There is some cause for concern about a possible dividend cut, and shares are trading near their all-time low.

Now that apartment rental growth rates have stabilized slightly higher than inflation, leaving concerns about oversupply appearing a bit overblown (as documented in previous articles), and since Freddie Mac estimates that the U.S. housing market is still more than 3 million housing units short of the country's demand, maybe it's time to take another look at some intriguing Apartment REITs.

This article looks at an Apartment REIT that is a little unusual, and has just one fly in the ointment, separating it from a solid Buy.

Formed in December of 2020 as a spin-off from Apartment Investment and Management (AIV), and headquartered in Denver, Apartment Income REIT Corp. (NYSE:AIRC) owns and operates 95 apartment communities spread across 15 U.S. states and Washington, D.C. The portfolio totals almost 26,000 units, with 58% of these classified as Class A and 42% as Class B.

The largest concentrations are in California (23 communities), Florida (11 communities), and Massachusetts (9 communities), followed by Colorado with 8, Pennsylvania with 7, and Virginia with 6.

What sets AIRC apart from the average Apartment REIT is its focus on two things:

The company claims to be on track to outperform all its peers for same-store revenue growth, both this year and next.

Occupancy has slipped a bit since its high level of 97.5% in Q1, and the previous 8.6% blended leasing spreads have slipped along with them, but remain healthy, at 6.6%.

Resident turnover is dropping steadily, from 43% in 2019, to 38% as of March 31. Another way of saying that would be that tenant retention has gone from 56.8% to 61.9% over that time period.

At the same time, the median tenant income is rising rapidly, from $117,250 in 2019, all the way to $170,000 in 2023, a CAGR of 9.7%. With average monthly rent of $2773, residents enjoy a healthy income-to-rent ratio of 5.11x.

With same-store NOI margin of 74.4% through the end of last year, AIRC had achieved 20 consecutive quarters of peer-leading NOI margin, and free cash flow conversion of 66.8% led all peers also.

AIRC recently formed joint venture partnerships with "two of the world's largest real estate investors," by selling part of its ownership in 11 properties, raising about $1.2 billion.

In 10 of the 11 deals, AIRC sold 47% of its interest in core holdings. In the other, they sold 70% of a value-add project in Virginia. The cash raised will be used to pay down revolver debts and fund new acquisitions with long-term levered IRR's greater than 10%. AIRC retains property and asset management responsibilities, and will collect about $2.5 million annually in fees as a result.

Since separating from AIV, AIRC has recycled assets worth about 45% of its GAV (gross asset value), raising average revenue per unit by 25% in the process.

AIRC reported the following mixed results for Q2 2023.

* (Run-Rate FFO excludes earnings related to the Aimco note receivable and its repayment in 2022.)

Despite the loss thus far, AIRC management is guiding for net income of $0.71 per share at the midpoint.

In the same-store portfolio, AIRC reported the following results, posting solid gains despite a decline in occupancy. About 60 basis points of the decline in occupancy is a result of move-outs and evictions of non-paying residents as COVID-related protections expired. The company expects improvement in occupancy in Q3 and Q4.

CEO Terry Considine had this to say on the Q2 earnings call:

My final take away for the quarter is that the business is returning to normal after three tumultuous years. Since 2020, results have been driven by the COVID response, urban or suburban locations, sunbelt versus coastal markets, and the impacts and reactions to generationally high inflation. These factors are normalizing and what we're left with is an industry in which operations matter. This is the time when the AIR Edge will be increasingly apparent.

Here are the 3-year growth figures for FFO (funds from operations), and TCFO (total cash from operations).

Source: TD Ameritrade, Hoya Capital Income Builder, and author calculations

AIRC is clearly off to a very good start in its brief history, with growth figures all in the very high double digits.

Meanwhile, here is how the stock price has done over the past 2 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF (VNQ).

Source: MarketWatch.com and author calculations

Two years ago, REITs were near their zenith. Since then, investors have been pretty unimpressed with both AIRC (-19.0)% and the VNQ (-13.4)%. AIRC shares are trading at or near all-time lows, and searching for a bottom.

Here are the mixed balance sheet metrics. The company has a mild problem with indebtedness, but its EBITDA is strong, which puts its Debt/EBITDA at a healthy 5.3, and the balance sheet sports an investment-grade BBB rating.

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