Independence Realty Trust, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2012; this is an annual report, not a quarterly filing. Independence Realty Trust is an externally managed REIT sponsored by RAIT Financial Trust. At year-end it owned eight multifamily properties totaling 2,004 units across six states; average occupancy was 92.0% and average effective monthly rent was $787 per unit. The portfolio is concentrated in multifamily housing, and several properties were acquired from the sponsor.
Financial performance, cash flow, debt and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $16.629 million | $8.668 million |
| Operating income | $3.732 million | $1.357 million |
| Net income (loss) | $427,000 | $(370,000) |
| Net income (loss) allocable to common shares | $(123,000) | $(112,000) |
| Basic and diluted EPS | $(0.45) | $(5.60) |
| Funds from operations (FFO), non-GAAP | $3.799 million | $1.401 million |
| Modified FFO (MFFO), non-GAAP | $3.956 million | $1.889 million |
| Cash flow from operations | $4.484 million | $2.196 million |
Revenue nearly doubled, primarily because properties acquired in 2011 contributed for a full year in 2012 and Runaway Bay was acquired in October 2012. Property operating expenses rose to $8.066 million from $4.477 million; depreciation and amortization increased to $3.466 million from $1.771 million; and interest expense increased to $3.305 million from $1.727 million. GAAP operating margin was approximately 22.4%, compared with 15.7% in 2011. FFO and MFFO are supplemental non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Year-end total assets were $146.197 million, including net real estate investments of $141.282 million and cash and cash equivalents of $2.533 million. Total liabilities were $95.346 million and total equity was $50.851 million. Mortgage debt was $92.413 million, up from $82.175 million; borrowings were 63% of undepreciated real estate investments. All property mortgages were first mortgages; reported weighted-average interest rate was 3.8%, with maturities primarily in 2019–2022. The Belle Creek and Tresa loans were scheduled to move from fixed 2.5% rates to floating rates after their initial two-year periods. Contractual principal and interest obligations totaled $121.516 million, including $4.027 million due within one year.
Cash flow from investing activities was $(16.928) million, reflecting acquisitions and capital expenditures; financing activities provided $13.870 million. Cash distributions declared were $0.60 per common share for 2012, equivalent to a stated 6.0% annualized rate at the $10 offering price. The company reported $3.2 million of cash distributions, including amounts paid or allocable to non-controlling interests, versus $4.5 million of operating cash flow and $3.8 million of FFO. The $10 per-share value used for reporting purposes was based on the ongoing offering price, not a regularly calculated net asset value.
Material changes versus the prior comparable period
- Revenue increased $7.961 million, while total expenses increased to $12.897 million from $7.311 million; the company moved from a $370,000 net loss to $427,000 net income.
- Operating cash flow increased by $2.288 million, and year-end cash rose from $1.107 million to $2.533 million.
- Debt increased by $10.238 million, substantially associated with the Runaway Bay acquisition. The company also issued $3.5 million of Series B preferred operating partnership units to its sponsor, carrying a 10% preferential distribution rate.
- Runaway Bay, a 192-unit property, was acquired for approximately $15.75 million. The company ended the year with eight properties and 2,004 units.
Outlook, management commentary, risks and unusual items
- Management said available cash, financing arrangements and operating cash flows were expected to cover existing-portfolio liquidity needs for the next 12 months. The business nevertheless depends substantially on raising capital to pursue further acquisitions and diversification.
- The board extended the offering through June 10, 2014. Management intended to consider liquidity alternatives, such as a listing, merger or asset sale, beginning five to seven years after completion of the offering stage; neither timing nor a transaction is assured.
- For 2013, the board authorized common distributions at a stated 6.0% annualized rate through March and 6.25% for April through June, based on a $10 share price. Future distributions are not guaranteed and may be funded from sources other than operating cash flow.
- Key risks include the absence of a public trading market and potentially limited share repurchases; dependence on the sponsor, advisor and affiliated property manager; conflicts arising from related-party financing, acquisitions and fees; leverage and refinancing exposure; real-estate, occupancy and rent risks; and maintaining REIT qualification.
- RAIT held 92.7% of common shares as of March 8, 2013. The sponsor held $38.075 million of the company’s debt at year-end. The filing also describes substantial fees and reimbursements paid or payable to sponsor affiliates, making related-party oversight an important consideration.
- The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor’s report did not provide an opinion on internal control effectiveness.
Important facts for investors to verify
- Review the mortgage schedule, including the floating-rate reset terms for Belle Creek and Tresa, amortization commencement dates and debt maturities.
- Assess whether distributions are supported by recurring property cash flow after debt service, capital expenditures and preferred distributions; do not rely on FFO or MFFO alone.
- Examine sponsor-affiliate ownership, debt, preferred units, management fees and property-management arrangements, along with independent-director review of related-party transactions.
- Confirm the offering’s extension and capital-raising progress, and understand that the stated $10 share value is an offering price rather than an independently established NAV or guaranteed resale value.
- Track occupancy and rent trends, particularly at Heritage Trace, which reported 81.5% occupancy, and evaluate the portfolio’s geographic and property-type concentration.