Independence Realty Trust, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company is a REIT owning and operating multifamily apartment communities, primarily in non-gateway U.S. markets. At year-end it owned 52 communities with 14,017 units; portfolio occupancy was 94.0%.
Financial performance and position
- Revenue: $161.2 million, up 5.1% from $153.4 million in 2016.
- Operating results: Operating income was $45.4 million, compared with $39.7 million. Net income was $31.4 million, versus a $9.6 million net loss in 2016; diluted EPS was $0.41 versus a loss of $0.19. The comparison is affected by 2016’s $45.0 million management-internalization expense.
- Property performance: Same-store revenue rose 3.9%, same-store operating expenses rose 2.5%, and same-store NOI increased 4.8% to $86.7 million. Same-store average occupancy increased to 94.6% from 93.8%, and average effective monthly rent per occupied unit rose 2.8% to $1,015.
- REIT operating measures: FFO was $0.56 per share/unit, compared with a loss of $0.12 in 2016; Core FFO was $0.73, down from $0.79. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash flow and distributions: Operating cash flow was $54.3 million, versus an outflow of $7.5 million in 2016; investing activities used $190.8 million and financing activities provided $125.6 million. Year-end cash was $10.0 million. The company paid $54.4 million in distributions to common stockholders and noncontrolling interests and reported $55.8 million of operating cash flow before specified acquisition/internalization expenses and working-capital changes. The 2017 common dividend was $0.72 per share.
- Debt and liquidity: Year-end principal debt was $784.6 million ($778.4 million carrying value net of financing costs); total assets were $1.45 billion. Management reported debt to gross assets of 50.2%, down from a historical 64%. The debt’s weighted-average rate was 3.6% and weighted-average maturity 5.7 years. Cash and an unsecured credit facility are key liquidity sources; the $300 million facility had $104.0 million outstanding at year-end. The filing reports compliance with financial covenants.
- Capital and portfolio: The company acquired 10 communities totaling 2,340 units for $243.6 million and sold four properties for $86.8 million. It raised approximately $126.1 million net from a September common-stock offering and $11.9 million net through its ATM program.
Material changes versus 2016
- Revenue increased 5.1%, while same-store NOI increased 4.8%; year-end portfolio occupancy was 94.0%, compared with 94.5% a year earlier.
- Net income turned positive, but the comparison reflects the prior-year management-internalization charge and lower 2017 gains on property sales ($18.8 million versus $31.8 million). 2017 also included $3.6 million of acquisition-related debt-extinguishment costs.
- Interest expense declined to $28.7 million from $35.5 million, which management attributed primarily to debt reductions in 2016.
- The 2017 common-stock offering substantially increased shares outstanding. Core FFO per share/unit declined despite higher total Core FFO ($55.7 million versus $43.3 million).
- The company refinanced its prior secured credit facility with a $300 million unsecured facility and added a $100 million unsecured term loan maturing in 2024, extending and diversifying its financing.
Outlook, risks and unusual items
- Management expressed optimism about rental demand, household formation, employment and relatively limited new apartment supply in its markets. It also noted supply-related occupancy and rent challenges in some submarkets.
- Management expected interest rates to rise in 2018 but stated it did not expect higher interest expense because debt was effectively fixed through fixed-rate mortgages and derivatives. It cautioned that higher capitalization rates could affect acquisition and disposition pricing. No quantitative earnings guidance is provided in the filing text.
- Key risks include geographic concentration, local oversupply and weaker demand, short lease terms, higher property taxes and operating costs, acquisition execution, access to external capital, and the ability to refinance debt. The filing identifies approximately $746.6 million of potential balloon principal payments at maturities ranging from 2021 to 2026.
- Management cited upcoming property-tax reassessments in several markets. Other disclosed risks include weather and uninsured losses, environmental and regulatory liabilities, and uncertainty around LIBOR’s possible phaseout after 2021.
- The HPI portfolio acquisition was not fully completed by year-end: two remaining properties closed January 3, 2018. The company also acquired The Chelsea in January 2018 and drew $68 million on its credit facility for these acquisitions.
- The 2017 Tax Cuts and Jobs Act may affect the company and stockholders; management noted that guidance and clarification remained uncertain. The company recorded no income-tax expense for 2017, consistent with its REIT status.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at December 31, 2017.
Investor verification priorities
- Review the debt maturity schedule, balloon obligations, covenant headroom, and availability under the revolving facility; reconcile the filing’s floating-rate debt and hedge disclosures.
- Assess whether same-store rent and occupancy gains can continue amid new supply and property-tax reassessments.
- Evaluate the sustainability of the $0.72 annual dividend against recurring cash flow, capital expenditures, and Core FFO per share/unit.
- Separate recurring property performance from property-sale gains, acquisition costs, defeasance costs, and other adjustments used in Core FFO.
- Confirm the post-year-end acquisitions, related financing, and share-count dilution, and assess the performance of acquired properties, including the low year-end occupancy reported for Live Oak Trace.