Real Estate Investment Trust (REIT) Apartment Income REIT Corp. (NYSE: AIRC), or AIR, recently made its public market debut following its separation from fellow residential REIT Apartment and Investment Management (NYSE: AIV), or Aimco. The REITs decided to go their separate ways to concentrate on one aspect of the former combined business model. AIR would focus on owning a diversified portfolio of cash-flowing apartment communities to support a steady dividend, while Aimco would concentrate on developing and redeveloping apartment communities.
As a result, income-focused investors now have a new pure-play REIT to consider. Here’s a closer look at the new entity.
Apartment Income REIT owns interests in 98 multifamily properties with 26,599 units. More than 90% of its portfolio are in its top eight markets:
- Los Angeles: 21.5% of its gross asset value (GAV).
- Greater Washington, D.C., area: 12.4% of GAV.
- Philadelphia: 12% of GAV.
- The Bay Area of Northern California: 10.6% of GAV.
- Boston: 9.9% of GAV.
- Miami: 9.6% of GAV.
- San Diego: 7.2% of GAV.
- Denver: 7.1% of GAV.
Roughly 57% of its communities are Class A properties, while the other 43% are a mix of class B and C real estate. Meanwhile, about 65% of its units are in suburban markets, while 35% are in urban markets. This diversification by location, submarket, and property type is worth noting, considering that the pandemic had the most significant impact on Class A properties in high-cost urban markets. As a result, REITs concentrated in those areas have experienced higher vacancy levels and lower rental rates than those with exposure to suburban and lower-cost urban markets.
The company backs that portfolio with a solid financial profile. It has a decent balance sheet with a leverage ratio 6.8 times net debt + preferred equity-to-EBITDA, which is at the high end of its peer group of large apartment-focused REITs.
Meanwhile, the REIT plans to pay dividends totaling $1.72 per share in 2021 — about 5% above the pre-separation level — implying a roughly 4.5% yield at its recent stock price of around $38 per share. That would put it slightly above the current REIT sector average of 3.9%. The new rate puts its dividend payout ratio at 83.5% of its annualized FFO during the pandemic-impacted third quarter, or 72.5% of its annualized FFO at the beginning of 2020.
What does the future hold for AIR?
AIR’s go-forward plan is to only invest in stabilized apartment communities. While it will spend money on property enhancements like kitchen and bath upgrades, it won’t develop or redevelop properties, which will remain Aimco’s focus.
The two companies will maintain a relationship where Aimco will redevelop or develop specific properties on AIR’s behalf. For example, at the time of the separation, AIR had leased five properties to Aimco, which is completing the construction and lease-up of those projects. Upon stabilization, AIR will have the option to acquire the leasehold from Aimco.
Meanwhile, AIR owns some other properties with development or redevelopment potential, and it has the right to sign similar leases with Aimco. In addition to that, AIR has the option to purchase all the stabilized properties owned by Aimco other than those included in the initial portfolio. Outside of that relationship, AIR has the freedom to buy stabilized apartments from third parties.
AIR also aims to have a strong balance sheet so that it can pay a stable dividend and acquire additional stabilized apartment communities. While its current leverage ratio is at the high-end of its peer group average, its medium-term target is 5.5 times, putting it towards the lower end. It expects to achieve that goal by repaying property debt and growing its net operating income (NOI).
As the company enhances its NOI and reduces debt, it should be able to grow its dividend. Meanwhile, its focus on owning stabilized apartments instead of investing in riskier redevelopments and development projects should reduce stock-price volatility. Thus, it will become a better investment option for risk-averse investors, like retirees.
A compelling option for income-focused investors
Apartment Income REIT has one primary aim: To pay a stable dividend. It plans to do that by focusing on owning stabilized apartment communities and maintaining a top-notch financial profile. That focus on dividend stability makes it an ideal option for income-seeking REIT investors.
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