Apartment Income REIT Earnings: Series of Paired Transactions Should Lead to Small AFFO Increase

Apartment Income REIT AIRC reported third-quarter results that were relatively in line with our expectations, leading us to reaffirm our $50 fair value estimate for the no-moat company. Same-store occupancy fell 20 basis points sequentially and 60 basis points year over year to 95.3%, worse than our assumption of a 20-basis-point sequential improvement. However, rental rate growth of 7.5% was higher than our estimate of 4.7% growth for the third quarter, leading to same-store revenue growing 6.8%. Same-store expenses were up 8.0% in the quarter, so the company reported same-store net operating income growth of 6.3% that was slightly better than our estimate of 5.9% growth. Apartment Income REIT reported pro forma funds from operations of $0.64 per share in the third quarter, a penny better than our $0.63 estimate.

The firm announced a set of paired transactions that we view as being moderately positive for shareholders. The company formed a Core Joint Venture during the quarter and sold a 47% interest in 10 properties for $202 million in cash plus the joint venture assuming $303 million in debt. In a separate transaction, the company also sold a property in New York for $21 million. Combined, the disposition cap rate on these deals was 5.8%. Using the proceeds from these deals, Apartment Income REIT acquired two wholly owned properties for $155 million and contributed $132.5 million to acquire another property for the Core JV at an average cap rate of 5.4%. Also, in the third quarter, the company repurchased 2.2 million shares for $77.8 million and retired $161 million in debt early that had an average interest rate of 6.1%. We agree with management’s statement that the net results of these deals are likely to be neutral to NOI and FFO in 2024. However, the deals should be moderately accretive to AFFO, and we like that it slightly increases average portfolio quality and reduces leverage, so we think management made a series of smart investment decisions in the quarter.