Independence Realty Trust, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Dollar amounts are in thousands unless stated otherwise.
Business context and reporting period
The company is an externally managed, early-stage REIT focused primarily on U.S. multifamily properties. In April 2011, it acquired six properties from its sponsor, comprising 1,492 units. At June 30, the portfolio had 94.4% average physical occupancy and average effective rent of $726 per unit per month. The company intended to qualify as a REIT beginning with the tax year ending December 31, 2011. The 2011 results are not directly comparable with 2010, when the company had no revenue-producing properties.
Financial results and position
| Metric | Q2 2011 | Six months 2011 | Comparable 2010 |
|---|---|---|---|
| Total revenue | $2,174 | $2,174 | $3 / $5, respectively |
| Operating income | $235 | $172 | $3 / $5 |
| Interest expense | $424 | $424 | $0 |
| Net income (loss) | $(189) | $(252) | $3 / $5 |
| Net income (loss) allocable to common shares | $27 | $(36) | $3 / $5 |
| Basic and diluted EPS | $1.35 | $(1.80) | $0.13 / $0.26 |
Q2 revenue included $1,933 of rental income, $107 of tenant reimbursements and other property income, and $134 of other income. Six-month expenses were $2,002, including $1,104 of property operating expense, $346 of acquisition expense, $453 of depreciation and amortization, $99 of general and administrative expense, and $424 of interest. The company reported no separately stated margin measure.
At June 30, assets were $104,514, including net real estate of $101,433, cash and cash equivalents of $1,644, and restricted cash of $753. Mortgage debt was $64,575; total liabilities were $66,151 and total equity was $38,363. Operating cash flow was $664, investing cash flow $(216), and financing cash flow $987; cash increased by $1,435 from year-end 2010.
Material changes versus the prior comparable period
The April portfolio acquisition drove the increase in rental revenue, property expenses, depreciation, and mortgage interest. The 2010 periods largely reflected interest income from a short-term loan to the former sponsor; the filing cautions that reported results are not comparable. Pro forma six-month revenue, as if the portfolio had been acquired January 1, 2010, was $6,521 for 2011 and $6,526 for 2010; pro forma loss allocable to common shares was $(35) and $(31), respectively.
Debt, outlook, risks, and unusual items
- The $64,575 of property mortgages are held by the sponsor, mature April 29, 2021, and have a weighted-average rate of 3.8% at quarter-end. Four loans are fixed at 5.7%; two are fixed at 2.5% for two years and then float at 225 basis points over 30-day LIBOR. The loans are interest-only initially; scheduled amortization on the four 5.7% loans begins May 1, 2013.
- Management said available cash, operating cash flows, financing arrangements, and offering proceeds should meet liquidity needs for the next 12 months, while noting financing may not be available on acceptable terms. The company was conducting a public offering at $10 per share and a distribution reinvestment offering at $9.50; the filing does not state proceeds raised to date.
- The board declared post-quarter distributions equivalent to a 6.0% annualized rate based on a $10 share price, including a July special distribution and August and September distributions. These declarations do not establish future distribution levels.
- Management cited risks including limited operating history, ability to deploy offering proceeds, real estate and economic conditions, financing availability and interest rates, and dependence on the sponsor and advisor. The sponsor contributed the properties and holds the mortgages; the filing also identifies potential conflicts, possible unknown acquired liabilities, and risks relating to sponsor financing and nonrecourse carve-out guarantees.
- The company said it believed it had sufficient liquidity for the next 12 months and intended to maintain REIT qualification, which generally requires distribution of at least 90% of ordinary taxable income. Failure to qualify could result in corporate-level tax and loss of REIT treatment for four years, subject to possible relief.
- Management concluded disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting. No legal proceedings or defaults upon senior securities were reported.
Important facts for investors to verify
- Reconcile the $346 acquisition expense in the income statement with the related-party fee disclosure stating acquisition expenses were $0 for the quarter and six-month period.
- Review offering progress and cash needs, including whether operating cash flow and available cash can support distributions, property requirements, and expenses without additional financing.
- Assess the sponsor-held mortgage terms, especially the two loans that become LIBOR-based floating-rate debt after the initial two-year period, and the company’s exposure to its sponsor and advisor.
- Confirm the basis and allocation of the sponsor-contributed properties, including the difference between the stated $103,790 contribution value and the historical carrying-value accounting described in the filing.
- Monitor occupancy, rents, property operating costs, and the company’s ability to qualify as a REIT; the filing provides no quantified forward earnings or acquisition guidance.