Independence Realty Trust, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited. Unless noted, financial amounts below are in millions of dollars.
Business context and reporting period
IRT is an externally managed REIT focused on apartment properties. At quarter-end it owned 31 properties with 9,055 units. It acquired one 236-unit Indianapolis property in May for approximately $25.3 million.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $22.8 | $11.6 | $44.5 | $19.8 |
| Operating income | $4.6 | $1.8 | $8.4 | $3.1 |
| Net income (loss) allocable to common shares | $0.3 | $(0.1) | $0.1 | $2.8 |
| Diluted EPS | $0.01 | $(0.01) | $0.00 | $0.17 |
| Funds from operations (FFO) per diluted share | $0.18 | $0.18 | $0.36 | $0.49 |
| Core FFO per diluted share | $0.19 | $0.19 | $0.37 | $0.36 |
Cash flow and liquidity: Six-month operating cash flow was $13.3 million, versus $5.9 million; investing cash flow was $(29.0) million and financing cash flow was $22.5 million. Cash and cash equivalents were $21.6 million, with restricted cash of $6.3 million, at June 30.
Debt and equity: Total indebtedness was $457.2 million, up from $418.9 million at year-end 2014. The weighted-average effective interest rate was 3.6%; management reported consolidated leverage of 61.9%. The secured credit facility had $14.8 million outstanding and $15.2 million available. Stockholders’ equity was $239.8 million. Quarterly dividends were $0.18 per common share.
Portfolio operations: Q2 occupancy was 92.5%, versus 93.1% a year earlier. Average monthly effective rent per unit was $840, versus $765. Management reported same-store rental rates up 5%, same-store NOI up 6.5%, and portfolio NOI margin of 53%, compared with 52% in Q2 2014.
Material changes versus comparable periods
- Revenue nearly doubled year over year in Q2, primarily because of properties acquired since June 2014. For the first half, management attributed most of the revenue increase to acquired properties and their additional operating months.
- Operating income increased in both comparison periods, but higher property expenses, depreciation, asset-management fees, and interest expense accompanied the expanded portfolio.
- First-half net income allocable to common shares fell to $0.1 million from $2.8 million. The 2014 period included a $2.9 million gain related to acquired properties and assumed debt; first-half 2015 had no asset-sale gain.
- First-half FFO per share declined from $0.49 to $0.36, while Core FFO per share increased from $0.36 to $0.37. These are non-GAAP measures and are not equivalent to net income or operating cash flow.
- Debt increased alongside portfolio expansion. First-half acquisitions and capital expenditures used $27.8 million of cash; financing included $58.3 million of borrowings and $19.4 million of repayments.
Outlook, risks, contingencies and unusual items
- Proposed merger: Under a May 11 agreement, IRT would acquire Trade Street Residential common stock for $7.60 per share. The filing expected closing in Q3 2015, subject to customary approvals. Management projected a combined portfolio of 50 properties and 14,044 units, with capitalization above $1.4 billion. The filing said leverage could exceed IRT’s general 65% target in connection with the merger, with a plan to reduce it over time.
- Liquidity outlook: Management believed available cash, financing arrangements and operating cash flows would meet existing-portfolio liquidity needs for the next 12 months. It cautioned that additional financing might not be available on acceptable terms; merger-related funding needs would materially affect liquidity and capital resources.
- Related-party arrangements: RAIT owned 22.8% of IRT’s common shares and its affiliate externally managed IRT. Advisor base and incentive fees were included in asset-management expense; six-month asset-management fees were $2.5 million versus $0.6 million in 2014.
- Controls: Management concluded disclosure controls and procedures were not effective at June 30 because of a previously identified material weakness involving qualified resources and reconciliation, management-review, and accounting-estimate controls. Remediation was underway, with enhancements targeted for implementation during 2015.
- Contingencies: IRT reported no legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements. It reported compliance with debt covenants at quarter-end.
- Distributions: The board declared monthly dividends of $0.06 per share for July, August and September 2015. As a REIT, IRT stated it must generally distribute at least 90% of taxable income to maintain REIT status.
Most important facts for investors to verify
- Whether the Trade Street Residential merger closed as expected, its final financing terms, and its effect on leverage, liquidity, share count and per-share results.
- Whether occupancy, rents and same-store NOI trends continued, particularly given quarter-end occupancy of 92.5% and the newly acquired property’s 76.3% occupancy.
- How acquisition-driven revenue growth translates into recurring cash generation, and whether FFO and Core FFO reconcile to reported GAAP results without obscuring costs.
- Debt maturities, floating-rate exposure, available credit capacity and compliance with loan covenants as borrowings and portfolio size change.
- Whether management remediated the material weakness and whether enhanced controls operated effectively for a sufficient period.
- Whether dividends remain supported by cash flow, considering debt service, capital needs, REIT distribution requirements and any merger-related obligations.