Independence Realty Trust, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited; amounts below are in millions except per-share data and portfolio statistics. The company is an externally managed REIT focused on apartment properties.
Business context and portfolio
At quarter-end, the company owned nine apartment properties totaling 2,358 units across six states. Portfolio occupancy was 94.1%, and average monthly effective rent per occupied unit was $789. On September 19, it acquired Berkshire Square, a 354-unit Indianapolis property, for $13.25 million. RAIT remained the largest stockholder, with approximately 60% ownership after the August public offering.
Financial results
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $4.787 | $4.041 | $14.175 | $12.117 |
| Operating income | $1.208 | $0.795 | $3.659 | $2.786 |
| Operating margin | 25.2% | 19.7% | 25.8% | 23.0% |
| Net income (loss) | $0.302 | $(0.014) | $0.966 | $0.378 |
| Net income (loss) allocable to common shares | $0.255 | $(0.028) | $0.307 | $(0.068) |
| Diluted EPS | $0.03 | $(0.09) | $0.08 | $(0.26) |
| FFO / Core FFO | $1.263 / $1.313 | $0.822 / $0.874 | $3.843 / $3.893 | $2.837 / $2.929 |
Revenue increased 18% in Q3 and 17% for the nine-month period. Management attributed growth mainly to the October 2012 Runaway Bay acquisition and improved occupancy and rents. Operating expenses rose to $3.579 million in Q3 and $10.516 million year to date, including higher property costs and depreciation. Interest expense was $0.906 million in Q3 and $2.693 million year to date. FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3.726 million, versus $2.841 million in 2012. Investing cash use was $14.076 million, including $13.020 million for property acquisitions and $1.130 million of capital expenditures.
- Financing provided $24.343 million, principally reflecting $31.461 million of common-stock proceeds, partly offset by redemptions and distributions. Cash rose to $16.526 million from $2.533 million at year-end 2012.
- Mortgage debt was $92.284 million at September 30, slightly below $92.413 million at year-end 2012. The weighted-average stated interest rate was 3.7%; maturities shown for the property mortgages range from 2019 to 2022. Two mortgage loans are floating-rate loans tied to LIBOR.
- On October 25, the company entered into a $20 million secured revolving facility with a three-year term at LIBOR plus 2.75%, subject to customary financial covenants. This is a subsequent event, not debt outstanding at quarter-end.
- Management said available cash, operating cash flow and financing sources were expected to meet liquidity needs for the next 12 months. It intends generally to limit leverage to 70% of the combined initial purchase price of its properties, while noting leverage could be higher during portfolio build-out.
Material changes, outlook and risks
- The August underwritten offering sold 4 million shares at $8.50 each, generating approximately $31.1 million net proceeds. The company used proceeds in part to redeem all outstanding Series A preferred shares and Series B preferred units; the offering also funded growth plans and general corporate purposes.
- RAIT converted 5,274,900 operating partnership units into common shares in May. The large changes in share count and ownership affect period-to-period EPS comparability; weighted-average shares differed substantially between periods.
- The company agreed in October to purchase five Oklahoma City-area apartment properties for $65 million, including assumption of approximately $46.1 million of debt. Closing was uncertain, subject to due diligence and customary conditions, and could be terminated before the due-diligence period expired.
- No formal earnings or acquisition guidance was provided. Management expects future revenue and expenses to grow with anticipated acquisitions. The company’s stated strategy is to acquire apartments with stable occupancy and potential for rent growth.
- Key disclosed risks include limited operating history, ability to deploy offering proceeds effectively, real estate and economic conditions, access to capital, interest rates, and changes in REIT tax rules. The company is externally advised by a RAIT subsidiary and properties are managed by a RAIT-majority-owned manager; related-party fees and arrangements merit attention.
- The advisor waived $0.494 million of asset-management fees during the first nine months of 2013; the advisory agreement was amended, including exclusion of the original eight properties from the base-fee calculation retroactive to April 1. The company also paid $0.079 million in incentive fees in the nine-month period.
- Management reported effective disclosure controls, no significant changes in internal control, no material market-risk changes from the prior 10-K, and no legal proceedings or off-balance-sheet arrangements. No numeric margin or earnings forecast was provided.
Important facts for investors to verify
- Whether the Oklahoma portfolio acquisition closed, its final purchase accounting, assumed debt terms, and funding mix.
- Current occupancy, rent trends, property-level performance and capital expenditure needs, particularly for Berkshire Square and Runaway Bay.
- Revolving-credit availability, covenant headroom, floating-rate exposure and the schedule of mortgage principal payments and maturities.
- How the share issuance and partnership-unit conversion affect per-share FFO, distributions and RAIT’s continuing ownership and related-party economics.
- Whether recurring operating cash flow supports distributions and planned acquisitions after property costs, debt service and capital expenditures.