaining the basis of presentation, significant accounting policies, and specific financial items Apartment Income REIT Corp.: Condensed Consolidated Balance Sheets This section presents the Condensed Consolidated Balance Sheets for the company AIR Corp. Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Total assets | $6,407,010 | $6,551,883 | | Total indebtedness | $3,684,577 | $3,641,629 | | Total liabilities | $4,160,977 | $4,155,434 | | Total equity | $2,168,890 | $2,319,306 | - Total assets decreased by $144.873 million from December 31, 2022, to June 30, 2023, while total indebtedness increased by $42.948 million[21] Apartment Income REIT Corp.: Condensed Consolidated Statements of Operations This section presents the Condensed Consolidated Statements of Operations for the company AIR Corp. Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric (Three Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :---------- | :---------- | :---------- | :--------- | | Total revenues | $214,560 | $183,500 | $31,060 | 16.9% | | Net income (loss) | $598 | $211,659 | $(211,061) | -99.7% | | Net (loss) income attributable to AIR common stockholders | $(1,439) | $196,722 | $(198,161) | -100.7% | | Net (loss) income per share – basic and diluted | $(0.01) | $1.26 | $(1.27) | -100.8% | | Metric (Six Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :---------- | :---------- | :---------- | :--------- | | Total revenues | $426,553 | $364,978 | $61,575 | 16.9% | | Net income (loss) | $(9,350) | $613,043 | $(622,393) | -101.5% | | Net (loss) income attributable to AIR common stockholders | $(12,718) | $573,105 | $(585,823) | -102.2% | | Net (loss) income per share – basic and diluted | $(0.09) | $3.66 | $(3.75) | -102.5% | - Net income attributable to AIR common stockholders significantly decreased, resulting in a loss of $0.01 per share for the three months ended June 30, 2023, compared to a net income of $1.26 per share in the prior year, primarily due to a loss on dispositions and impairments of real estate and higher interest expense[23] Apartment Income REIT Corp.: Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the Condensed Consolidated Statements of Comprehensive Income (Loss) for the company AIR Corp. Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric (Three Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :-------- | :-------- | :---------- | :--------- | | Net income (loss) | $598 | $211,659 | $(211,061) | -99.7% | | Unrealized gain on derivative instruments, net | $16,631 | $13,715 | $2,916 | 21.3% | | Comprehensive income (loss) | $11,865 | $227,363 | $(215,498) | -94.8% | | Metric (Six Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :-------- | :-------- | :---------- | :--------- | | Net income (loss) | $(9,350) | $613,043 | $(622,393) | -101.5% | | Unrealized gain on derivative instruments, net | $5,191 | $12,932 | $(7,741) | -59.9% | | Comprehensive income (loss) | $(13,677) | $627,964 | $(641,641) | -102.2% | Apartment Income REIT Corp.: Condensed Consolidated Statements of Equity This section presents the Condensed Consolidated Statements of Equity for the company AIR Corp. Total Equity (in thousands) | Date | Total Equity | | :--------------- | :----------- | | June 30, 2023 | $2,168,890 | | December 31, 2022 | $2,319,306 | | June 30, 2022 | $2,288,825 | | December 31, 2021 | $1,939,155 | - Total AIR equity decreased from $2,156,417 thousand at December 31, 2022, to $1,999,465 thousand at June 30, 2023, primarily due to distributions in excess of earnings and net loss[21][27][29] Apartment Income REIT Corp.: Condensed Consolidated Statements of Cash Flows This section presents the Condensed Consolidated Statements of Cash Flows for the company AIR Corp. Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | Change ($) | Change (%) | | :----------------- | :---------- | :---------- | :---------- | :--------- | | Operating Activities | $182,662 | $201,496 | $(18,834) | -9.3% | | Investing Activities | $(228,410) | $574,667 | $(803,077) | -139.8% | | Financing Activities | $(125,744) | $(768,033) | $642,289 | 83.6% | | Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | $(171,492) | $8,130 | $(179,622) | -2209.4% | - Net cash used in investing activities significantly increased in 2023, shifting from a net cash provided of $574.7 million in 2022 to a net cash used of $228.4 million, primarily due to lower proceeds from dispositions and note repayments[31] Apartment Income REIT, L.P.: Condensed Consolidated Balance Sheets This section presents the Condensed Consolidated Balance Sheets for the company AIR Operating Partnership Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Total assets | $6,407,010 | $6,551,883 | | Total indebtedness | $3,684,577 | $3,641,629 | | Total liabilities | $4,160,977 | $4,155,434 | | Total partners' capital | $2,168,890 | $2,319,306 | - The balance sheet for AIR Operating Partnership mirrors that of AIR Corp. in total assets, liabilities, and equity/partners' capital, reflecting its role as the primary asset holder and operator[34] Apartment Income REIT, L.P.: Condensed Consolidated Statements of Operations This section presents the Condensed Consolidated Statements of Operations for the company AIR Operating Partnership Condensed Consolidated Statements of Operations Highlights (in thousands, except per unit data) | Metric (Three Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :---------- | :---------- | :---------- | :--------- | | Total revenues | $214,560 | $183,500 | $31,060 | 16.9% | | Net income (loss) | $598 | $211,659 | $(211,061) | -99.7% | | Net (loss) income attributable to the AIR Operating Partnership's common unitholders | $(1,754) | $209,471 | $(211,225) | -100.8% | | Net (loss) income per unit – basic and diluted | $(0.01) | $1.26 | $(1.27) | -100.8% | | Metric (Six Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :---------- | :---------- | :---------- | :---------- | | Total revenues | $426,553 | $364,978 | $61,575 | 16.9% | | Net income (loss) | $(9,350) | $613,043 | $(622,393) | -101.5% | | Net (loss) income attributable to the AIR Operating Partnership's common unitholders | $(14,037) | $609,519 | $(623,556) | -102.3% | | Net (loss) income per unit – basic and diluted | $(0.09) | $3.66 | $(3.75) | -102.5% | - Similar to AIR Corp., the AIR Operating Partnership experienced a significant decline in net income attributable to common unitholders, resulting in a loss of $0.01 per unit for the three months ended June 30, 2023, compared to a net income of $1.26 per unit in the prior year[37] Apartment Income REIT, L.P.: Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the Condensed Consolidated Statements of Comprehensive Income (Loss) for the company AIR Operating Partnership Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric (Three Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :-------- | :-------- | :---------- | :--------- | | Net income (loss) | $598 | $211,659 | $(211,061) | -99.7% | | Unrealized gain on derivative instruments, net | $16,631 | $13,715 | $2,916 | 21.3% | | Comprehensive income (loss) | $11,865 | $227,363 | $(215,498) | -94.8% | | Metric (Six Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :---------------------------------- | :-------- | :-------- | :---------- | :--------- | | Net income (loss) | $(9,350) | $613,043 | $(622,393) | -101.5% | | Unrealized gain on derivative instruments, net | $5,191 | $12,932 | $(7,741) | -59.9% | | Comprehensive income (loss) | $(13,677) | $627,964 | $(641,641) | -102.2% | Apartment Income REIT, L.P.: Condensed Consolidated Statements of Partners' Capital This section presents the Condensed Consolidated Statements of Partners' Capital for the company AIR Operating Partnership Total Partners' Capital (in thousands) | Date | Total Partners' Capital | | :--------------- | :---------------------- | | June 30, 2023 | $2,168,890 | | December 31, 2022 | $2,319,306 | | June 30, 2022 | $2,288,825 | | December 31, 2021 | $1,939,155 | - Total partners' capital for AIR Operating Partnership decreased from $2,398,091 thousand at December 31, 2022, to $2,248,977 thousand at June 30, 2023, primarily due to net loss and distributions to common unitholders[34][40][42] Apartment Income REIT, L.P.: Condensed Consolidated Statements of Cash Flows This section presents the Condensed Consolidated Statements of Cash Flows for the company AIR Operating Partnership Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | Change ($) | Change (%) | | :----------------- | :---------- | :---------- | :---------- | :--------- | | Operating Activities | $182,662 | $201,496 | $(18,834) | -9.3% | | Investing Activities | $(228,410) | $574,667 | $(803,077) | -139.8% | | Financing Activities | $(125,744) | $(768,033) | $642,289 | 83.6% | | Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | $(171,492) | $8,130 | $(179,622) | -2209.4% | - Net cash used in investing activities for the AIR Operating Partnership shifted from a net cash provided of $574.7 million in 2022 to a net cash used of $228.4 million in 2023, primarily due to reduced proceeds from dispositions and note repayments[45] Notes to the Condensed Consolidated Financial Statements of Apartment Income REIT Corp. and Apartment Income REIT, L.P.: This section provides detailed notes to the condensed consolidated financial statements, covering basis of presentation, accounting policies, and specific financial items Note 1 — Basis of Presentation and Organization This note clarifies the consolidated financial statements include Apartment Income REIT Corp. (AIR), Apartment Income REIT, L.P. (AIR Operating Partnership), and their subsidiaries. It details AIR's structure as a self-administered REIT, its general and special limited partner interests in the Operating Partnership, and the portfolio of 73 stabilized multi-family properties across 10 states and D.C. as of June 30, 2023 - The financial statements consolidate AIR, AIR Operating Partnership, and their subsidiaries, with AIR Operating Partnership conducting all business operations[47][53] - As of June 30, 2023, the portfolio included 73 apartment communities with 25,739 apartment homes, with an average ownership of approximately 87%[54][55] AIR's Ownership in AIR Operating Partnership (as of June 30, 2023) | Ownership Type | Percentage | | :------------- | :--------- | | Legal Interest | 91.3% | | Economic Interest | 93.1% | Note 2 — Summary of Significant Accounting Policies This note outlines key accounting policies, including the consolidation of Variable Interest Entities (VIEs) where the company is the primary beneficiary. It also details the presentation of redeemable preferred OP Units as temporary equity/partners' capital due to their redeemable nature and provides a rollforward of their redemption value - The company consolidates VIEs where it is deemed the primary beneficiary, having power to direct activities and absorb significant losses or receive significant benefits[57] - Redeemable preferred OP Units are presented as temporary equity/partners' capital because they are redeemable at the holders' option for cash or AIR Common Stock[58] Redeemable Preferred OP Units Redemption Value Rollforward (in thousands) | Metric | Amount | | :----------------------- | :--------- | | Balance at January 1, 2023 | $77,143 | | Preferred distributions | $(3,140) | | Net income allocated to preferred units | $3,140 | | Balance at June 30, 2023 | $77,143 | Note 3 — Significant Transactions This note details significant transactions, including the acquisition of one apartment community for $298 million in South Florida during H1 2023. It also covers dispositions of two apartment communities in Q2 2023, impairment losses totaling $23.6 million on three real estate assets, and the formation of two joint ventures: the Value-Add JV (70% interest sold) and the Core JV (47% interest sold in 10 properties) Apartment Community Acquisition (H1 2023, in thousands) | Item | Amount | | :-------------------- | :--------- | | Purchase price | $298,000 | | Capitalized transaction costs | $5,469 | | Total consideration | $303,469 | - During Q2 2023, the company sold two apartment communities and recognized non-cash impairment losses of $8.2 million and $15.4 million on three real estate assets, totaling $23.6 million[63][67][68] - Formed two joint ventures: the Value-Add JV (sold 70% interest in Huntington Gateway, recognized $6.4 million gain) and the Core JV (sold 47% interest in 10 properties, expected to generate $813.3 million cash proceeds)[70][71][73] Note 4 — Leases This note provides details on lease income from tenant arrangements, distinguishing between fixed and variable payments. It also outlines the average remaining term for residential leases (17.1 months) and the future minimum annual rental payments contractually obligated to be received Total Lease Income (in thousands) | Lease Income Type (Three Months Ended June 30) | 2023 | 2022 | | :--------------------------------------------- | :-------- | :-------- | | Fixed lease income | $196,718 | $169,337 | | Variable lease income | $15,253 | $11,216 | | Total lease income | $211,971 | $180,553 | | Lease Income Type (Six Months Ended June 30) | 2023 | 2022 | | :--------------------------------------------- | :-------- | :-------- | | Fixed lease income | $393,054 | $337,567 | | Variable lease income | $28,541 | $22,021 | | Total lease income | $421,595 | $359,588 | - As of June 30, 2023, residential leases have an average remaining term of 17.1 months[74] Future Minimum Annual Rental Payments (in thousands) | Year | Amount | | :--------------- | :--------- | | 2023 (remaining) | $262,306 | | 2024 | $258,690 | | 2025 | $41,745 | | 2026 | $11,214 | | 2027 | $9,701 | | Thereafter | $34,712 | | Total | $618,368 | Note 5 — Debt This note summarizes the company's total indebtedness, comprising secured and unsecured debt, and details changes in debt structure, including new fixed-rate financing and a secured credit facility. It also lists financial covenants that the company must maintain, such as leverage and fixed charge coverage ratios Total Indebtedness (in thousands) | Debt Type | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Total non-recourse property debt, net | $2,197,437 | $1,985,430 | | Total unsecured debt, net | $1,487,140 | $1,656,199 | | Total indebtedness | $3,684,577 | $3,641,629 | - In Q1 2023, AIR borrowed $320 million in 10-year fixed-rate financing at 4.9% interest, used to refinance a floating rate loan and reduce revolving credit facility borrowings[75] - Established a secured credit facility for up to $1 billion in committed property-level financing with a 15-year term, increasing total liquidity to approximately $1.8 billion[76] - Key financial covenants include a maximum leverage ratio of 0.60 to 1.00 and a fixed charge coverage ratio of no less than 1.50 to 1.00[77] Note 6 — Commitments and Contingencies This note addresses legal matters and environmental liabilities. It states that the company is party to various legal actions not expected to have a material adverse effect. Environmental obligations, such as asset retirement obligations (AROs) for hazardous materials, are generally not reasonably estimable due to timing uncertainties, with estimable AROs being immaterial - The company is involved in various legal actions, but none are expected to have a material adverse effect on financial condition, results of operations, or cash flows[78] - Legal obligations for environmental remediation (AROs) are generally not reasonably estimable due to significant uncertainties in timing and manner of settlement, and estimable AROs are immaterial[79][80] Note 7 — Earnings and Dividends per Share and per Unit This note provides reconciliations for basic and diluted earnings per share (EPS) and earnings per unit (EPU) for both AIR and AIR Operating Partnership. It also states the dividends and distributions paid per share/unit for the periods Earnings per Share/Unit (Basic and Diluted) | Metric (Three Months Ended June 30) | 2023 | 2022 | | :---------------------------------- | :-------- | :-------- | | Earnings per share – basic and diluted | $(0.01) | $1.26 | | Earnings per unit – basic and diluted | $(0.01) | $1.26 | | Metric (Six Months Ended June 30) | 2023 | 2022 | | :---------------------------------- | :-------- | :-------- | | Earnings per share – basic and diluted | $(0.09) | $3.66 | | Earnings per unit – basic and diluted | $(0.09) | $3.66 | - Dividends and distributions paid per share of Common Stock and per common unit were $0.45 for the three months and $0.90 for the six months ended June 30, 2023 and 2022, respectively[81] - Approximately 2.2 million common share equivalent securities were excluded from diluted EPS calculation for Q2 2023 as they were anti-dilutive[82] Note 8 — Fair Value Measurements This note describes the three-level GAAP fair value hierarchy used for measuring assets and liabilities. It summarizes recurring fair value measurements for derivative instruments and treasury rate locks, and notes that carrying values for cash, receivables, and short-term debt approximate fair value. Non-recurring fair value measurements include a real estate asset written down for impairment - The company uses a three-level valuation hierarchy (Level 1, 2, 3) for fair value measurements, prioritizing observable inputs[83] Recurring Fair Value Measurements (as of June 30, 2023, in thousands) | Instrument | Total Fair Value | | :------------------------------ | :--------------- | | Interest rate swaps - pay-fixed, receive floating | $35,395 | | Interest rate swaps - pay-floating, receive fixed | $(1,959) | | Treasury rate lock | $2,236 | - As of June 30, 2023, one real estate asset was measured at fair value on a nonrecurring basis at $19.9 million due to impairment, classified as Level 2[86] Note 9 — Derivative Financial Instruments and Hedging Activities This note details the company's use of interest rate derivatives, primarily swaps and treasury locks, to manage interest rate risk and add predictability to interest expense. It explains the accounting treatment for cash flow hedges (recognized in OCI) and economic hedges (recognized in earnings), noting a de-designation of $830 million in swaps and new pay-floating, receive-fixed swaps in Q2 2023 - The company uses interest rate swaps and treasury locks to manage interest rate risk, with changes in fair value of cash flow hedges recognized in OCI and economic hedges in earnings[87][88][89] - In Q2 2023, $830 million of pay-fixed, receive-floating interest rate swaps were de-designated, with $29.5 million of unrealized gains to be reclassified to earnings over the remaining debt term[90] - New $480 million pay-floating, receive-fixed interest rate swaps were entered into in Q2 2023, not designated as accounting hedges, with changes in fair value recognized in earnings[92] Note 10 — Variable Interest Entities This note clarifies the company's involvement with Variable Interest Entities (VIEs), consolidating the AIR Operating Partnership and four other VIEs that own apartment communities. It also details interests in unconsolidated joint ventures, including the Value-Add JV (30% interest) and a joint venture with Blackstone (20% interest), where the company is not the primary beneficiary - AIR consolidates the AIR Operating Partnership and four other VIEs that own 15 apartment communities with 5,041 homes as of June 30, 2023[95][96][97] - The company holds interests in unconsolidated joint ventures, including a 30% interest in the Value-Add JV and a 20% interest in a joint venture with Blackstone, where it is not the primary beneficiary[100][101] Assets and Liabilities of Consolidated VIEs (excluding AIR Operating Partnership, in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------- | :------------ | :---------------- | | Net real estate | $1,040,597 | $1,066,482 | | Total Assets | $1,135,333 | $1,143,723 | | Non-recourse property debt, net | $1,204,242 | $1,212,065 | | Total Liabilities | $1,240,488 | $1,247,430 | Note 11 — Business Segments This note defines the company's two business segments: Same Store (stabilized communities) and Other Real Estate (recently acquired, leased, or to-be-sold properties). Performance is assessed using proportionate property Net Operating Income (NOI), which excludes utility reimbursements and certain offsite costs. As of June 30, 2023, the Same Store segment included 63 communities (22,794 homes) and Other Real Estate included 10 communities (2,945 homes) - The company operates in two segments: Same Store (63 communities, 22,794 homes) and Other Real Estate (10 communities, 2,945 homes) as of June 30, 2023[103][105] - Proportionate property NOI, which excludes utility reimbursements and certain offsite costs, is used to assess segment operating performance[104][146][147] Proportionate Property Net Operating Income (in thousands) | Segment (Three Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :----------------------------------- | :---------- | :---------- | :---------- | :--------- | | Same Store | $118,850 | $107,408 | $11,442 | 10.7% | | Other Real Estate | $19,044 | $1,729 | $17,315 | nm | | Total | $137,894 | $109,137 | $28,757 | 26.3% | | Segment (Six Months Ended June 30) | 2023 | 2022 | Change ($) | Change (%) | | :----------------------------------- | :---------- | :---------- | :---------- | :--------- | | Same Store | $235,505 | $210,852 | $24,653 | 11.7% | | Other Real Estate | $37,590 | $2,024 | $35,566 | nm | | Total | $273,095 | $212,876 | $60,219 | 28.3% | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance and condition for the quarter ended June 30, 2023. It covers strategic objectives, operational excellence, significant transactions, balance sheet and liquidity management, dividend policy, and team culture. The discussion also includes a detailed analysis of operating results, non-GAAP financial measures like FFO and leverage ratios, and an outlook on future capital needs Forward-Looking Statements This section highlights that the report contains forward-looking statements, which are based on management's current expectations and are subject to various risks and uncertainties. These risks include fluctuations in real estate values, economic conditions, operating costs, financing risks, and legal/regulatory changes, which could cause actual results to differ materially - Forward-looking statements are subject to risks including real estate and operating risks, national and local economic conditions (inflation, recession), competitive housing supply, changes in operating costs, and financing risks (interest rate changes)[113] - The company assumes no obligation to revise or update forward-looking statements to reflect future events or circumstances[115] Executive Overview The executive overview emphasizes AIR's strategic objectives: a simple, efficient business model, a diversified portfolio of stabilized multi-family properties, and a low-leveraged balance sheet. Key goals include improving property operations, maintaining an efficient cost structure, disciplined capital allocation, forming private capital partnerships, and commitment to corporate responsibility - Strategic objectives include pursuing a simple, efficient business model, maintaining a high-quality diversified portfolio, continuously improving property operations, and maintaining a flexible, low-levered balance sheet[117] - As of June 30, 2023, the portfolio comprised 73 apartment communities with 25,739 apartment homes across 10 states and D.C., with an average ownership of approximately 87%[118] Operational Excellence Operational excellence is demonstrated by a record 74.2% Same Store NOI margin in Q2 2023, driven by 8.8% residential rent growth and controlled expenses. Average Daily Occupancy (ADO) declined 190 basis points sequentially due to seasonality and increased move-outs from expiring COVID-related protections, with anticipation of recovery in Q3 and Q4 - Second quarter 2023 Same Store NOI margin was 74.2%, up 120 basis points year-over-year, an AIR record for the second quarter[120] - Residential Rents grew by 8.8% and controllable expenses increased by only 100 basis points[125] - Average Daily Occupancy (ADO) declined 190 basis points sequentially due to normal seasonality (110 bps) and increased move-outs of non-paying residents (60 bps), expected to rebound in Q3 and Q4[121] Acquisition Portfolio Performance (Three Months Ended June 30, 2023) | Year Class | Apartment Communities | % of Gross Asset Value | Year-over-Year Rev Change | Year-over-Year Exp Change | Year-over-Year NOI Change | Sequential NOI Change | | :--------- | :-------------------- | :--------------------- | :------------------------ | :------------------------ | :------------------------ | :-------------------- | | 2021 | 5 | 8.0% | 19.0% | (2.2%) | 30.5% | 4.9% | | 2022 & 2023 | 5 | 9.0% | N/A | N/A | N/A | 3.4% | | Total Acquisition Portfolio | 10 | 17.0% | N/A | N/A | N/A | 4.1% | Transactions The company employs a 'paired trades' strategy to acquire properties, enhance their value through 'AIR Edge' operations, and then sell them to reinvest capital for accelerated growth. Two joint ventures were formed: the Value-Add JV (70% interest sold in Huntington Gateway) and the Core JV (47% interest sold in 10 properties). The company is also completing its strategic exit from New York City through property sales, recognizing $1.5 billion in non-cash GAAP gains from dispositions since the Separation - AIR's strategy involves 'paired trades' to acquire properties, deploy 'AIR Edge' operational expertise to improve profitability, and then sell them to reinvest capital for higher returns[126][127] - Formed two joint ventures in Q2/Q3 2023: the Value-Add JV (sold 70% interest in Huntington Gateway) and the Core JV (sold 47% interest in 10 properties, expected to generate $813.3 million cash)[128][73] - Nearing completion of strategic exit from New York City, with $1.5 billion in non-cash GAAP gains recognized from $2.2 billion of dispositions since the Separation[130] Joint Venture Partnerships Overview | JV Name | Formation Date | Gross Asset Value @ 100% | AIR / JV Partner Ownership | Number of Properties | Units | Average Revenue per Unit | | :---------------- | :------------- | :----------------------- | :------------------------- | :------------------- | :---- | :----------------------- | | California JV | September 2020 | $2.4B | 61% / 39% | 12 | 4,051 | $3,389 | | Washington, D.C. JV | October 2021 | $0.5B | 20% / 80% | 3 | 1,748 | $2,070 | | Core JV | July 2023 | $1.1B | 53% / 47% | 10 | 3,093 | $2,534 | | Value-Add JV | June 2023 | $0.1B | 30% / 70% | 1 | 443 | $2,307 | Balance Sheet and Liquidity AIR targets a Net Leverage to EBITDAre ratio between 5.0x and 6.0x, focusing on fixed-rate, long-term debt with laddered maturities. Pro forma for announced joint ventures, Net Leverage to EBITDAre is reduced to 5.9x, with 96% fixed-rate leverage and $2.3 billion in available liquidity, supported by $5.8 billion in unencumbered property value - AIR targets Net Leverage to EBITDAre between 5.0x to 6.0x, with a focus on fixed-rate, long-term debt and laddered maturities[131] - Pro forma for announced joint ventures, Net Leverage to EBITDAre is reduced to 5.9x, with 96% fixed-rate leverage and limited repricing risk before Q2 2025[133] - Available liquidity is $2.3 billion, with access to more potentially secured by $5.8 billion in unencumbered property value[133] Dividend and Equity Capital Markets On July 25, 2023, AIR's Board of Directors declared a quarterly cash dividend of $0.45 per share of Common Stock, targeting a 75% payout ratio on Pro forma FFO for 2023, which is expected to have favorable tax characteristics - A quarterly cash dividend of $0.45 per share of Common Stock was declared on July 25, 2023, payable on August 29, 2023[134] - The Board targeted a 75% payout ratio on Pro forma FFO for 2023, expecting favorable tax characteristics[134] Team and Culture The company emphasizes a culture of productivity, innovation, and cost reduction through automation and technology. It fosters a collaborative, respectful, and responsible team environment, prioritizing internal promotions and talent development. This focus has led to significant industry recognition for customer service and being a top workplace - The company focuses on productivity, innovation, and cost reduction through automation, technology, and resident retention[135] - A collaborative and productive culture, based on respect and personal responsibility, is reinforced by a preference for internal promotion and talent development[137] - Recognized as a Kingsley Excellence Elite Five multifamily company, a winner of the 2023 Kingsley Excellence Awards for customer service (ranking second overall, first among publicly traded REITs), and multiple 'Top Workplaces' awards[138] Results of Operations The company reported a net loss attributable to common stockholders of $0.01 per share for Q2 2023 and $0.09 per share for H1 2023, a significant decline from prior year's net income. Pro forma FFO per share also decreased to $0.58 for Q2 2023 and $1.12 for H1 2023, primarily due to impairment losses, lower interest income from the Aimco note repayment, and higher interest expense, partially offset by increased property operations contribution Net (Loss) Income Attributable to AIR Common Stockholders per Share (Diluted) | Period (Ended June 30) | 2023 | 2022 | | :--------------------- | :-------- | :-------- | | Three Months | $(0.01) | $1.26 | | Six Months | $(0.09) | $3.66 | Pro forma FFO per Share | Period (Ended June 30) | 2023 | 2022 | | :--------------------- | :-------- | :-------- | | Three Months | $0.58 | $0.66 | | Six Months | $1.12 | $1.23 | - The decline in net income and Pro forma FFO was primarily driven by impairment losses, lower interest income from the Aimco note repayment, and higher interest expense, partially offset by increased contribution from property operations[141][148] Property Operations The Same Store segment's proportionate property NOI increased by 10.6% for Q2 2023 and 11.6% for H1 2023, driven by an 8.8% and 9.4% increase in residential rental rates, respectively, partially offset by a decrease in Average Daily Occupancy (ADO). The Other Real Estate segment's NOI significantly increased due to contributions from recently acquired properties - Same Store proportionate property NOI increased by 10.6% for Q2 2023 and 11.6% for H1 2023, excluding ownership changes[150][152] - This increase was primarily due to an 8.8% (Q2) and 9.4% (H1) increase in residential rental rates, partially offset by a 1.1% (Q2) and 0.7% (H1) decrease in ADO[150][152] - Other Real Estate proportionate property NOI increased by $17.3 million (Q2) and $35.6 million (H1) due to contributions from properties acquired in 2022 and 2023[151][153] Non-Segment Real Estate Operations Non-segment real estate operations, which include offsite property management costs, casualty losses, and results from sold/held-for-sale properties, decreased by $6.6 million for Q2 2023 and $20.6 million for H1 2023. This decline was primarily due to lower NOI from sold properties and increased casualty losses - Non-segment real estate operations decreased by $6.6 million for Q2 2023 and $20.6 million for H1 2023 compared to the prior year[155] - The decrease was primarily attributable to $6.7 million (Q2) and $16.4 million (H1) lower NOI from sold properties, a $2.6 million increase in casualty losses (H1), and a $1.6 million increase in property management expenses (H1)[155] Depreciation and Amortization Depreciation and amortization expense increased by $10.6 million (13.5%) for Q2 2023 and $21.7 million (13.3%) for H1 2023 compared to the prior year. This increase is mainly due to properties acquired after June 30, 2022, partially offset by reduced depreciation from sold properties - Depreciation and amortization expense increased by $10.6 million (13.5%) for Q2 2023 and $21.7 million (13.3%) for H1 2023[156] - The increase is primarily due to properties acquired subsequent to June 30, 2022, partially offset by reduced depreciation from sold properties[156] Other expenses (income), net Other expenses (income), net, decreased by $5.6 million for Q2 2023, shifting from income to expense, primarily due to fees earned from the Value-Add JV and services under a transition agreement, partially offset by a prior year gain on a cost basis investment. For H1 2023, other expense, net, increased by $5.2 million - Other expenses (income), net, decreased by $5.6 million for Q2 2023 (from income of $3.1 million to expense of $2.5 million)[158] - This change was primarily due to fees earned from the Value-Add JV and services provided under a transition services agreement, partially offset by a 2022 gain on a cost basis investment[158][159] - For H1 2023, other expense, net, increased by $5.2 million compared to 2022[159] Interest Income Interest income significantly decreased by $24.1 million (94.1%) for Q2 2023 and $36.1 million (92.3%) for H1 2023 compared to the prior year. This substantial decline is primarily attributed to the repayment of the note receivable from Aimco in 2022, including a $12.9 million prepayment penalty received in Q2 2022, and lower interest income from properties previously leased to Aimco - Interest income decreased by $24.1 million (94.1%) for Q2 2023 and $36.1 million (92.3%) for H1 2023[160] - The decrease was primarily due to lower interest income from the Aimco note receivable (repaid in 2022), including a $12.9 million prepayment penalty received in Q2 2022[160] Interest Expense Interest expense increased by $11.5 million (44.3%) for Q2 2023 and $25.6 million (53.2%) for H1 2023 compared to the prior year. This rise is mainly due to higher interest rates on term loans and the revolving credit facility, interest expense from senior unsecured notes issued in Q2 2022, and higher outstanding property debt balances - Interest expense increased by $11.5 million (44.3%) for Q2 2023 and $25.6 million (53.2%) for H1 2023[161] - The increase was primarily due to higher rates on term loans and the revolving credit facility, interest expense from senior unsecured notes issued in Q2 2022, and higher outstanding property debt balances[161] Loss on Extinguishment of Debt The company did not incur any loss on extinguishment of debt during Q2 2023 or Q2 2022. For H1 2023, the loss on extinguishment of debt decreased by $21.6 million compared to H1 2022, due to fewer prepayment penalties incurred from early debt payments in 2022 - No loss on extinguishment of debt was incurred during Q2 2023 or Q2 2022[162] - For H1 2023, loss on extinguishment of debt decreased by $21.6 million compared to H1 2022, due to lower prepayment penalties from early debt payments in 2022[162] (Loss) Gain on Dispositions and Impairments of Real Estate For Q2 and H1 2023, the company recognized a $17.5 million loss on dispositions and impairments of real estate. This was primarily due to non-cash impairment losses totaling $23.6 million on three real estate assets, partially offset by a $6.4 million gain from the formation of the Value-Add JV. This contrasts sharply with Q2 and H1 2022, which saw significant gains of $175.6 million and $587.6 million, respectively, from apartment community sales - A $17.5 million loss on dispositions and impairments of real estate was recognized for Q2 and H1 2023[163] - This loss was primarily due to non-cash impairment losses of $8.2 million and $15.4 million on three real estate assets, partially offset by a $6.4 million gain from the Value-Add JV formation[163] - In contrast, Q2 and H1 2022 recognized significant gains of $175.6 million and $587.6 million, respectively, from real estate dispositions[163] Gain on Derivative Instruments For Q2 and H1 2023, the company recognized gains of $11.4 million and $9.3 million, respectively, on derivative instruments not designated as cash flow hedges. These gains include both cash and non-cash components - Gains on derivative instruments not designated as cash flow hedges were $11.4 million for Q2 2023 and $9.3 million for H1 2023[164] - For Q2 2023, these gains comprised $5.3 million in cash gains and $6.1 million in non-cash gains. For H1 2023, they included $5.3 million in cash gains and $4.0 million in non-cash gains[164] Critical Accounting Estimates The company identifies the impairment of long-lived assets as a critical accounting policy that involves significant judgments and estimates in preparing its condensed consolidated financial statements. No other significant changes in critical accounting estimates were reported from the prior Annual Report on Form 10-K - The impairment of long-lived assets is considered a critical accounting policy due to the significant judgments and estimates involved[165] - No other significant changes in critical accounting estimates have occurred since the December 31, 2022, Annual Report on Form 10-K[166] Non-GAAP Measures This section defines and reconciles key non-GAAP financial measures used by management and investors, including NAREIT Funds From Operations (FFO) and Pro forma Funds From Operations (Pro forma FFO). These metrics adjust GAAP net income for real estate-specific items and non-recurring events to provide a clearer view of operational performance, although they are not substitutes for GAAP measures - NAREIT FFO and Pro forma FFO are non-GAAP measures used to assess operational performance, adjusting GAAP net income for real estate-specific items and non-recurring events[168][169][171] NAREIT FFO and Pro forma FFO Attributable to AIR Common Stockholders (in thousands, except per share data) | Metric (Three Months Ended June 30) | 2023 | 2022 | | :---------------------------------- | :-------- | :-------- | | NAREIT FFO attributable to AIR common stockholders | $92,893 | $100,422 | | Pro forma FFO attributable to AIR common stockholders | $85,717 | $102,819 | | NAREIT FFO per share – diluted | $0.62 | $0.64 | | Pro forma FFO per share – diluted | $0.58 | $0.66 | | Metric (Six Months Ended June 30) | 2023 | 2022 | | :---------------------------------- | :-------- | :-------- | | NAREIT FFO attributable to AIR common stockholders | $165,526 | $166,006 | | Pro forma FFO attributable to AIR common stockholders | $167,025 | $192,328 | | NAREIT FFO per share – diluted | $1.11 | $1.06 | | Pro forma FFO per share – diluted | $1.12 | $1.23 | Leverage Ratios The company targets Net Leverage to Adjusted EBITDAre between 5.0x and 6.0x, and also focuses on Proportionate Debt to Adjusted EBITDAre. These non-GAAP ratios are used to assess financial risk and credit quality. As of June 30, 2023, Proportionate Debt to Adjusted EBITDAre was 6.3x (5.7x pro forma for Core JV) and Net Leverage to Adjusted EBITDAre was 6.5x (5.9x pro forma for Core JV) - The company targets Net Leverage to Adjusted EBITDAre between 5.0x and 6.0x[177] Leverage Ratios (as of June 30, 2023) | Ratio | Annualized Current Quarter | Annualized Current Quarter Pro forma for the Core Joint Venture Transaction | | :---------------------------------- | :------------------------- | :-------------------------------------------------------------------------- | | Proportionate Debt to Adjusted EBITDAre | 6.3x | 5.7x | | Net Leverage to Adjusted EBITDAre | 6.5x | 5.9x | Net Leverage Reconciliation (as of June 30, 2023, in thousands) | Item | Amount | | :---------------------------------------- | :--------- | | Total indebtedness | $3,684,577 | | Proportionate Debt | $3,233,108 | | Net Leverage | $3,312,251 | | Net Leverage, Pro forma for Core Joint Venture transaction | $2,860,347 | Liquidity and Capital Resources The company's primary liquidity sources are cash flows from operations, dispositions, debt refinancing, and credit facilities. As of June 30, 2023, available liquidity was $1.8 billion, increasing to approximately $2.3 billion after the Core JV completion. Liquidity is used for operations, debt payments, capital expenditures, dividends, and acquisitions, with long-term needs met through borrowings, equity offerings, and property sales - Primary liquidity sources include cash flows from operations, dispositions, debt refinancing, new property debt, credit facilities, and equity offerings[183] - As of June 30, 2023, available liquidity was $1.8 billion, increasing to approximately $2.3 billion after the Core JV completion[183][184] - Long-term liquidity requirements are expected to be met through secured/unsecured borrowings, equity issuances, property sales, and operating cash flows[186] Leverage and Capital Resources The company's total leverage, including secured/unsecured debt, preferred OP Units, and redeemable noncontrolling interests, had a weighted-average remaining term of 6.6 years and an interest rate of 4.3% as of June 30, 2023. Post-Core JV, the average term extends to 7.2 years with a 4.0% interest rate. The company is in compliance with financial covenants and has sufficient committed credit to repay all debt maturing through 2027 - Total leverage had a weighted-average remaining term of 6.6 years and an interest rate of 4.3% as of June 30, 2023[190] - Subsequent to the Core JV transaction, the weighted-average interest rate for total leverage is 4.0% and the average remaining term to maturity is 7.2 years[190] - The company believes it was in compliance with all financial covenants as of June 30, 2023, and expects to remain so for the next 12 months, with sufficient committed credit to repay all debt due through 2027[191] Changes in Cash, Cash Equivalents, and Restricted Cash This section provides an overview of the changes in consolidated cash, cash equivalents, and restricted cash, broken down by operating, investing, and financing activities, as detailed in the condensed consolidated statements of cash flows - Changes in cash, cash equivalents, and restricted cash are discussed in relation to operating, investing, and financing activities[192] Operating Activities Net cash provided by operating activities for H1 2023 was $182.7 million, a decrease of $18.8 million compared to H1 2022. This decline was primarily due to lower net operating income from sold apartment communities, partially offset by increased contributions from recently acquired properties - Net cash provided by operating activities was $182.7 million for H1 2023[193] - This represents an $18.8 million decrease compared to H1 2022, primarily due to lower NOI from sold properties, partially offset by increased contributions from recently acquired properties[193] Investing Activities Net cash used in investing activities for H1 2023 was $228.4 million, primarily for real estate purchases and capital expenditures. This contrasts with H1 2022, which saw $574.7 million in net cash provided by investing activities, mainly from dispositions and the repayment of the Aimco note receivable. Total capital additions for H1 2023 were $88.0 million - Net cash used in investing activities was $228.4 million for H1 2023, primarily for real estate purchases and capital expenditures[194] - In contrast, H1 2022 provided $574.7 million in cash from investing activities, mainly from dispositions and Aimco note repayment[194] Total Capital Additions (Six Months Ended June 30, in thousands) | Category | 2023 | 2022 | | :---------------------- | :-------- | :-------- | | Capital replacements | $17,372 | $12,916 | | Capital improvements | $5,880 | $6,855 | | Capital enhancements | $44,756 | $41,920 | | Initial capital expenditures | $15,250 | $12,807 | | Casualty | $4,646 | $10,828 | | Entitlement and planning | $133 | $1,027 | | Total capital additions | $88,037 | $86,353 | Financing Activities Net cash used in financing activities for H1 2023 was $125.7 million, primarily driven by net repayments on the revolving credit facility and dividend payments, partially offset by proceeds from non-recourse property debt. This is a significant reduction from the $768.0 million used in H1 2022, which included substantial repayments of non-recourse debt and term loans, and common stock repurchases - Net cash used in financing activities was $125.7 million for H1 2023[197] - This was primarily due to net repayments on the revolving credit facility and dividend payments, partially offset by net proceeds from non-recourse property debt[197] - H1 2022 saw $768.0 million in net cash used, mainly for repayments on non-recourse debt and term loans, dividends, and common stock repurchases, partially offset by unsecured notes payable proceeds[197] Future Capital Needs The company expects to fund future acquisitions, debt maturities, and capital spending primarily through proceeds from apartment community sales (including joint ventures), secured and unsecured borrowings, equity issuances, and operating cash flows. Management believes it has sufficient cash and access to additional liquidity to meet operational needs for 2023 and beyond - Future capital needs will be funded principally by proceeds from apartment community sales (including joint ventures), secured/unsecured borrowings, equity issuances, and operating cash flows[198] - Management believes the company has sufficient cash and access to additional liquidity to meet operational needs for 2023 and beyond[198] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's primary market risks: refunding risk (availability of funds for maturing debt) and repricing risk (interest rate changes). The company uses derivative financial instruments like interest rate swaps and treasury rate locks to mitigate interest rate risk. As of June 30, 2023, a 100-basis point change in floating rates would impact annual interest expense by $7.4 million, reducing to $1.3 million post-Core JV transaction - Primary market risks are refunding risk (availability of funds for maturing debt) and repricing risk (increases in base interest rates and credit risk spreads)[199] - Derivative financial instruments, such as interest rate swaps and treasury rate locks, are used to reduce exposure to interest rate risk[199] - As of June 30, 2023, a 100-basis point change in floating rates would increase/decrease annual interest expense by $7.4 million; post-Core JV, this sensitivity reduces to $1.3 million[200] - The estimated fair value of total indebtedness was approximately $3.4 billion as of June 30, 2023[202] ITEM 4. CONTROLS AND PROCEDURES This section confirms that the disclosure controls and procedures for both Apartment Income REIT Corp. (AIR) and Apartment Income REIT, L.P. (AIR Operating Partnership) were evaluated and deemed effective as of June 30, 2023. Furthermore, there were no material changes in internal control over financial reporting for either entity during the second quarter of 2023 AIR: Disclosure Controls and Procedures AIR's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023 - AIR's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[203] AIR: Changes in Internal Control Over Financial Reporting There were no material changes in AIR's internal control over financial reporting during the second quarter of 2023 - No material changes in AIR's internal control over financial reporting occurred during Q2 2023[204] The AIR Operating Partnership: Disclosure Controls and Procedures The management of AIR Operating Partnership, with the participation of AIR's CEO and CFO, concluded that its disclosure controls and procedures were effective as of June 30, 2023 - The AIR Operating Partnership's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[206] The AIR Operating Partnership: Changes in Internal Control Over Financial Reporting There were no material changes in the AIR Operating Partnership's internal control over financial reporting during the second quarter of 2023 - No material changes in the AIR Operating Partnership's internal control over financial reporting occurred during Q2 2023[207] PART II. OTHER INFORMATION This section states that there have been no material changes to the risk factors previously disclosed in Apartment Income REIT Corp.'s and AIR Operating Partnership's combined Annual Report on Form 10-K for the year ended December 31, 2022 ITEM 1A. RISK FACTORS This section states that there have been no material changes to the risk factors previously disclosed in Apartment Income REIT Corp.'s and AIR Operating Partnership's combined Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to the risk factors from the combined Annual Report on Form 10-K for the year ended December 31, 2022, have occurred[210] [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=48&type=section&id=ITEM%202.%20UNREGISTERED%20SALES