Independence Realty Trust, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The company was formed in 2009 but began owning revenue-producing properties in April 2011; results therefore reflect a partial year of real estate operations and are not directly comparable with 2010.
Business context
Independence Realty Trust is an externally managed, early-stage multifamily REIT that owns its assets through its operating partnership. At year-end it held seven apartment properties, totaling 1,812 units across five states. The properties were acquired from its sponsor, RAIT Financial Trust, in related-party transactions. The company had no paid employees and its common shares were not exchange-listed.
Financial and operating highlights
| Metric | 2011 |
|---|---|
| Total revenue | $8.668 million |
| Operating expenses | $7.311 million, including $4.477 million property operating costs, $1.771 million depreciation and amortization, $575,000 general and administrative costs, and $488,000 acquisition expenses |
| Interest expense | $1.727 million |
| Net loss | $370,000; loss allocable to common shares was $112,000 |
| FFO / MFFO | $1.401 million / $1.889 million, respectively; both are non-GAAP measures |
| Cash from operations | $2.196 million |
| Cash and cash equivalents | $1.107 million at year-end; restricted cash was an additional $1.072 million |
| Assets / liabilities / equity | $131.352 million / $84.294 million / $47.058 million |
| Real estate | $137.428 million gross cost; $128.124 million net carrying value |
| Mortgage debt | $82.175 million, with a 3.8% weighted-average stated rate; debt was 63% of undepreciated real estate investment |
Year-end portfolio occupancy was 93.4%, with average effective monthly rent of $721 per unit. Debt maturities are concentrated after 2021: $80.320 million of principal is shown as due after five years. Several loans are interest-only initially; Belle Creek and Tresa loans were fixed at 2.5% for two years and then float at 225 basis points over 30-day LIBOR. The filing estimates $27.867 million of total future interest payments under its stated assumptions.
Changes versus prior periods
Revenue rose from $5,000 in 2010 to $8.668 million in 2011 as the company acquired six properties in April and a seventh in December. The prior-year business had no material real estate operations; 2010 revenue was principally interest on short-term loans. The company reported a $370,000 2011 net loss versus $4,000 net income in 2010, while the comparison is substantially affected by the start of property operations and associated depreciation and interest costs.
Cash distributions began in the third quarter of 2011. The company reported $1.0 million of cash distributions paid during 2011, including amounts paid or allocated to non-controlling interests, compared with $2.196 million of operating cash flow and $1.401 million of FFO. The filing cautions that distributions may be funded from sources other than operating cash flow.
Outlook, risks and notable items
- Outlook: Management expects to raise offering capital, increase borrowings and acquire additional properties; it says results are expected to change materially as the portfolio grows. It believes available cash, financing arrangements and operating cash flow can meet existing-portfolio liquidity needs for the next 12 months, but warns financing may not be available on acceptable terms. No quantified earnings or acquisition guidance is provided.
- Distributions and liquidity: The board began distributions at a 6.0% annualized rate based on a $10 share price; future payments are not assured. The common stock is unlisted, repurchases are limited and discretionary, and the company expected to consider liquidity alternatives five to seven years after completion of its offering stage, without assurance a transaction would occur.
- Capital raising and sponsor ownership: The filing says no public-offering shares had been sold as of December 31, 2011. After year-end, the sponsor purchased $3.0 million of common shares on February 29, 2012, satisfying the $2.5 million minimum offering threshold. As of March 9, 2012, 320,000 common shares were outstanding and the sponsor held 100%.
- Preferred stock after year-end: On January 4, 2012, the company issued 125 shares of 12.5% cumulative, non-voting Series A preferred stock for $125,000 in total to accredited investors described as unaffiliated. The preferred securities rank senior to other operating-partnership equity for distributions, liquidation and redemption.
- Key risks: The company has a limited operating history, depends on its sponsor and affiliated advisor and property manager, and acquired all seven properties from its sponsor. Related-party fees and transactions may create conflicts. Other material exposures include real estate and local-market conditions, refinancing and interest-rate risk, leverage, illiquidity, environmental and property liabilities, and maintaining REIT qualification.
- Governance and audit: The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile offering and ownership disclosures: the filing reports no offering shares sold at December 31, but reports the sponsor’s $3.0 million purchase and 320,000 shares outstanding by March 9, 2012.
- Review debt terms property by property, especially the post-two-year floating-rate exposure, interest-only periods, guarantees and future refinancing needs.
- Assess whether operating cash flow can sustain distributions: 2011 distributions exceeded reported FFO, and the company warns distributions may come from offering proceeds, borrowings or other sources.
- Evaluate sponsor-related acquisitions, operating agreements and fees, including property management fees and the sponsor’s substantial operating-partnership interests.
- Do not treat 2011 results as a stable run rate: acquisitions began during the year, and reported EPS of negative $5.60 reflects only 20,000 weighted-average common shares while convertible partnership units were excluded as anti-dilutive.
- Confirm the company’s ongoing REIT qualification, capital-raising progress, and any subsequent changes to preferred-stock rights, distributions or liquidity plans.