Independence Realty Trust, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Dollar amounts are in thousands, except per-share data. The company is an externally managed apartment REIT; at quarter-end it owned eight properties with 2,004 units in six states.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4,700 | $4,086 | $9,388 | $8,076 |
| Operating income | $1,223 | $1,038 | $2,451 | $1,991 |
| Interest expense | $899 | $799 | $1,787 | $1,599 |
| Net income | $324 | $239 | $664 | $392 |
| Net income (loss) attributable to common shares | $48 | ($14) | $52 | ($40) |
| Basic and diluted EPS | $0.01 | ($0.04) | $0.03 | ($0.18) |
| FFO per diluted share | $0.23 | $0.19 | $0.46 | $0.37 |
Revenue rose about 15% in Q2 and 16% in the first half; operating income increased about 18% and 23%, respectively. Operating margin was approximately 26% in both 2013 periods, versus 25% in Q2 2012 and 25% in the first half of 2012. Management attributed higher revenue and operating costs mainly to the October 2012 acquisition of Runaway Bay, as well as improved occupancy and rents. Interest expense also increased with acquisition financing. Common-share earnings comparisons are affected by the May 2013 conversion of RAIT’s partnership units into common shares.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $2,056, compared with $1,875 in 2012; capital expenditures were $673. Cash and cash equivalents declined by $285 during the period to $2,248. Restricted cash was $856.
- At June 30, total assets were $144,821, mortgage debt was $92,360, total liabilities were $94,990, and total equity was $49,831. Debt was essentially unchanged from year-end 2012.
- Weighted-average mortgage interest rate was 3.8%; stated maturities range from 2019 to 2022. Two loans totaling $38,075 bear floating rates tied to LIBOR; the remaining listed loans are fixed-rate. RAIT held $38,075 of the debt.
- Management said cash, operating cash flow, financing and the subsequent offering were expected to meet liquidity needs for the next 12 months. It generally intended to limit leverage to 70% of combined initial property purchase prices, while noting it might use higher leverage temporarily to build the portfolio.
Portfolio, distributions and material changes
- Portfolio occupancy was 94.2%, with average monthly effective rent of $789 per occupied unit. Heritage Trace had the lowest reported occupancy, at 86.5%.
- RAIT converted 5,274,900 operating partnership units into common shares in May. At June 30, 5,643,540 common shares were outstanding; RAIT was the largest stockholder. The conversion materially changed the ownership and share-count structure.
- Common dividends declared were $0.16 per share for Q2, versus $0.15 a year earlier. The company also declared monthly dividends of $0.05333 per share for July through September 2013.
- After quarter-end, on August 13, the company priced an underwritten offering of 4,000,000 shares at $8.50 per share, or approximately $34.0 million gross. Estimated net proceeds were $31.1 million before any overallotment exercise. Planned uses included property acquisitions, redemption of outstanding preferred securities, and general corporate purposes.
Outlook, risks and unusual items
- No specific earnings or acquisition guidance was provided. Management expected acquisitions funded by the offering and potential borrowings to increase portfolio income and expenses.
- The offering followed termination of the continuous offering. The advisor’s July amendment excluded the initial eight properties from the base management fee calculation, retroactive to April 1, 2013; management said this would improve future net income relative to the prior fee basis. The advisor is a RAIT subsidiary, and property management is also provided by a RAIT-affiliated company.
- The company’s external advisor received fees, including $79 of incentive fees for the first half. The company disclosed related-party debt and service arrangements.
- Key stated risks include limited operating history, ability to deploy offering proceeds, real estate and broader economic conditions, access to capital, interest rates, and REIT regulatory or tax changes. The company must generally distribute at least 90% of ordinary REIT taxable income to maintain REIT status.
- The filing reported no off-balance-sheet arrangements, no legal proceedings, and no material change in previously disclosed risk factors or market risks. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Offering closing proceeds, any overallotment exercise, actual use of proceeds, and completion of the planned preferred-security redemptions.
- Post-offering share count, RAIT’s ownership and influence, and the resulting dilution to existing holders.
- Property-level operating trends, particularly occupancy and rent performance at Heritage Trace, and the extent to which growth reflects acquisitions versus same-property improvement.
- Debt terms and exposure to LIBOR, upcoming amortization requirements, and actual leverage relative to management’s stated target.
- Future advisor and property-manager fees, related-party transactions, and the effect of fee amendments on reported results.
- FFO and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow; review the company’s definitions and reconciliations.