Independence Realty Trust, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unless noted otherwise, financial amounts below are in millions of dollars. The company is an externally managed REIT seeking to invest primarily in U.S. multifamily properties. It acquired its initial portfolio in April 2011 and expected to elect REIT tax treatment for 2011.
Portfolio and financial position
- At September 30, the portfolio comprised six multifamily properties with 1,492 units; reported physical occupancy was 94.3% and average effective rent was $723 per unit per month.
- Total assets were $104.2, including $101.2 of net real estate. Total liabilities were $66.5, including $64.6 of mortgage debt; total equity was $37.7.
- Cash and cash equivalents were $1.21; restricted cash was $1.16. The filing does not identify restricted cash as generally available liquidity.
- The mortgages mature April 29, 2021 and had a 3.8% weighted-average current interest rate. Four loans had fixed 5.7% rates; two had 2.5% rates for the first two years, then float at 225 basis points over 30-day LIBOR. All were interest-only at the reporting date; amortization on the four 5.7% loans begins in May 2013.
Results and cash flow
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Total revenue | $3.22 | $5.40 |
| Operating income | $0.56 | $0.74 |
| Interest expense | $0.63 | $1.05 |
| Net loss | $(0.07) | $(0.32) |
| Net loss allocable to common shares | $(0.05) | $(0.08) |
- Nine-month revenue consisted of $4.79 rental income, $0.27 tenant reimbursements and other property income, and $0.34 other income. Nine-month expenses totaled $4.66, including $2.83 property operating costs, $0.40 acquisition expenses, and $1.08 depreciation and amortization.
- Nine-month operating cash flow was $1.45; investing cash flow was $(1.02), including $0.56 in capital expenditures; financing cash flow was $0.57. Cash increased by $1.00 during the period.
- Management reported FFO of $0.77 and MFFO of $1.17 for the nine months, and FFO of $0.57 and MFFO of $0.62 for the quarter. These are non-GAAP measures, not substitutes for net income or operating cash flow; MFFO adds back acquisition expenses.
Changes, outlook, and risks
- The April 2011 acquisition of six properties from sponsor-affiliated entities for a stated contribution value of $103.8 transformed the company from a pre-revenue development-stage entity into a property operator. The company assumed $64.6 of mortgage debt and issued $39.2 of operating-partnership units to its sponsor; the properties were recorded at the sponsor’s historical carrying amounts.
- Reported nine-month results are not directly comparable with 2010, when the company owned no revenue-producing properties. 2010 reported revenue was $0.005 and net income allocable to common shares was $0.004. Pro forma nine-month revenue assuming the portfolio had been acquired at the start of each period was $9.69 in 2011 and $9.69 in 2010; pro forma common-share losses were $0.09 and $0.09, respectively.
- Management stated that available cash, operating cash flow, financing arrangements, and anticipated offering proceeds were expected to meet liquidity needs for the next 12 months. It cautioned that additional financing may not be available on acceptable terms and that business growth could be constrained if financing is unavailable. The company planned to use offering proceeds primarily for property acquisitions.
- The board declared distributions equivalent to a 6.0% annualized rate based on a $10 share price for July through September 2011 and declared the same rate for October through December. The filing does not establish that this rate is sustainable or supported by recurring cash flow.
- Key disclosed risks include the company’s limited operating history, ability to deploy public-offering proceeds, real estate and general economic conditions, capital availability, interest rates, and REIT qualification. The filing also notes that sponsor-related litigation could distract management; it reports no legal proceedings against the company and no material change to previously disclosed risk factors beyond the stated addition.
- The advisor and property manager are sponsor-affiliated. The company reported $0.21 of property management and leasing fees for the nine months; the advisor waived asset-management fees on the initial portfolio for two years. Related-party arrangements and the sponsor-held mortgages merit attention.
Important facts for investors to verify
- Offering progress and actual availability of proceeds to fund acquisitions, operations, and distributions.
- Property-level occupancy, rent collections, operating costs, and performance since acquisition; the reported occupancy and rent cover only the period since inception/acquisition.
- Debt terms after the initial fixed-rate periods, exposure to LIBOR changes, covenants, and the company’s capacity to service and refinance the sponsor-held mortgages.
- Whether distributions are covered by recurring operating cash flow after interest, capital expenditures, and other obligations.
- Final REIT qualification and the effects of related-party fees, unit redemption rights, and other sponsor-affiliated arrangements.