Business Context and Reporting Period
Company: Independence Realty Trust, Inc. (formerly Empire American Realty Trust, Inc.)
Reporting Period: Fiscal year ended December 31, 2010
Status: Development stage company; no real estate operations commenced.
Structure: Maryland corporation and indirect, wholly-owned subsidiary of RAIT Financial Trust (NYSE: RAS). The company intends to qualify as a Real Estate Investment Trust (REIT) once minimum offering requirements are met.
Offering Status: Public offering of up to 100,000,000 shares at $10.00 per share was declared effective in May 2010 but was suspended during 2010. All subscription proceeds received were refunded to investors prior to year-end.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenue | $5,369 | $2,227 |
| Total Expenses | $440 | $300 |
| Net Income | $3,726 | $1,196 |
| Cash and Cash Equivalents | $209,425 | $205,667 |
| Total Assets | $209,425 | $205,667 |
| Total Liabilities | $2,503 | $2,471 |
| Stockholders' Equity | $204,922 | $201,196 |
| Outstanding Shares | 20,000 | 20,000 |
Revenue Source: Revenue consisted entirely of interest income ($5,369 in 2010) derived from short-term loans made to the former sponsor to cover organization and offering expenses. These loans were fully repaid by year-end.
Debt: No outstanding debt as of December 31, 2010.
Liquidity: The company held $209,425 in cash. No distributions were paid to stockholders as of December 31, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 141% from $2,227 in 2009 to $5,369 in 2010, driven by interest income on loans to the sponsor.
- Net Income: Net income increased from $1,196 in 2009 to $3,726 in 2010.
- Offering Activity: While the offering was declared effective in 2010, sales were suspended, and all subscription proceeds were refunded. Consequently, the company did not raise capital from the public offering during the period.
- Accounting Firm Change: The company replaced Ernst & Young LLP with Grant Thornton LLP as its independent registered public accounting firm in February 2011.
Outlook, Risks, and Management Commentary
Outlook and Strategy: The company has not commenced operations and remains in the development stage. It plans to invest in a diversified portfolio of multifamily properties. Management intends to complete a liquidity event (listing on a national exchange or liquidation) within five to seven years from the completion of the offering stage. As of the filing date, sales efforts had not recommenced.
Key Risks:
- Lack of Operating History: The company and its advisor are newly formed with no prior operating history, making performance evaluation difficult.
- Capital Raising: The offering is on a "best efforts" basis. Failure to raise sufficient funds would limit diversification and increase fixed costs as a percentage of income.
- Liquidity: Common stock is not listed on an exchange, and there is no public trading market. Shares may be difficult to sell or may sell at a substantial discount.
- Conflicts of Interest: The company is externally managed by an advisor affiliated with the sponsor. Conflicts may arise regarding property acquisitions, fee waivers, and allocation of investment opportunities.
- REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income tax, reducing cash available for distributions.
Unusual Items: The company made five short-term loans totaling $1,185,000 to its former sponsor during the period to maintain minimum capitalization while covering offering costs. These loans bore an average interest rate of 5.8% and were fully repaid.
Investor Verification Checklist
- Offering Status: Verify if the public offering has been recommenced and if any new capital has been raised since the suspension in 2010.
- Asset Acquisition: Confirm whether the company has acquired any real estate assets, as it held none as of December 31, 2010.
- Sponsor Relationship: Review the terms of the advisory agreement and any potential conflicts of interest with RAIT Financial Trust, the sponsor.
- Liquidity Event Timeline: Monitor the company's progress toward the stated goal of a liquidity event (listing or liquidation) within five to seven years of the offering completion.
- REIT Election: Confirm the filing of the REIT election and the company's ability to meet the 90% distribution requirement once operations commence.