Independence Realty Trust, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. The company is an externally managed apartment REIT. At quarter-end it owned 30 properties comprising 8,819 units.
Financial and operating performance
- Revenue: $21.7 million, up from $8.1 million in Q1 2014. Management attributed most of the increase to 20 properties acquired during 2014.
- Operating results: Operating income was $3.8 million versus $1.3 million. Net loss was $0.24 million, or $0.01 per share, compared with net income of $2.94 million, or $0.19 per share, in Q1 2014. The prior-year result included a $2.88 million gain on assets.
- Property operations: NOI was $11.6 million. Portfolio NOI margin was 53%, compared with 51% a year earlier; same-store NOI increased 5%, and same-store rental rates increased 4%. Portfolio occupancy was 94.0%, and average monthly effective rent per occupied unit was $827.
- FFO measures: FFO was $5.8 million, or $0.18 per diluted share; Core FFO was $5.9 million, or $0.19 per share. These are non-GAAP measures and are not substitutes for net income or operating cash flow.
- Cash flow and distributions: Operating cash flow was $8.5 million, investing cash outflow was $2.0 million, and financing cash outflow was $2.2 million. Cash and cash equivalents ended the quarter at $19.1 million, up from $14.8 million at December 31, 2014. Common distributions were $5.7 million; dividends declared were $0.18 per share for the quarter, or $0.06 monthly.
- Debt and liquidity: Indebtedness was $422.6 million, versus $418.9 million at year-end, with a 3.6% weighted-average effective interest rate. Management reported consolidated leverage of 59.5% and compliance with debt covenants. Mortgage debt fair value was $439.6 million against a $422.6 million carrying value. Management believed available cash, operating cash flow, and financing sources would meet existing-portfolio needs for the next 12 months.
- Balance sheet: Total assets were $694.0 million and total equity was $256.9 million at March 31, 2015. Gross real estate investment was $689.9 million.
Changes versus the prior comparable period
- Revenue growth primarily reflects the 20 properties acquired during 2014; the company made no property acquisitions during Q1 2015. The portfolio expanded from 17 properties and 4,970 units at March 31, 2014 to 30 properties and 8,819 units at March 31, 2015.
- Interest expense rose to $4.0 million from $1.3 million, principally due to debt associated with the 2014 acquisitions. Depreciation and amortization rose to $6.0 million from $2.1 million for the same broad reason.
- Despite higher revenue, GAAP earnings fell to a loss, partly because Q1 2014 included the asset-sale gain. Core FFO per share increased to $0.19 from $0.17, while reported FFO per share decreased to $0.18 from $0.33.
Outlook, risks, and notable items
- No specific earnings or acquisition guidance was provided. Management said it was focused on absorbing 2014 portfolio growth and expected future acquisitions to affect results; it also stated that additional financing may not be available on acceptable terms.
- After quarter-end, the company acquired a 236-unit Indianapolis property on May 1 for $25.25 million, excluding closing costs. It also entered into a $20.53 million mortgage loan on April 13, bearing 3.2% interest and maturing in 2025.
- The company’s stated target is to limit aggregate leverage to 65% of combined initial property purchase prices, but it is not legally restricted from exceeding that level.
- Internal controls: Management concluded disclosure controls were not effective at March 31 due to a previously identified material weakness involving staffing and the design and operation of reconciliation, management-review, and accounting-estimate controls. Remediation was in progress, with completion targeted during 2015.
- Related parties: RAIT externally manages the company, owned 22.9% of its common shares, and held $38.1 million of its mortgage debt. The advisor earned $1.2 million in asset-management and incentive fees in Q1; the RAIT-affiliated property manager earned $0.8 million in management and leasing fees.
- The company reported no material litigation, no off-balance-sheet arrangements, and no material change in market-risk disclosures. It cautioned that forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether the control-remediation plan is completed and the material weakness is resolved after controls operate effectively for a sufficient period.
- How same-store rent, occupancy, and NOI trends develop, separately from the effects of acquisitions.
- Debt maturities, refinancing needs, floating-rate exposure, leverage, and the capacity to fund planned acquisitions and distributions.
- The post-quarter Indianapolis acquisition and Stonebridge loan, including their effects on leverage, cash flow, and per-share performance.
- The sustainability of the $0.18 quarterly dividend relative to cash flow, capital expenditures, debt service, and REIT distribution requirements; Core FFO is non-GAAP.
- The costs and governance implications of the external management and property-management arrangements with RAIT affiliates.