Business context and reporting period
Independence Realty Trust, Inc. (IRT) filed this Form 10-K for the fiscal year ended December 31, 2015. IRT is an externally advised apartment REIT focused primarily on non-gateway markets, with its portfolio concentrated in the southeastern United States.
The key event was the September 17, 2015 acquisition of Trade Street Residential, Inc. (TSRE). At year-end, IRT owned 49 properties with 13,724 units, compared with 30 properties and 8,819 units a year earlier. Average portfolio occupancy was 93.6% and average monthly effective rent per occupied unit was $951.
Financial and operating highlights
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $109.6 million | $49.2 million |
| Net income | $30.2 million | $2.9 million |
| Net income allocable to common shares | $28.2 million | $2.9 million |
| Diluted earnings per share | $0.78 | $0.14 |
| Funds from operations (FFO) per share | $1.37 | $0.72 |
| Core FFO per share | $0.80 | $0.70 |
| Cash from operating activities | $18.7 million | $15.7 million |
| Cash and cash equivalents at year-end | $38.3 million | $14.8 million |
| Total indebtedness at year-end | $975.8 million | $418.9 million |
- Revenue rose 122.8%, primarily reflecting the TSRE acquisition and properties acquired in 2014 being included for a full year; it should not be read as same-property growth.
- Same-store NOI increased 7.5% for the year; same-store revenue rose 5.9%, average effective monthly rent increased 5.5% to $809, and average occupancy was 94.0% versus 94.1%. Same-store NOI margin improved to 49.9% from 49.1%.
- Annual common dividends were $0.72 per share, paid at $0.06 monthly. The filing classified 83% of 2015 dividends as return of capital and 17% as capital-gain distribution.
- Investing cash outflow was $153.5 million and financing cash inflow was $158.3 million. Capital expenditures were $8.9 million. IRT reported $36.6 million of operating cash flow before acquisition, integration and TSRE employee-separation expenses, compared with $26.3 million of distributions to common stockholders and noncontrolling interests.
Material changes versus the prior comparable period
- The TSRE transaction materially expanded the portfolio and increased the common shares outstanding from 31.8 million to 47.1 million. Legacy IRT holders owned approximately 68% of the combined company on a fully diluted basis after closing.
- Year-end leverage rose to 68.1% from 58.4% in 2014, and debt increased by approximately $557 million. Of $975.8 million of debt, $429.6 million was floating-rate; the weighted-average effective interest cost was 3.7%.
- Interest expense increased to $23.6 million from $8.5 million, while depreciation and amortization rose to $28.1 million from $12.5 million, largely reflecting portfolio growth and acquisition financing.
- Reported 2015 net income included a $64.6 million bargain-purchase gain on TSRE, a $27.5 million charge for financing extinguishment and employee separation, and a $6.4 million property-sale gain. These items make GAAP earnings a less direct indicator of recurring performance; Core FFO was $30.3 million, or $0.80 per share, versus $15.0 million, or $0.70 per share.
- In the fourth quarter, revenue was $39.7 million, net income was $4.4 million and diluted EPS was $0.09; fourth-quarter 2014 revenue was $16.3 million and net income was $0.2 million.
Outlook, risks, contingencies and unusual items
- Management expected TSRE integration and cost savings to continue through 2016, with the acquired portfolio expected to contribute to 2016 Core FFO. These are expectations, not guarantees.
- IRT began a capital-recycling plan to reduce leverage by selling properties outside its core focus or with limited operating upside. It sold a Tucson property in December 2015 and a Smyrna property in February 2016; additional sales were under contract or under consideration. Proceeds were intended primarily to repay the KeyBank interim facility.
- At December 31, 2015, IRT had $53.5 million available under its KeyBank senior revolver and no availability under its $120 million interim term loan. The interim loan matured in September 2016, subject to a conditional extension; the filing also identifies $165.1 million of scheduled principal payments within one year and mortgage maturities in April 2016.
- Management stated that cash, available borrowing capacity, operating cash flow and expected asset-sale proceeds should meet liquidity needs. Failure to complete planned sales or refinancing could impair the company’s ability to repay debt and reduce leverage as intended.
- Risks include concentrated regional exposure, short-term residential leases, rising interest rates, refinancing and balloon-payment obligations, property operating costs, and the execution and integration of TSRE. IRT had an interest-rate cap with a $200 million notional amount and a 3.0% strike rate through October 2017.
- A purported class action related to the TSRE merger remained pending; defendants had moved to dismiss. IRT accrued estimated legal-defense costs but could not reasonably estimate any further possible loss.
- IRT is externally advised by a RAIT affiliate and pays related-party management and property-management fees. The advisory agreement was extended to October 1, 2020, with revised management and incentive fee terms effective October 1, 2015.
- The filing says a material weakness in internal control identified at December 31, 2014 was remediated by year-end 2015. Management and the independent auditor reported effective internal control over financial reporting as of December 31, 2015; the auditor issued an unqualified opinion on the financial statements.
- Management cited favorable rental-housing demand and employment trends in its markets, while also expecting commercial real-estate financing rates to rise. The board had declared $0.06 monthly distributions for January through March 2016, but future distributions remained discretionary.
Important facts for investors to verify
- Reconcile reported earnings, FFO and Core FFO, especially the bargain-purchase gain and acquisition-related and financing charges; assess whether expected integration savings materialize.
- Review debt maturities, covenant headroom, floating-rate exposure and the status and cost of refinancing or repaying the interim facility.
- Confirm completion and net proceeds of announced property sales, and whether proceeds reduce debt as planned.
- Track same-store rent, occupancy and NOI trends separately from acquisition-driven portfolio growth.
- Monitor the TSRE-related litigation, related-party fees and the sustainability of distributions relative to recurring cash generation.