Apartment Income REIT Earnings: Revenue Growth Significantly Higher Than Expense Growth

Apartment Income REIT AIRC reported first-quarter results that were in line with our expectations, leading us to reaffirm our $52 fair value estimate for the no-moat company. Same-store occupancy was up 50 basis points sequentially to 97.5%, slightly better than our 97.2% estimate. Average rental rates grew 10.6% year over year, also slightly better than our estimate of 9.5%, and led to same-store revenue growth of 10.1%. Same-store expenses grew only 3.3% in the first quarter, though some expense items saw large increases, like utility costs rising 10.1% and insurance costs rising 38.8%. As a result, same-store net operating income was up 12.7% in the quarter, slightly better than our estimate of 10.9%. Despite the better-than-anticipated portfolio results, Apartment Income REIT reported pro forma funds from operations of $0.55 per share in the first quarter, $0.04 lower than our $0.59 estimate, as it incurred higher-than-anticipated property management expenses.

Management’s updated guidance suggests significantly higher results in the second half of the year. Management narrowed its 2023 pro forma FFO guidance by $0.02, to a new range of $2.36-$2.46. Additionally, it expects second-quarter pro forma FFO of $0.55-$0.59, which puts our $0.60 estimate slightly above the high end of the range. Given the $0.55 figure reported in the first quarter and using the $0.57 midpoint of the second-quarter guidance, management is implying that the third and fourth quarters will average $0.64 per share at the midpoint of its full-year guidance, which is well above our estimates for those quarters. We don’t anticipate making significant changes to our full-year estimates, since our $2.43 estimate is within the guidance range, but we may make changes to our quarterly estimates to shift more growth into the second half of the year.