Independence Realty Trust, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statement amounts below are in millions of dollars unless noted. The company is an externally managed REIT focused on apartment properties.
Business context and portfolio
At June 30, IRT owned 46 apartment properties with 12,982 units. Portfolio occupancy was 94.4%, and average monthly effective rent per occupied unit was $961. The company said it was integrating growth from the September 2015 TSRE acquisition and pursuing capital recycling to reduce leverage.
Financial and operating results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $38.3 | $22.7 | $77.0 | $44.4 |
| Operating income | $11.0 | $4.6 | $18.4 | $8.4 |
| Net income | $30.8 | $0.4 | $30.7 | $0.1 |
| Net income allocable to common shares | $29.0 | $0.3 | $28.9 | $0.1 |
| Diluted EPS | $0.61 | $0.01 | $0.61 | Less than $0.01 |
| FFO per diluted share | $0.18 | $0.18 | $0.36 | $0.36 |
| Core FFO per diluted share | $0.22 | $0.19 | $0.42 | $0.38 |
Same-store NOI rose 5.0% in Q2 and 4.0% for the six-month period. Q2 same-store effective rent per unit increased 2.9%, occupancy averaged 93.9% versus 93.6% a year earlier, and NOI margin was 53.8% versus 52.9%.
Cash from operations was $18.8 for the first half, versus $13.3 a year earlier. Investing activities provided $33.0, primarily from property dispositions; financing activities used $62.1. Cash and cash equivalents ended the period at $28.1, with restricted cash of $6.8. The company reported $18.1 of distributions to common stockholders and noncontrolling interests during the first half.
At June 30, total debt principal was $888.4 (carrying amount $880.3), down from $975.5 principal at year-end 2015. The weighted-average debt rate was 3.6%, with a 5.6-year weighted-average maturity. Debt comprised $247.3 under the secured credit facility, $40.0 of term loans, and $601.0 of fixed-rate mortgages. The $325.0 credit facility had $77.7 available. Total assets were $1,307.9 and total liabilities were $905.9. The company said it was in compliance with all debt covenants.
Material changes and unusual items
- Revenue increased substantially year over year, primarily because 19 properties acquired in connection with TSRE contributed revenue; property sales partly offset the increase. Same-store revenue and NOI also grew.
- Common-share net income included $29.3 of Q2 gains on asset sales ($31.8 for the first half). These gains materially elevated GAAP earnings; Q2 FFO per share was $0.18 compared with GAAP diluted EPS of $0.61.
- Three property dispositions listed in the notes generated $88.0 of sale proceeds and $31.8 of gains for the first half. The company reported using dispositions and refinancing to reduce debt, including replacing the interim facility with a $40.0 term loan in June.
- Interest expense rose to $9.0 in Q2 and $19.0 in the first half, principally reflecting acquisition-related properties and debt. A $0.6 debt-extinguishment loss was also recorded.
- IRT entered into a $150.0 interest-rate swap, converting that amount of floating-rate debt to fixed-rate exposure; the swap had a $1.2 liability fair value at period-end. A $200.0 interest-rate cap was no longer designated as a cash-flow hedge as of June 24.
- The board declared monthly dividends of $0.06 per share, including declarations covering July through September 2016. No annual earnings or FFO guidance is provided in the filing text.
Outlook, commentary and risks
Management said available cash, financing arrangements and operating cash flows should fund liquidity needs for the next 12 months and the foreseeable future. Its stated capital-recycling strategy targets properties outside its core Southeastern footprint or with limited further operating upside, with proceeds intended to reduce debt. This is management’s assessment, not a guarantee.
Interest-rate exposure remains relevant: $287.3 of principal was floating-rate and $601.1 fixed-rate at June 30, before considering hedging. The filing estimates a 100-basis-point increase would add $1.4 to interest expense under its stated assumptions. Management also identifies financing availability and cost, real estate market conditions, property operations, and REIT qualification as risks. IRT is externally managed by a RAIT subsidiary; RAIT owned 15.4% of IRT shares, and related-party management and property-management fees apply.
The TSRE-related shareholder lawsuit was dismissed in its entirety on May 18, 2016, and plaintiffs did not appeal. IRT said it did not expect future losses or defense costs beyond amounts previously reserved. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and cash available for distributions is recurring, given the significant disposition gains and the difference between GAAP EPS and FFO/Core FFO.
- Whether same-store rent and NOI growth, occupancy, and operating costs remain favorable as the portfolio adjusts after acquisitions and asset sales.
- The debt reduction plan, refinancing and maturity schedule, availability under the credit facility, and sensitivity to floating rates; confirm the effect and continued performance of hedges.
- Whether operating cash flow adequately covers distributions and capital expenditures over time; first-half distributions were approximately $18.1 versus $18.8 of operating cash flow.
- Reconcile the filing’s references to four targeted properties sold for $121.6 since year-end with the notes’ three 2016 dispositions totaling $88.0.
- Assess related-party advisory and property-management arrangements, including fee terms and RAIT’s ownership interest.