Independence Realty Trust, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company is a REIT focused on apartment properties in non-gateway markets. This was its first full quarter as an internally managed REIT following its December 2016 management internalization. Unless stated otherwise, dollar amounts below are in millions.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Total revenue | $39.1 | $38.7 |
| Operating income | $11.8 | $7.4 |
| Net income (loss) | $4.2 | $(0.05) |
| Net income (loss) attributable to common shares | $4.1 | $(0.08) |
| Diluted earnings per share | $0.06 | $0.00 as reported |
| Cash flow from operating activities | $12.4 | $7.5 |
| Cash flow from investing activities | $(31.1) | $5.9 |
| Cash flow from financing activities | $7.9 | $(29.7) |
| Cash and cash equivalents at quarter-end | $10.1 | $20.9 at December 31, 2016 |
| Total assets | $1,307.0 | $1,294.2 at December 31, 2016 |
| Indebtedness, net carrying amount | $765.7 | $743.8 at December 31, 2016 |
- Same-store revenue increased 4.8% and same-store net operating income (NOI) rose 5.2%. Same-store NOI margin was 59.8%, versus 59.5%; average occupancy was 93.9%, versus 92.9%; and average effective monthly rent per occupied unit was $1,007, up 3.7%.
- Management reported Core Funds from Operations (CFFO) of $0.18 per diluted share, versus $0.21, and Adjusted EBITDA of $19.5 million, up 3.1% from $18.9 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Quarter-end debt principal was $771.6 million: $172.0 million on a floating-rate credit facility and $599.6 million of fixed-rate mortgages. The reported weighted-average rate was 3.6%; the company said it was in compliance with all debt covenants. A $150 million swap hedged floating-rate debt through June 2021.
Changes versus the prior-year quarter
- GAAP net income improved from a small loss to $4.2 million. Operating income rose 59.5%, while total revenue increased 0.6% in the MD&A comparison (the financial statements report $39.142 million versus $38.666 million).
- Same-store performance improved, but revenue from non-same-store properties declined, partly reflecting property sales in 2016. The company attributed same-store gains to higher rents and occupancy.
- Interest expense fell $2.5 million to $7.4 million, primarily following debt repayments in 2016, partly offset by a $22 million facility draw for the 2017 acquisition. Depreciation and amortization declined $3.9 million, mainly because previously recognized in-place lease amortization had run off.
- General and administrative expense declined $0.5 million as former-advisor fees ended after internalization, partly offset by added employee compensation. Property management expense increased as the company took on direct management costs and third-party management activity.
- Operating cash flow increased to $12.4 million, but cash declined by $10.8 million during the quarter, primarily reflecting the property acquisition, capital expenditures, and distributions.
Outlook, commentary, and notable items
- The company described same-store operating results as strong and continued its capital-recycling strategy, seeking to replace lower-quality Class C properties with higher-quality assets in markets with growth potential.
- It acquired the 216-unit Lakes of Northdale community in Tampa for approximately $29.8 million in February. It was under contract to acquire a 160-unit Lexington, Kentucky community, which it expected to close by May 25, 2017, subject to closing conditions.
- Four Class C properties, reported as held for sale at $61.1 million, were being marketed for sale. Management expected sales by June 30, 2017, subject to market conditions, negotiations, and contract performance.
- After quarter-end, on May 1, 2017, the company closed a new $300 million unsecured credit facility, comprising a $50 million term loan and a revolving commitment of up to $250 million. It replaced the prior secured facility, extended maturities, and management estimated annual savings of approximately 35–40 basis points at closing leverage levels. Pricing was LIBOR plus 145 basis points for the term loan and LIBOR plus 150 basis points for revolving borrowings.
- The board declared monthly common dividends of $0.06 per share for January through June 2017. Management said available cash, financing arrangements, and operating cash flows should meet liquidity needs for the next 12 months and foreseeable future; this is forward-looking and subject to risks.
- Management cited ordinary-course litigation but did not expect it to materially affect financial position, results, or cash flows. No material change to previously disclosed risk factors or material off-balance-sheet arrangements was reported. The filing cautions that actual results may differ from forward-looking statements.
Important facts for investors to verify
- Whether the expected Lexington acquisition and planned dispositions of the four held-for-sale properties closed on the anticipated terms and timetable.
- How the new unsecured facility was drawn and used, and the company’s subsequent borrowing costs, maturities, covenant headroom, and liquidity.
- Whether same-store rent, occupancy, and NOI trends persisted, and how operating expense growth—particularly repairs and maintenance—affected margins.
- How recurring cash generation compares with dividends and ongoing capital expenditure needs. Q1 distributions to common shareholders and noncontrolling interests were approximately $13.0 million; management reported $13.1 million of operating cash flow after its specified adjustments.
- The sustainability of CFFO per share and the reconciliation of non-GAAP measures to GAAP results; reported CFFO per diluted share declined to $0.18 from $0.21 despite higher net income.
- Potential effects of interest-rate changes, REIT qualification requirements, property valuations and impairment estimates, and the company’s ability to execute its portfolio-repositioning strategy.