Independence Realty Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results. The company is a REIT focused on apartment properties; at quarter-end it owned 46 properties with 12,982 units and was externally managed by a RAIT subsidiary.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $38.4 million | $25.5 million | $115.4 million | $69.9 million |
| Operating income | $10.6 million | $(5.8) million | $29.0 million | $2.6 million |
| Net income | $2.4 million | $25.6 million | $33.2 million | $25.7 million |
| Net income allocable to common shares | $2.3 million; $0.05/share | $24.0 million; $0.71/share | $31.2 million; $0.66/share | $24.1 million; $0.74/share |
| FFO per diluted share | $0.20 | $0.85 | $0.56 | $1.25 |
| Core FFO per diluted share | $0.21 | $0.20 | $0.63 | $0.57 |
Q3 same-store revenue increased 4.1%, NOI increased 6.0%, and NOI margin was 51.7% versus 50.8%. Same-store average occupancy was 93.2% versus 93.4%, while average effective monthly rent per unit rose 3.5% to $867. For the nine-month period, same-store NOI increased 4.6% and margin was 52.7% versus 52.1%. Company-wide occupancy was 94.1% at quarter-end; average monthly effective rent per occupied unit was $977.
Cash flow and liquidity: Nine-month operating cash flow was $33.3 million, investing cash flow was positive $29.0 million, and financing cash flow was negative $71.4 million. Cash and cash equivalents were $29.2 million at September 30, down from $38.3 million at year-end; restricted cash was $8.0 million. Capital expenditures were $8.0 million. Cash distributions to common shareholders and noncontrolling interests totaled $27.1 million; management reported $31.2 million of operating cash flow excluding acquisition costs and changes in other assets and liabilities.
Debt: Quarter-end principal debt was $888.1 million ($880.6 million carrying value), with a 3.5% weighted-average rate and 5.3-year weighted-average maturity. The secured credit facility had $247.3 million outstanding and $77.7 million available; the $40 million term loan and fixed-rate mortgages of $600.7 million were also outstanding. The company reported compliance with all debt covenants. A $150 million interest-rate swap converted part of floating-rate debt to fixed-rate exposure.
Material changes and unusual items
- Revenue growth chiefly reflected the full-period contribution of properties acquired in the 2015 Trade Street Residential (TSRE) transaction. Q3 revenue rose 50.5%; nine-month revenue rose 65.1%. Property sales partly offset the increase.
- Same-store operating performance improved, but GAAP earnings comparisons were substantially affected by prior-year transaction accounting and one-time items. Q3 2015 included a $64.0 million TSRE merger/property acquisition gain and $27.5 million of TSRE financing extinguishment and employee separation expense. Q3 2016 included a $0.6 million TSRE purchase-accounting gain.
- For the first nine months of 2016, three property sales generated $31.8 million in gains. Interest expense increased to $27.8 million from $13.4 million, largely reflecting acquisition-related debt and a larger portfolio. Nine-month net income also included the sale gains; FFO excluded real-estate gains, and Core FFO additionally adjusts for specified nonrecurring and noncash items.
- The company continued its capital-recycling strategy, selling three properties during 2016 for $88.0 million in aggregate. Management said debt principal had been reduced by $252.6 million from the TSRE acquisition through October 2016 and leverage had declined from 68.0% to 53.4% over that period.
Outlook, transactions, and risks
- No quantified operating guidance was provided. Management cited solid population and job growth in its markets, potential for rent increases and NOI growth, and expected a lower contractual rate on the secured credit facility in Q1 2017 following reduced leverage.
- On October 5, the company completed an offering of 25.0 million shares at $9.00, then issued another 3.75 million shares through the overallotment option. Total net proceeds were approximately $243.8 million. Uses included repaying the $40 million term loan, repurchasing and retiring 7.27 million RAIT-owned shares for $62.2 million, paying down the credit facility, and reserving $43 million for management internalization. It made additional $30 million credit-facility paydowns on October 11 and October 24.
- The planned $43 million management internalization includes acquiring the external advisor and certain multifamily property-management assets, contracts, and liabilities. The agreement provides for a closing no earlier than December 20, 2016; management expected closing by year-end, subject to conditions including third-party consents. Management anticipated cost savings and reduced conflicts, but cautioned that the transaction price would be expensed when incurred and share issuance would dilute earnings per share and Core FFO. The company also disclosed integration, employee-retention, transition-services, and related-party conflict risks; completion and anticipated savings were not assured.
- The board declared monthly dividends of $0.06 per share through December 2016. As a REIT, the company must meet qualification requirements, including distributing at least 90% of ordinary taxable income.
- Management said available cash, financing arrangements, and operating cash flow should meet liquidity needs for the next 12 months and the foreseeable future. Ordinary-course litigation was not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors apart from risks related to internalization.
Important facts for investors to verify
- Whether the management internalization closed on the expected terms and timing, and whether projected cost savings materialized relative to the $43 million purchase price and ongoing transition costs.
- The effect of the October share issuance and RAIT share repurchase on share count, per-share earnings, Core FFO, and dividend coverage; the filing reported 68,996,070 common shares outstanding as of November 2, 2016.
- Post-offering debt balances, interest costs, facility availability, covenant headroom, and progress toward management’s stated leverage reduction.
- Whether same-store rent growth and NOI gains persist, and how portfolio dispositions, occupancy, property expenses, and capital needs affect cash available for distributions.
- The sustainability of the $0.06 monthly dividend, considering REIT distribution requirements, operating cash flow, debt service, and recurring capital expenditures.