Business context and reporting period
Independence Realty Trust, Inc. is an externally managed REIT focused on apartment properties. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. At quarter-end, the company owned 19 properties with 5,342 units across 10 states.
Financial performance and position
Unless stated otherwise, dollar amounts are in millions. The filing reports financial statements in thousands.
- Second-quarter revenue: $11.65, up 148% from $4.70 in Q2 2013; rental income was $10.61.
- Second-quarter earnings: operating income was $1.80 versus $1.22; net loss allocable to common shares was $0.13, or $(0.01) per share, versus income of $0.05, or $0.01 per share. Operating margin was approximately 15.5%, compared with 26.0% a year earlier.
- Second-quarter operating measures: NOI was $6.08; FFO was $3.10, or $0.18 per share, and Core FFO was $3.37, or $0.19 per share. Core FFO is a non-GAAP measure and the company cautions that its calculation may differ from other REITs.
- First-half results: revenue was $19.78 versus $9.39; operating income was $3.15 versus $2.45; net income allocable to common shares was $2.81 versus $0.05. FFO was $8.16 ($0.49 per share) and Core FFO was $5.94 ($0.36 per share), compared with $2.58 ($0.46 per share) for both measures in first-half 2013. The 2014 results include a $2.88 gain on assets acquired.
- Cash flow: first-half operating cash flow was $5.88, investing cash outflow was $100.45, and financing cash inflow was $99.29. Cash and cash equivalents ended the period at $8.05, compared with $3.33 at year-end 2013; restricted cash was an additional $2.70.
- Debt and liquidity: debt carrying value was $215.63 at June 30, versus $103.30 at December 31, 2013. Principal outstanding was $213.49, with a 3.6% weighted-average effective rate; $50.23 was floating-rate and $163.26 fixed-rate. The $20 million revolving facility had $7.9 million available, and the company reported compliance with its covenants.
- Equity and distributions: 17.75 million common shares were outstanding at June 30, versus 9.65 million at year-end. The company declared $0.06 per share monthly during Q2, totaling $0.18 for the quarter.
Material changes versus the prior comparable period
- Growth primarily reflected acquisitions: the company acquired nine properties totaling 2,552 units during the first half for an aggregate purchase price of $168.5 million. The portfolio grew from 8 properties and 2,004 units at June 30, 2013 to 19 properties and 5,342 units at June 30, 2014.
- Management attributed most of the Q2 rental-income increase to acquisitions, with the balance from improved occupancy and rents at historical properties. Same-store effective monthly rent per unit increased to $798 from $784 a year earlier.
- Portfolio occupancy was 93.1%, down from 94.2% a year earlier and 93.9% in the prior quarter. Management attributed increased property expenses in part to higher real estate taxes and repairs and maintenance at historical properties.
- Debt increased substantially to fund the expanded portfolio. Interest expense rose to $1.93 in Q2 from $0.90 a year earlier.
- On July 21, 2014, after quarter-end, the company issued 8.05 million shares at $9.50, raising $76.5 million gross and $72.4 million net. Management expected to deploy most proceeds by the end of Q3.
Outlook, risks and unusual items
- No numerical earnings or operating guidance is provided. Management said cash balances, operating cash flow and financing arrangements were expected to meet liquidity needs for the existing portfolio for the next 12 months, and anticipated further acquisitions and related increases in income and expenses.
- The company generally intends to limit leverage to 65% of the combined initial purchase price of its properties, but is not contractually subject to that limit and may use materially more or less leverage.
- The OKC Portfolio acquisition produced a $2.88 million gain because the fair value of acquired assets exceeded the purchase price. Purchase-price allocations remained preliminary and may be revised.
- Interest-rate exposure includes floating-rate debt; the filing estimates that a 100-basis-point increase would add approximately $0.50 million to annual interest expense, before considering other effects. No interest-rate derivatives were in effect at quarter-end.
- Risks include the availability and cost of future financing, property operating and real estate tax costs, acquisition execution, occupancy and rent trends, and potential impairment estimates. The company disclosed no material litigation, no defaults, and no material changes to the risk factors in its 2013 Form 10-K.
- Related-party arrangements are significant: RAIT affiliates provide advisory and property-management services, and RAIT held $38.1 million of the company’s mortgage debt at June 30. Following the July offering, RAIT’s ownership fell to 28.2%.
Important facts for investors to verify
- Whether acquisition-driven revenue and FFO growth translates into durable same-property performance, particularly given the quarter-end occupancy decline.
- How the July offering proceeds are deployed, and the resulting impact on share count, leverage, per-share returns and future distributions.
- The timing and refinancing implications of debt maturities, especially the OKC Portfolio loan maturing in April 2016, and the company’s sensitivity to floating rates.
- The final purchase-price allocations and sustainability of reported earnings excluding the $2.88 million acquisition gain; also distinguish GAAP earnings, FFO and Core FFO.
- Whether liquidity remains adequate after acquisitions, debt service, capital expenditures and distributions; the filing does not provide a clear property-level capital expenditure forecast.