INDEPENDENCE REALTY TRUST, INC. annual report, FY2016

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Independence Realty Trust, Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. IRT owns and operates apartment communities, primarily in non-gateway U.S. markets, and elected REIT tax treatment.

Business context and portfolio

At year-end, IRT owned 46 properties with 12,982 apartment units, down from 49 properties and 13,724 units at December 31, 2015. Portfolio average occupancy was 93.8% and average effective monthly rent was $977 per occupied unit. IRT became internally managed on December 20, 2016, ending its external advisory arrangement with RAIT.

Financial and operating performance

  • Revenue: $153.4 million, up 40.0% from $109.6 million in 2015. Growth primarily reflected a full year of contribution from properties acquired in 2015; same-store revenue increased 3.2%.
  • Profit: Net loss was $9.6 million, or $0.19 per diluted share, versus net income of $30.2 million, or $0.78 per share, in 2015. Results included a $45.0 million management-internalization expense and $31.8 million of gains on 2016 property sales. The 2015 comparison included a $64.6 million bargain-purchase gain related to the TSRE acquisition.
  • Property operations: Same-store NOI increased 4.5% to $38.7 million; same-store NOI margin was 57.2%, versus 56.5%. Same-store average occupancy was 93.4%, up 0.2 percentage points, and average effective monthly rent rose 2.7% to $875.
  • Funds from operations: Core FFO was $43.3 million, or $0.79 per share, compared with $30.3 million, or $0.80 per share, in 2015. Adjusted EBITDA increased 43.8% to $74.5 million. These are non-GAAP measures defined by the company and may not be comparable with other REITs.
  • Cash flow: GAAP operating cash flow was negative $7.5 million, versus positive $18.7 million in 2015; management attributed the 2016 outflow partly to internalization costs. Investing activities provided $27.8 million, while financing activities used $37.7 million. Cash and cash equivalents ended the year at $20.9 million, down from $38.3 million. The company also reported $43.0 million of operating cash flow before acquisition and internalization costs and working-capital changes, compared with $38.7 million of distributions to common holders and noncontrolling interests.
  • Debt and liquidity: Outstanding debt principal was $750.2 million ($743.8 million carrying amount after discounts and financing costs), versus $975.5 million principal at year-end 2015. Debt to gross assets fell from 64% to 54.3%. Debt had a 3.6% weighted-average rate and 5.7-year weighted-average maturity; $150.0 million was floating-rate debt, hedged with a swap. The secured credit facility had $162.5 million of availability. IRT reported compliance with debt covenants.
  • Balance sheet: Total assets were $1.294 billion and total equity was $528.7 million. Four properties held for sale had a reported net carrying value of $60.8 million.
  • Distributions and equity: Dividends remained $0.06 per share monthly ($0.72 annualized). The October offering issued 28.75 million shares for approximately $245.5 million in net proceeds; IRT used $62.2 million to repurchase and retire RAIT’s 7.27 million shares.

Material changes versus prior year

  • Revenue and NOI grew substantially, largely because 2015 acquisitions contributed for a full year in 2016; same-store results also improved.
  • GAAP earnings turned to a loss, mainly reflecting the $45.0 million internalization expense. The $31.8 million of property-sale gains partly offset that expense.
  • Debt principal declined by approximately $225 million, supported by the equity offering, property dispositions, refinancing and debt repayments.
  • Share count rose materially following the offering, partly offset by the repurchase of RAIT’s holdings.
  • IRT acquired its external advisor and RAIT’s multifamily property-management business for $43.0 million and assumed related liabilities. The accounting recorded a $45.0 million expense, principally reflecting settlement of unfavorable pre-existing agreements.

Outlook, commentary and risks

Management expects healthy employment and population growth and limited new supply in many of its markets to support rent growth and stable occupancy in 2017. It provided no specific company-wide earnings or revenue guidance. Its 2017 priorities include selling Class C properties and reinvesting in Class B properties, improving property efficiency, reducing leverage and enhancing financing flexibility, and completing the transition away from RAIT shared services, scheduled to end June 20, 2017. Management estimates annual G&A savings of approximately $2.5 million after the shared-services period, while noting that the expected benefits may not be fully realized.

Management identified Oklahoma City’s energy-sector weakness as a pressure on rent growth and occupancy, but expected improvement in 2017. It also anticipated rising commercial real-estate interest rates and noted multi-year property-tax reassessments in several markets during 2017. Key risks include geographic concentration, competition and apartment supply, short-term leases, operating-cost increases, execution of the management transition and planned property sales, access to capital, and refinancing or maturity risk. Approximately $708.5 million of debt principal was scheduled to mature from 2018 through 2026. Ordinary-course legal matters were not expected to have a material adverse effect. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

  • Reconcile reported GAAP operating cash flow of negative $7.5 million with management’s $43.0 million adjusted operating-cash-flow measure, including excluded costs and working-capital movements.
  • Review the $45.0 million internalization expense, the $43.0 million transaction payment, and the assumptions behind expected annual savings of $2.5 million.
  • Track the status and realized proceeds of the four properties held for sale and the two prospective acquisitions reported at approximately $44.0 million in aggregate.
  • Assess debt maturities, floating-rate exposure, covenant headroom and refinancing capacity, including the $150.0 million facility balance and remaining revolver availability.
  • Monitor same-store rents, occupancy and expenses by market, particularly Oklahoma City, and evaluate the sustainability of the $0.06 monthly dividend against cash generation and capital needs.
  • Consider the dilution from the 2016 share issuance and outstanding exchangeable operating-partnership units when assessing per-share results.