Independence Realty Trust, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Amounts are in U.S. dollars unless otherwise noted.
Business context
Independence Realty Trust is an externally managed REIT focused on acquiring and operating apartment properties, primarily in non-gateway markets. RAIT Financial Trust owns approximately 22.9% of IRT and an affiliate provides advisory and property-management services. At year-end, the portfolio comprised 30 properties and 8,819 units.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $49.2 million | $19.9 million |
| Operating income | $8.5 million | $4.9 million |
| Net income | $2.9 million | $1.3 million |
| Diluted EPS | $0.14 | $0.12 |
| Net operating income (NOI) | $25.8 million | $10.5 million |
| FFO per share | $0.72 | $0.76 |
| Core FFO per share | $0.68 | $0.81 |
| Portfolio occupancy | 92.7% | 94.5% |
| Average monthly effective rent per occupied unit | $788 | $770 |
| Cash and cash equivalents at year-end | $14.8 million | $3.3 million |
| Total indebtedness at year-end | $418.9 million | $103.3 million |
Revenue increased 147% and operating income 73%, principally reflecting 20 property acquisitions during 2014 and two properties held for a full year. NOI margin was approximately 52% of revenue and operating margin approximately 17%. Net income included a $2.9 million gain related to the Oklahoma City portfolio acquisition. FFO and Core FFO are non-GAAP measures; Core FFO declined despite growth in the portfolio.
Cash from operating activities was $15.7 million, compared with $6.0 million in 2013. Investing cash outflow was $307.3 million, mainly for acquisitions; financing cash inflow was $303.0 million, mainly from equity offerings and borrowings. The company reported $5.2 million of restricted cash in addition to cash and cash equivalents.
IRT completed three common-stock offerings, raising $200.9 million gross proceeds, and acquired 20 properties with 6,029 units for aggregate purchase prices of $497.1 million. Some acquisition consideration was paid in operating-partnership units.
Debt, liquidity, and distributions
Year-end indebtedness included $399.0 million of mortgage principal and $18.4 million drawn on a $30 million secured revolving facility, with $11.6 million available. The weighted-average effective interest rate was 3.6%; $56.5 million of debt was floating-rate and unhedged. IRT reported compliance with debt covenants. Scheduled principal repayments were $44.9 million in 2016, including a significant assumed loan maturing in April 2016.
Management said available cash, operating cash flow, and financing arrangements should cover existing-portfolio liquidity needs for the next 12 months, while noting that further financing may not be available on acceptable terms. The stated leverage objective is generally no more than approximately 65% of initial property purchase prices, but this is not a binding limit.
Common dividends were $0.72 per share for 2014, paid monthly at $0.06 per month. The filing reports $15.1 million of cash distributions and $15.7 million of operating cash flow for the year. The board declared $0.06 monthly dividends for January through March 2015; future distributions remain discretionary and are not assured.
Changes, outlook, risks, and unusual items
- Portfolio expansion and funding: Properties at cost grew to $689.1 million from $190.1 million, funded by equity issuance, assumed debt, and new mortgage financing. Common shares outstanding increased to 31.8 million from 9.7 million.
- Operating trends: Occupancy declined to 92.7% from 94.5%, while average effective rent increased to $788 from $770. Management expected stable occupancy and average rent increases of 3%–4% through 2015; this is management’s expectation, not formal earnings guidance.
- Unusual acquisition gain: The OKC portfolio acquisition generated a $2.9 million accounting gain because the fair value of acquired properties and assumed debt exceeded the purchase price. Preliminary purchase-price allocations for 2014 acquisitions could still change.
- Material control weakness: Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to insufficient qualified resources and deficiencies in reconciliation, management-review, and accounting-estimate controls. Adjustments related mainly to acquisition purchase-price allocation, including a $9.6 million reallocation from land to buildings and $113,000 of additional depreciation. The auditor gave an adverse opinion on internal controls but an unqualified opinion on the financial statements. Management targeted remediation during 2015.
- Other risks: External management and property management are affiliated with RAIT; the filing identifies potential conflicts, related-party fees, and reliance on RAIT personnel. Other key risks include acquisition execution, market and property concentration, refinancing and interest-rate exposure, potential share dilution, REIT qualification and distribution requirements, and real-estate operating and regulatory risks.
- Contingencies: IRT reported no pending legal proceedings expected to have a material adverse effect. It reported no income-tax expense for 2014, consistent with its REIT election.
Investor verification priorities
- Track remediation and testing of the material weakness, and whether controls operate effectively for a sufficient period.
- Assess whether acquisitions translate into improved same-property occupancy, rent growth, NOI, and per-share FFO; distinguish recurring performance from the acquisition gain and Core FFO adjustments.
- Review debt maturities and refinancing plans, particularly the 2016 maturities, floating-rate exposure, and remaining revolver availability.
- Compare cash distributions with recurring operating cash flow, FFO, capital expenditures, and debt obligations; distributions are not guaranteed.
- Evaluate continued equity issuance and operating-partnership unit exchanges for dilution, and examine related-party financing, management fees, and acquisition terms.