Independence Realty Trust, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Unless noted otherwise, financial amounts below are in thousands of dollars. The interim financial statements are unaudited.
Business context
Independence Realty Trust is an externally managed REIT sponsored by RAIT Financial Trust. It owns multifamily properties through its operating partnership and reported seven properties with 1,812 units across five states at quarter-end. The portfolio’s average occupancy was 92.36%, and average effective monthly rent was $759 per unit. The company was continuing a public offering to fund a planned portfolio of multifamily investments.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2012 | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2011 |
|---|---|---|---|---|
| Total revenue | $4,041 | $3,222 | $12,117 | $5,396 |
| Operating income | $795 | $564 | $2,786 | $736 |
| Net income (loss) | $(14) | $(65) | $378 | $(317) |
| Net income (loss) allocable to common shares | $(28) | $(48) | $(68) | $(84) |
| Basic and diluted loss per share | $(0.09) | $(2.40) | $(0.26) | $(4.20) |
| Interest expense | $809 | $629 | $2,408 | $1,053 |
Operating margin was approximately 19.7% for Q3 2012 versus 17.5% a year earlier, and 23.0% for the first nine months of 2012 versus 13.6% in 2011. The company reported positive nine-month net income, but a net loss for the quarter and a loss allocable to common shares for both periods.
- Cash flow: Nine-month cash from operations was $2,841, investing cash outflow was $992, and financing cash inflow was $662. Cash and cash equivalents rose by $2,511 to $3,618; restricted cash was another $1,194.
- Balance sheet at Sept. 30: Total assets were $132,611; mortgage debt was $82,175; total liabilities were $84,559; and total equity was $48,052. Real estate, net of accumulated depreciation, was $126,523.
- Debt: All seven properties were mortgaged. The weighted-average stated interest rate was 3.8%, with maturities from 2019 to 2021. Two loans totaling $38,075 were held by the sponsor; the remainder was held by third parties. Two loans, totaling $38,075, carried an initial 2.5% fixed rate and then a floating rate of 225 basis points over 30-day LIBOR.
- Non-GAAP measures: Nine-month FFO was $2,837 ($0.52 per diluted share equivalent) and MFFO was $2,929 ($0.54). These measures exclude items including real estate depreciation and, for MFFO, acquisition fees and expenses; the filing cautions they are not substitutes for GAAP earnings or operating cash flow.
Changes versus prior comparable periods
Q3 revenue increased $819 and nine-month revenue increased $6,721 year over year. Management attributed the growth principally to properties acquired after or during the 2011 comparison period, rather than identifying it as same-property growth. Expenses and interest expense also rose with the larger portfolio. Nine-month operating income increased by $2,050, and net income improved from a loss of $317 to income of $378; common shareholders nevertheless had a nine-month loss of $68.
Compared with December 31, 2011, cash and cash equivalents increased from $1,107 to $3,618, while net real estate declined from $128,124 to $126,523. Mortgage indebtedness remained $82,175. Stockholders’ equity rose from $87 to $3,019, while non-controlling interest declined from $46,971 to $45,033.
Outlook, risks, and notable items
- Management said available cash, financing arrangements, and operating cash flow should be sufficient for existing-portfolio liquidity needs over the next 12 months. It also expected future capital raises, borrowing, and acquisitions to materially affect results; no quantified earnings or distribution guidance was provided.
- The offering had generated $3,050 in gross proceeds through September 30, including $3,000 from the sponsor affiliate RAIT NTR. The company said the offering would end no later than June 10, 2013, subject to a possible extension in eligible states.
- On October 11, 2012, the operating partnership sold 350 Series B preferred units to RAIT NTR for $3,500, with a stated 10% annual cash distribution preference. Also that day, the company acquired the 192-unit Runaway Bay Apartments in Indianapolis for $15,750, funded with a $10,238 mortgage and $5,512 cash.
- Distributions were declared for common shares and operating partnership units. The Series A preferred shares carry a 12.5% annualized distribution rate. The filing does not establish that distributions are covered by recurring earnings or cash flow; nine-month distributions to non-controlling interests were $2,351.
- Key disclosed risks include limited operating history, ability to raise and deploy offering proceeds, real estate and economic conditions, interest rates, capital availability, and maintaining REIT qualification. Management reported no material change in previously disclosed risk factors, no material market-risk change, no off-balance-sheet arrangements, and no legal proceedings.
- The company is externally managed and uses affiliated advisor, dealer-manager, and property-manager entities. It reported $160 in asset-management fees and $476 in property-management and leasing fees paid to affiliates during the first nine months of 2012. Management stated operating expenses did not exceed the applicable 2%/25% guideline threshold for the year ended September 30, 2012.
Investor verification priorities
- Verify property-level and same-property performance, particularly whether revenue growth reflects acquisitions or improving occupancy and rents; compare with the reported 92.36% portfolio occupancy.
- Assess distribution coverage using recurring operating cash flow, debt service, capital expenditures, and payments to common, preferred, and non-controlling holders.
- Review debt terms and refinancing exposure, especially the loans that transition from fixed to LIBOR-based floating rates, and confirm the sponsor-held debt arrangements.
- Check the economics, funding, and returns of the Runaway Bay acquisition and the Series B preferred issuance, including their post-quarter-end timing and affiliate participation.
- Reconcile share and unit counts across the filing: the balance sheet reports 325,023 common shares at September 30, while the cover reports 327,536 shares outstanding as of November 7; diluted FFO calculations also include convertible partnership units.
- Review offering costs, related-party fees, and the financial impact of continued equity issuance and acquisitions. The filing’s offering-cost table presents amounts and percentages that appear difficult to reconcile with the stated $3.05 million of gross proceeds.