Independence Realty Trust, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Dollar figures are in thousands unless noted. The company is an externally managed, early-stage multifamily REIT sponsored by RAIT Financial Trust. At quarter-end it owned seven properties, totaling 1,812 units across five states.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $3,990 | $0 |
| Total expenses | $3,037 | $63 |
| Operating income (loss) | $953 | $(63) |
| Interest expense | $800 | $0 |
| Net income (loss) | $153 | $(63) |
| Net income (loss) allocable to common shares | $(26); $(0.21) per share | $(63); $(3.16) per share |
| Cash from operating activities | $1,164 | $(57) |
| Cash and cash equivalents at quarter-end | $4,214 | $1,107 at Dec. 31, 2011 |
| Mortgage indebtedness | $82,175 | Unchanged from Dec. 31, 2011 |
Operating margin was approximately 23.9% (operating income divided by revenue). The filing does not provide a clear GAAP net margin discussion. The portfolio’s reported average occupancy was 94.9%, with average effective monthly rent of $746 per unit. Net real estate investment was $127,564; total assets were $133,753 and total liabilities were $84,283. Restricted cash was $1,204.
Cash increased by $3,107 during the quarter: operating activities provided $1,164, investing activities used $392 (including $260 of capital expenditures), and financing activities provided $2,335. Financing inflows included $3,000 from common stock issued to a sponsor subsidiary; the company also paid $760 in distributions to non-controlling interests.
Material changes and comparability
- Revenue and property expenses arose after the company acquired seven properties during 2011. The 2011 comparison is not operationally comparable because the company had no revenue-producing assets in Q1 2011.
- The company met the minimum offering amount in Q1 2012 by selling 300,000 common shares to an indirect sponsor subsidiary for $3,000. The sponsor indirectly owned all outstanding common stock at March 31.
- On January 4, 2012, the company issued 125 Series A cumulative, non-voting preferred shares to unaffiliated investors for a stated aggregate purchase price of $125. The preferred stock carries a 12.5% annualized dividend rate.
- Mortgage debt totaled $82,175, with a disclosed weighted-average current interest rate of 3.8%. Most loans were interest-only at quarter-end; $38,075 of debt was fixed at 2.5% for two years and then floats at 225 basis points over 30-day LIBOR.
Outlook, risks and notable matters
- Management said available cash, operating cash flows and financing arrangements should meet existing-portfolio liquidity needs for the next 12 months. It expects to raise offering capital, increase borrowings and make acquisitions; these plans could materially affect future results. No earnings or distribution guidance was provided.
- The company’s stated strategy is to invest offering proceeds in diversified multifamily properties, primarily core and stabilized assets. The public offering was scheduled to end by June 10, 2013, with a possible extension in certain states to no later than June 10, 2014.
- Management cited limited operating history, ability to deploy offering proceeds, real estate and general economic conditions, access to capital, interest rates, regulatory and REIT tax changes, and accounting changes as risks. Additional financing may not be available on acceptable terms.
- The company intends to qualify as a REIT and notes it must distribute at least 90% of ordinary taxable income. Failure to qualify could result in corporate-level taxes and restrict REIT requalification for four years, subject to potential relief.
- The business is externally managed by sponsor-affiliated entities and has no paid employees. Q1 payments included $53 of advisor asset-management fees and $157 of property-management and leasing fees. The advisor also incurred $187 of reimbursable expenses, of which $30 was reimbursed in the quarter.
- On May 14, 2012, after quarter-end, James J. Sebra was appointed chief financial officer; Jack E. Salmon remained president and a director. Management reported effective disclosure controls, no significant changes in internal control, no legal proceedings, and no material changes to previously disclosed risk factors.
- FFO was $973 and MFFO was $1,000 for Q1 2012, both non-GAAP measures. The filing cautions they are not substitutes for GAAP earnings or operating cash flow and do not represent cash available for discretionary use.
Investor verification priorities
- Reconcile the common-share figures: the filing reports 320,000 issued and outstanding shares, yet weighted-average basic shares of 125,495 in Q1 2012 and 20,000 in Q1 2011; confirm the applicable share units and basis for reported EPS.
- Reconcile the preferred-stock issuance terms and cash-flow reporting: the note states $125 aggregate proceeds, while the cash-flow statement reports $101 of preferred-stock proceeds.
- Review debt maturities, the transition of the $38,075 floating-rate portion to LIBOR-based rates, and any related interest-rate exposure.
- Assess related-party management, advisory, property-management and offering costs, including their effect on cash available for distributions and acquisitions.
- Verify subsequent offering proceeds, use of capital, REIT qualification and distribution capacity; reported Q1 operating results do not establish full-year performance.