Independence Realty Trust, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are in thousands of dollars unless stated otherwise. The company is an externally managed, early-stage multifamily REIT sponsored by RAIT Financial Trust. At quarter-end, it owned seven properties with 1,812 units across five states; average occupancy was 93.6% and average effective monthly rent was $757 per unit.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $4,086 | $2,174 | $8,076 | $2,174 |
| Operating income | $1,038 | $235 | $1,991 | $172 |
| Net income (loss) | $239 | $(189) | $392 | $(252) |
| Net income (loss) allocable to common shares | $(14) | $27 | $(40) | $(36) |
| Basic and diluted EPS | $(0.04) | $1.35 | $(0.18) | $(1.80) |
- For the six months, operating cash flow was $1,875, investing cash outflow was $503, and financing cash inflow was $1,461. Cash and cash equivalents rose to $3,940 from $1,107 at year-end 2011. Capital expenditures were $592.
- At June 30, assets were $133,022, including net real estate of $127,085; mortgage debt was $82,175; total liabilities were $84,153; and total equity was $48,869. Restricted cash was $983. All seven properties were subject to first mortgages.
- Mortgage debt had a weighted-average stated rate of 3.8%, with maturities from 2019 to 2021. Two loans totaling $38,075 carried 2.5% fixed interest for two years, then float at 225 basis points over 30-day LIBOR; four other loans begin amortizing in 2013 or 2015.
- Management reported no off-balance-sheet arrangements and said cash, operating cash flow, financing arrangements, and expected capital raising should meet existing-portfolio liquidity needs for the next 12 months. No current ratio or formal margin measure is provided.
Material changes versus the prior comparable period
- Revenue and expenses increased substantially because the 2012 periods included a December 2011 acquisition and more complete operating periods for six properties acquired in April 2011. The comparison is therefore not a same-property growth comparison.
- For the six months, property operating expenses rose to $3,809 from $1,104, depreciation and amortization to $1,631 from $453, and interest expense to $1,599 from $424. General and administrative expense rose to $605 from $99.
- The company sold 300,000 common shares to a sponsor subsidiary for $3,000 during Q1, satisfying the offering minimum. The sponsor indirectly owned all common stock at June 30; after quarter-end, 5,000 shares were sold to unaffiliated investors for $50.
- Distributions during the six months included $52 on common stock, $1,556 to non-controlling operating-partnership interests, and $8 on preferred stock. Common and partnership-unit distributions were declared at $0.00163934 per share or unit per day.
Outlook, commentary, risks, and unusual items
- The company intends to use offering proceeds and future borrowings to acquire additional multifamily properties, principally stabilized assets. The offering was expected to end by June 10, 2013, with a possible extension to June 10, 2014 where permitted. No quantified earnings, revenue, or acquisition guidance is provided.
- Management identified risks including its limited operating history, ability to deploy offering proceeds, real estate and broader economic conditions, capital availability, interest rates, regulatory or REIT tax changes, and GAAP changes. It cautioned that actual results may differ materially from forward-looking statements.
- Management said REIT qualification requires distribution of at least 90% of ordinary taxable income and stated its belief that it would qualify and maintain REIT status. Failure to qualify could result in corporate tax and adversely affect distributions.
- The business is externally managed by a sponsor-affiliated advisor and property manager; related-party fees and reimbursements apply. Management reported operating expenses did not exceed the applicable 2%/25% guideline for the year ended June 30, 2012.
- Series A preferred stock carries a 12.5% annualized distribution rate based on $1,000 per share. The board declared further preferred distributions for July–December 2012, payable at year-end. The CEO appointment of Jack E. Salmon was announced on August 9, 2012.
- Management reported effective disclosure controls, no material change in internal control, no material change in market-risk disclosures, and no material changes to previously reported risk factors. Legal proceedings: none reported.
- FFO and MFFO are presented as supplemental non-GAAP measures, not substitutes for GAAP results or cash flow. The filing reports six-month FFO of $2,023 and MFFO of $2,063, but notes these measures may not indicate cash available for distributions.
Important facts for investors to verify
- Reconcile share counts: the balance sheet reports 320,000 common shares at June 30, while the cover reports 325,010 shares outstanding as of August 10; the filing also describes 5,000 post-quarter-end shares sold.
- Check the preferred-stock proceeds disclosure: the notes describe 125 preferred shares sold for $125 in aggregate, while the six-month cash-flow statement reports $100 of preferred-stock issuance proceeds.
- Clarify the statement that no offering proceeds had been used by June 30 against the reported cash balance, property expenditures, and financing disclosures.
- Assess the underlying property-level trend separately from reported growth, which largely reflects acquisitions and changed ownership periods; review occupancy, rents, operating costs, and property capital needs.
- Evaluate leverage and floating-rate exposure, including the 2013 transition of the two 2.5% loans to LIBOR-based rates, alongside the company’s reliance on further equity issuance and borrowing to fund growth.