Independence Realty Trust, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing was signed March 11, 2014. Figures are in U.S. dollars; financial statement amounts are generally in thousands unless noted.
Business context
IRT is a Maryland REIT that owns and operates apartment properties and is externally advised by a RAIT Financial Trust subsidiary. At year-end it owned 10 properties comprising 2,790 units in seven states. Its strategy is to acquire and operate apartments with stable occupancy and potential for rent growth or value-enhancing improvements.
Financial and operating results
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $19.943 million | $16.629 million |
| Property operating expenses | $9.429 million | $8.066 million |
| Property net operating income (NOI) | $10.514 million | $8.563 million |
| Operating income | $4.933 million | $3.732 million |
| Net income | $1.274 million | $0.427 million |
| Net income allocable to common shares | $0.615 million | $(0.123) million |
| Diluted GAAP earnings per share | $0.12 | $(0.45) |
| Core FFO | $5.782 million; $0.81 per share | $3.956 million; $0.71 per share |
| Cash flow from operating activities | $6.018 million | $4.484 million |
| Cash and cash equivalents at year-end | $3.334 million | $2.533 million |
| Total indebtedness at year-end | $103.303 million | $92.413 million |
- Revenue rose 19.9% and NOI rose approximately 23% year over year; management attributed growth mainly to acquisitions and improved occupancy.
- Year-end portfolio occupancy was 94.5%, versus 92.0% in 2012. Average monthly effective rent per occupied unit is reported as $770 in the MD&A, compared with $787 in 2012; another section reports $775 for 2013.
- Core FFO is a non-GAAP measure, includes specified add-backs, and is not equivalent to GAAP income or operating cash flow. Management reports 46.2% year-over-year growth in Core FFO.
- Investing cash outflow was $38.239 million, primarily for property acquisitions and capital expenditures; financing cash inflow was $33.022 million, substantially reflecting the August 2013 stock offering.
- Reported leverage was 52% at year-end, measured as debt to gross assets. Debt carried a 3.8% weighted-average interest rate; $40.6 million was floating-rate and unhedged. The $20 million secured revolving facility had $2.5 million drawn and $17.5 million of stated availability, subject to borrowing-base and covenant requirements.
- Total assets were $181.871 million and total equity was $74.908 million at December 31, 2013. The filing reports no income tax expense for 2013, consistent with its REIT election.
Material changes and significant subsequent events
- IRT acquired two properties during 2013, adding 786 units, and ended the year with 10 properties. Its common stock began trading on NYSE MKT in August 2013.
- The August 2013 public offering raised approximately $34.0 million gross. In January 2014, IRT issued 8.05 million shares for approximately $66.8 million gross; outstanding shares increased from 9.65 million at year-end to approximately 17.74 million as of March 10, 2014.
- In January 2014, IRT acquired Eagle Ridge in Illinois for $29.0 million and arranged an $18.85 million, fixed-rate mortgage at 4.67%, with interest-only payments and a 2024 maturity.
- In February 2014, IRT acquired five Oklahoma properties with 1,658 units for $65 million, including assumption of approximately $46 million of mortgage debt at 5.62%, maturing in April 2016. The operating partnership guaranteed the loan; a further springing guaranty applies under defined conditions.
- A Missouri property acquisition for $32.7 million was under contract, subject to lender consent and other closing conditions; the filing does not establish that it closed.
- The board raised the monthly dividend from approximately $0.05333 per share in late 2013 to $0.06 for January–March 2014, a 12.5% increase. 2013 dividends declared were $0.63 per share. The company states that future distributions remain at the board’s discretion.
Outlook, risks and unusual items
- Management expected acquisitions to increase revenue, expenses and net income and believed available liquidity would meet needs for the existing year-end portfolio over the following 12 months. It provided no specific earnings, NOI or FFO guidance.
- Management intends to keep leverage at approximately 65% or less of the portfolio’s combined initial purchase price, but the company is not contractually limited to that level. Funding growth and distributions depends partly on access to equity, property-secured debt and operating cash flow.
- Key risks include apartment-market and local employment conditions, rent and occupancy pressure, rising operating costs and interest rates, refinancing and debt-service risk, property illiquidity, and execution or integration risk from acquisitions. Certain debt has prepayment restrictions; near-term refinancing exposure includes the Oklahoma loan maturing in 2016.
- IRT depends on RAIT-affiliated advisory and property-management services. The filing describes potential conflicts involving related-party financing, allocation of investment opportunities, fees, and transactions with affiliates. RAIT held 39.3% of IRT’s common stock as of March 11, 2014.
- 2013 cash distributions of $4.8 million, including amounts paid or allocable to non-controlling interests, compared with $6.0 million of operating cash flow and $5.7 million of FFO. Distributions are not assured and may be funded from sources other than recurring operations.
- No material legal proceedings were reported. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; auditor attestation on internal controls was not included.
Most important facts for investors to verify
- Resolve the filing’s differing 2013 average-rent figures ($770 in the MD&A and property table versus $775 elsewhere) and assess same-property rent and occupancy trends.
- Review Core FFO’s adjustments and per-share calculation alongside GAAP earnings and operating cash flow; do not treat FFO as cash available for distribution.
- Confirm the status, financing, guarantees, covenants and maturity risks of the Oklahoma and Eagle Ridge acquisitions, and whether the Missouri transaction closed.
- Assess dividend sustainability against recurring cash flow, capital spending, debt service and the REIT distribution requirement.
- Evaluate dilution from the January 2014 share issuance and the governance and economic effects of RAIT’s ownership, related-party debt and advisory arrangements.