Independence Realty Trust, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. IRT is a REIT focused on multifamily properties in non-gateway U.S. markets. At quarter-end it owned 56 properties with 15,280 units; portfolio occupancy was 93.8%.
Financial performance and position
Amounts below are in millions, except per-share data and where otherwise noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $46.9 | $39.6 | $92.6 | $78.7 |
| Operating income | $12.1 | $11.2 | $23.8 | $23.0 |
| Net income | $3.5 | $19.5 | $7.0 | $23.8 |
| Net income attributable to common shares | $3.5 | $18.7 | $6.9 | $22.8 |
| Diluted earnings per share | $0.04 | $0.27 | $0.08 | $0.33 |
| Interest expense | $8.6 | $7.2 | $16.9 | $14.6 |
- Property operations: Same-store revenue rose 1.8% and same-store NOI rose 1.7% in Q2; for the first half, they increased 2.1% and 2.3%, respectively. Q2 same-store NOI margin was 59.9%, versus 60.0%; same-store average occupancy was 94.8%, versus 95.1%, while average effective monthly rent per unit increased 1.9% to $1,025.
- FFO and CFFO: Q2 FFO was $15.1 million ($0.17 per share) versus $8.7 million ($0.12); CFFO was $16.4 million ($0.19 per share) versus $13.4 million ($0.19). First-half FFO was $29.8 million ($0.34 per share) versus $20.6 million ($0.29); CFFO was $32.0 million ($0.37 per share) versus $26.4 million ($0.37). These are non-GAAP measures and are not substitutes for GAAP income or operating cash flow.
- Cash flow and liquidity: First-half operating cash flow was $35.7 million, investing cash outflow $104.8 million, and financing cash inflow $72.4 million. Cash and restricted cash totaled $17.9 million at June 30, including $10.9 million unrestricted cash. Management said available cash, financing arrangements and operating cash flow should meet existing-portfolio liquidity needs for the next 12 months and foreseeable future.
- Debt: Outstanding principal was $917.6 million ($911.8 million carrying value), with a weighted-average rate of 3.7% and maturity of 5.0 years. This included $199.0 million drawn on a $300 million unsecured credit facility, $100 million of floating-rate term loans and $618.6 million of fixed-rate mortgages. The company reported compliance with all debt covenants.
- Balance sheet: Total assets were $1.583 billion and total equity $627.3 million at June 30. Real estate held for sale was recorded at $141.1 million. Common dividends declared during the first half were $31.5 million; cash distributions to common shareholders and noncontrolling interests were $21.1 million.
Material changes and notable items
- Revenue growth primarily reflected acquisitions and the resulting larger portfolio: IRT acquired four properties totaling 1,263 units in the first half for a combined contract price of $131.2 million. Same-store growth was more modest.
- Net income fell sharply year over year because Q2 and first-half 2017 included approximately $16.1 million of gains on asset sales; no such gains were recorded in 2018. Higher depreciation and amortization and interest expense also weighed on 2018 earnings. Interest expense increased primarily with a $107 million higher unsecured-credit-facility balance compared with June 2017.
- IRT began a capital-recycling program in Q2, targeting five properties totaling 1,348 units for sale. Their net carrying value was $141.1 million; the MD&A describes $154.2 million of gross real estate investment. Management intends to redeploy proceeds into higher-growth non-gateway markets.
- Value-add renovations were completed or underway across 3,258 units at ten properties in Q2. Plans covered two phases across 4,317 units at 14 properties, with work at the remaining four properties expected to begin in Q3.
- After quarter-end, IRT acquired two additional properties in July for a combined $64.2 million and drew $70 million on its unsecured credit facility for those acquisitions and capital expenditures. It also issued 594,127 shares through its ATM program in July for net proceeds of $6.0 million.
- IRT moved to quarterly common-stock distributions in 2018; the board declared $0.18 per share for each of the first two quarterly distributions. The ATM sales agreement permits up to $150 million of aggregate offerings, with $137.3 million available at June 30.
Outlook, risks and contingencies
- No formal earnings or operating guidance is provided in the supplied filing text. Management’s stated strategy includes portfolio growth, value-add investment and selective property dispositions.
- Management cautions that forward-looking statements are subject to business, economic and competitive uncertainties. Key exposures include interest-rate and financing-market risk, property operating conditions, acquisition and disposition execution, and the ability to maintain REIT qualification. The company uses interest-rate swaps and collars to hedge some floating-rate exposure.
- Management reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and no material adverse effect expected from ordinary-course legal proceedings. It reported effective disclosure controls and no material change in internal control over financial reporting.
- The company’s REIT status requires distributions of at least 90% of ordinary taxable income, subject to the stated tax rules. Failure to qualify could materially affect income and cash available for distribution.
Important facts for investors to verify
- Track same-store rent, occupancy, expense growth and NOI margins separately from acquisition-driven portfolio growth.
- Review the 2017 asset-sale gain when comparing GAAP earnings, and compare FFO/CFFO with their stated reconciliations and limitations.
- Assess debt capacity, floating-rate exposure, upcoming maturities and the effect of the July $70 million facility draw.
- Monitor execution and pricing of the five held-for-sale properties, and whether disposition proceeds are reinvested as management intends.
- Evaluate renovation spending and leasing outcomes, dividend coverage, and potential dilution from the ATM program and equity awards.