UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2014
OR
For the transition period from to
Commission file number 001-36041
INDEPENDENCE REALTY TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
Cira Centre
2929 Arch St., 17th Floor
Philadelphia, PA
(215) 243-9000
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 12, 2014 there were 17,742,540 shares of the Registrant’s common stock issued and outstanding.
INDEX
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PART I—FINANCIAL INFORMATION
Independence Realty Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited and dollars in thousands, except share and per share data)
ASSETS:
Investments in real estate:
Investments in real estate at cost
Accumulated depreciation
Investments in real estate, net
Cash and cash equivalents
Restricted cash
Accounts receivable and other assets
Intangible assets, net of accumulated amortization of $1,299 and $569, respectively
Deferred costs, net of accumulated amortization of $229 and $151, respectively
Total Assets
LIABILITIES AND EQUITY:
Indebtedness
Accounts payable and accrued expenses
Accrued interest payable
Dividends payable
Other liabilities
Total Liabilities
Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized, 0 and 0 shares issued and outstanding, respectively
Common stock, $0.01 par value; 300,000,000 shares authorized, 17,742,540 and 9,652,540 shares issued and outstanding, including 40,000 unvested restricted common share awards, as of March 31, 2014
Additional paid-in capital
Retained earnings (accumulated deficit)
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations
REVENUE:
Rental income
Tenant reimbursement income
Other income
Total revenue
EXPENSES:
Property operating expenses
General and administrative expenses
Asset management fees
Acquisition expenses
Depreciation and amortization
Total expenses
Operating income
Interest expense
Interest income
Gain (loss) on assets
Net income (loss):
(Income) loss allocated to preferred shares
(Income) loss allocated to non-controlling interests
Net income (loss) allocable to common shares
Earnings (loss) per share:
Basic
Diluted
Weighted-average shares:
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Consolidated Statements of Changes in Equity
(Unaudited and dollars in thousands, except share information)
Balance, January 1, 2014
Net income (loss)
Common dividends declared
Stock compensation expense
Common shares issued, net
Balance, March 31, 2014
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Consolidated Statements of Cash Flows
(Unaudited and dollars in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to cash flow from operating activities:
Amortization of deferred financing costs and debt discounts
Share based compensation
(Gain) loss on assets
Changes in assets and liabilities:
Net cash from operating activities
Cash flows from investing activities:
Acquisition of real estate properties
Capital expenditures
(Increase) decrease in restricted cash
Net cash from investing activities
Cash flows from financing activities:
Debt borrowings
Proceeds from issuance of common stock
(Payments) reimbursements for deferred financing costs
Debt repayments
Distributions on common stock
Distributions to non-controlling interests
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of the period
Supplemental cash flow information:
Cash paid for interest
Mortgage debt assumed
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Notes to Consolidated Financial Statements
As of March 31, 2014
NOTE 1: Organization
Independence Realty Trust, Inc. was formed on March 26, 2009 as a Maryland corporation that has elected to be taxed as a real estate investment trust, or REIT, commencing with the taxable year ended December 31, 2011. We are externally managed by a subsidiary of RAIT Financial Trust, or RAIT, a publicly traded Maryland REIT whose common shares are listed on the New York Stock Exchange under the symbol “RAS.” As used herein, the terms “we,” “our” and “us” refer to Independence Realty Trust, Inc. and, as required by context, Independence Realty Operating Partnership, LP, which we refer to as our operating partnership, and their subsidiaries. We own apartment properties in geographic submarkets that we believe support strong occupancy and have the potential for growth in rental rates. We seek to provide stockholders with attractive risk-adjusted returns, with an emphasis on distributions and capital appreciation. We own substantially all of our assets and conduct our operations through our operating partnership, of which we are the sole general partner.
As of March 31, 2014, we owned seventeen apartment properties with 4,970 units located in ten states.
NOTE 2: Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2013 included in our Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
b. Principles of Consolidation
The consolidated financial statements reflect our accounts and the accounts of our operating partnership and other wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
c. Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
d. Investments in Real Estate
Allocation of Purchase Price of Acquired Assets
We account for acquisitions of properties that meet the definition of a business pursuant to FASB ASC Topic 805, “Business Combinations”. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities associated with the real estate acquired. Transaction costs and fees incurred related to acquisitions are expensed as incurred. Transaction costs and fees incurred related to the financing of an acquisition are capitalized and amortized over the life of the loan.
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Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets and liabilities (consisting of above and below-market leases, in-place leases and tenant relationships), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. Based on these estimates, we allocate the initial purchase price to the applicable assets and liabilities. As final information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation, in no case later than twelve months of the acquisition date.
In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the differences between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term. We did not acquire any above-market or below-market in-place leases during the three-month period ending March 31, 2014.
The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The value assigned to this intangible asset is amortized over the assumed lease up period of six months. For the three months ended March 31, 2014 and 2013 we recorded $729 and $118 of amortization expense for intangible assets, respectively. We expect to record amortization expense of intangible assets of $1,827 for 2014.
Impairment of Long-Lived Assets
Management evaluates the recoverability of its investment in real estate assets, including related identifiable intangible assets, in accordance with FASB ASC Topic 360, “Property, Plant and Equipment”. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that recoverability of the assets is not assured.
Management evaluates the long-lived assets on an ongoing basis and records an impairment charge when there is an indicator of impairment. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on our plans for the respective assets and our views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective and/or comparable properties, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial.
Depreciation and Amortization
Depreciation expense for real estate assets are computed using a straight-line method based on a life of 40 years for buildings and improvements and five to ten years for equipment and fixtures. Expenditures for tenant improvements are capitalized and amortized over the initial term of each lease. For the three-months ended March 31, 2014 and 2013 we recorded $2,123 and $1,036 of depreciation expense, respectively.
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e. Fair Value of Financial Instruments
In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in level 3.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.
Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.
FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of mortgage indebtedness is based on a discounted cash flows valuation technique, which classifies this as a level 3 liability within the fair value hierarchy. The carrying value and fair value of mortgage indebtedness as of March 31, 2014 is $188,850 and $189,800, respectively. The carrying value and fair value of mortgage indebtedness as of December 31, 2013 was $100,803 and $101,272, respectively. The fair value of secured credit facility, cash and cash equivalents and restricted cash approximates cost due to the nature of these instruments.
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f. Recent Accounting Pronouncements
In April 2014, the FASB issued an accounting standard classified under FASB ASC Topic 205, “Presentation of Financial Statements”. This accounting standard amends existing guidance to change reporting requirements for discontinued operations by requiring the disposal of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This standard is effective for interim and annual reporting periods beginning on or after December 15, 2014. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.
NOTE 3: Investments in Real Estate
As of March 31, 2014, our investments in real estate consisted of seventeen apartment properties with 4,790 units. The table below summarizes our investments in real estate:
Land
Building
Furniture, fixtures and equipment
Total investment in real estate
Acquisitions
On March 31, 2014, we acquired a 152-unit apartment residential community, known as King’s Landing, in Creve Coeur, Missouri. We acquired the property for an aggregate purchase price of $32,700 exclusive of closing costs. In connection with the acquisition we assumed an existing loan with an outstanding principal balance of $21,200 secured by the property, bearing interest at 4.0% per annum, and maturing on June 1, 2021.
On February 28, 2014, we acquired a portfolio of five apartment properties with 1,658 units located in Oklahoma and referred to as the Oklahoma portfolio or, the “OKC Portfolio”. We acquired the property for an aggregate purchase price of $65,000 exclusive of closing costs. In connection with the acquisition we assumed an existing loan with an outstanding principal balance of $45,763 secured by the property, bearing interest at 5.6% per annum and maturing on April 1, 2016. The fair value of the properties acquired and debt assumed was $70,431 and $48,312, respectively, generating a net gain of $2,882.
On January 31, 2014, we acquired a 370-unit apartment residential community located in Waukegan, Illinois, known as The Reserve at Eagle Ridge. We acquired the property for an aggregate purchase price of $29,000 exclusive of closing costs.
On May 7, 2014, we acquired a 202-unit apartment residential community located in Little Rock, Arkansas, known as Carrington. We acquired the property for an aggregate purchase price of $21,500 exclusive of closing costs.
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The following table summarizes the aggregate fair value of the assets and liabilities associated with the properties acquired during the three months ended March 31, 2014, on the date of each acquisition, for the real estate accounted for under FASB ASC Topic 805.
Description
Assets acquired:
Investments in real estate
Other assets
Deferred financing costs
Intangible asset
Total assets acquired
Liabilities assumed:
Loans payable on real estate
Total liabilities assumed
Estimated fair value of net assets acquired
Our consolidated unaudited pro forma information, after including the acquisition of real estate properties, is presented below as if the acquisitions occurred on January 1, 2013. These pro forma results are not necessarily indicative of the results which actually would have occurred if the acquisition occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods:
Total revenue from acquisitions, as reported
Pro forma revenue
Net income (loss) allocable to common shares from acquisitions, as reported(1)
Pro forma net income (loss) allocable to common shares
Earnings (loss) per share
Basic-as reported
Diluted-as reported
Basic-pro forma
Diluted-pro forma
We have not yet completed the process of estimating the fair value of assets acquired and liabilities assumed. Accordingly, our preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as we complete the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in our financial statements retrospectively.
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NOTE 4: Mortgage Indebtedness
The following table contains summary information concerning the indebtedness that encumbered our properties as of March 31, 2014:
Belle Creek Apartments
Berkshire Square Apartments
Centrepoint Apartments
Copper Mill Apartments
Crestmont Apartments
Cumberland Glen Apartments
Heritage Trace Apartments
Runaway Bay Apartments
Tresa at Arrowhead
Reserve at Eagle Ridge
OKC Portfolio
Kings’ Landing
Total mortgage debt/Weighted-Average
Secured Credit Facility
Total indebtedness /Weighted-Average
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The following table contains summary information concerning the indebtedness that encumbered our properties as of December 31, 2013:
The weighted average interest rate of our mortgage indebtedness was 3.6% as of March 31, 2014. As of March 31, 2014, RAIT held $38,075 of our debt while $150,828 was held by third parties. As of December 31, 2013, RAIT held $38,075 of our debt while $65,228 was held by third parties. For the three-months ended March 31, 2014 and 2013, we paid approximately $238 and $238 respectively, of interest to RAIT.
On March 31, 2014, in connection with the acquisition of King’s Landing, we assumed $21,200 of an existing loan secured by the property. The loan bears interest at a fixed rate of 4.0% per annum, provides for monthly payments of interest only until June 1, 2017 when principal and interest payments will be due monthly based on a 30-year amortization schedule, and matures on June 1, 2021.
On February 28, 2014, in connection with the acquisition of the OKC Portfolio we assumed $45,763 of an existing loan secured by the property. The Loan bears interest at a fixed rate of 5.6% per annum, provides for monthly payments of principal and interest based on a 30-year amortization schedule and matures on April 1, 2016. We recorded the debt assumed at its fair value of $48,312 based on a market rate of 2.8% for the remaining term. The resulting premium of $2,549 will be amortized to interest expense over the remaining term of the mortgage.
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On February 7, 2014, we entered into a loan agreement for an $18,850 loan secured by a first mortgage on our Reserve at Eagle Ridge property. The loan bears interest at a fixed rate of 4.7% per annum, provides for monthly payments of interest only until the maturity date of March 1, 2024 when the principal balance, accrued interest and all other amounts due under the loan become due.
NOTE 5: Shareholder Equity and Non-Controlling Interests
Stockholder Equity
Preferred Shares
On February 28, 2013, our board of directors authorized and declared distributions on our Series A Preferred Stock for the period beginning on January 1, 2013, and ending on June 30, 2013. The distributions are payable to the holders of the Series A Preferred Stock of record at a rate of $0.34722222 per day, which is an amount that is equivalent to a 12.5% annualized distribution rate based on a share price of $1,000. The distributions were aggregated and paid in cash on June 28, 2013, pursuant to the requirements of our charter.
On July 25, 2013, our board of directors authorized setting aside amounts sufficient to redeem our Series A Preferred Stock with the proceeds of our underwritten offering.
On August 19, 2013, we redeemed 125 shares of our 12.5% Series A Cumulative Non-Voting Preferred Stock for an aggregate redemption price of approximately $140 inclusive of accrued interest. The redemption of the Series A Preferred Stock was funded with cash received from the August 2013 public offering of common stock. After the redemption date, there were no shares of Series A Preferred Stock outstanding, and all rights of the holders of such shares and units were terminated.
Common Shares
On January 29, 2014, we completed an underwritten public offering selling 8,050,000 shares of our common stock for $8.30 per share resulting in gross and net proceeds of $66,815 and $62,984, respectively.
On February 28, 2013, our board of directors authorized and declared distributions on our common stock for the months of January through June 2013. For the months of January through March 2013, the distributions were payable to the holders of our common stock at a rate of $0.00163934 per share per day. For the months of April through June 2013, our board of directors authorized and declared distributions on our common stock at a rate of $0.00171233 per share per day. The distributions for each month were aggregated and paid on or before the fifteenth day following the completion of each respective month. All distributions were paid in cash.
On January 15, 2014 our board of directors declared the following dividends:
Month
January 2014
February 2014
March 2014
On April 17, 2014 our board of directors declared the following dividends:
April 2014
May 2014
June 2014
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Non-controlling Interest
On May 7, 2013, RAIT elected to convert 5,274,900 of its common limited partnership units to shares of our common stock according to the terms of the operating partnership’s agreement of limited partnership.
On February 28, 2013, our board of directors, in our capacity as the general partner of the operating partnership, authorized and declared distributions on our operating partnership’s Series B Preferred Units for the period of January, February and March 2013. The distributions were paid to holders of our Series B Preferred Units of record at a rate of $2.78 per unit per day. On May 7, 2013, our board of directors, in our capacity as the general partner of the operating partnership, authorized and declared distributions on our operating partnership’s Series B Preferred Units for the period of April, May and June 2013. The distributions were paid to holders of our Series B Preferred Units of record at a rate of $2.78 per unit per day. On July 25, 2013, our board of directors, in our capacity as the general partner of the operating partnership, authorized setting aside amounts sufficient to redeem our operating partnership’s Series B Preferred Units with the proceeds of our August 2013 underwritten offering. Our operating partnership, had the right to redeem the Series B Preferred Units, in whole or in part, at any time or from time to time for a redemption price equal to $10 plus all accrued and unpaid distributions thereon to and including the date fixed for redemption.
On August 19, 2013, our operating partnership redeemed 350 of its Series B Units, all of which were owned by a wholly-owned subsidiary of RAIT, for an aggregate redemption price of approximately $3,500. The redemption of the Series B Units was funded with cash received from the August 2013 underwritten offering of the common stock. After the redemption date, there were no Series B Units outstanding and all rights of the holders of such units were terminated.
NOTE 6: Equity Compensation Plans
Long Term Incentive Plan
On April 5, 2011, our board of directors approved and adopted the Long Term Incentive Plan, or the incentive plan, and the Independent Directors Compensation Plan, or the director plan. Our incentive plan provides for the grants of awards to our directors, officers and full-time employees (in the event we ever have employees), full-time employees of our advisor and its affiliates, full-time employees of entities that provide services to our advisor, directors of our advisor or of entities that provide services to it, certain of our consultants and certain consultants to our advisor and its affiliates or to entities that provide services to our advisor. The incentive plan authorizes the grant of restricted or unrestricted shares of our common stock, non-qualified and incentive stock options, restricted stock units, stock appreciation rights, dividend equivalents and other stock- or cash-based awards. On July 29, 2013, our board of directors and stockholders approved the amendment and restatement of our incentive plan to reduce the number of shares of common stock issuable thereunder to 800,000 shares.
Under the director plan, which operates as a sub-plan of our incentive plan, each of our independent directors will receive 3,000 shares of common stock annually. In addition, our independent directors may elect to receive their annual cash fee in the form of our common shares or a combination of common shares and cash. On October 29, 2013, our compensation committee made the initial stock grant under the director plan so that our independent directors received 9,000 shares of our common stock, in the aggregate. These awards vested immediately.
On January 31, 2014, the compensation committee awarded 40,000 shares of restricted common stock, valued at $328 using our closing stock price of $8.20, to persons affiliated with our advisor, including our executive officers. These awards generally vest over three-year periods.
On January 31, 2014, the compensation committee awarded 80,000 stock appreciation rights, or SARs, valued at $49 based on a Black-Scholes option pricing model at the date of grant, to persons affiliated with our advisor, including our executive officers. The SARs vest over a three-year period and may be exercised between the date of vesting and January 31, 2019, the expiration date of the SARs.
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Distribution Reinvestment Program
We had adopted a distribution reinvestment program, or the DRP, through which our stockholders could elect to reinvest an amount equal to the distributions declared on their shares of common stock in additional shares in lieu of receiving cash distributions. The common stock available under the DRP was reallocated to the August 2013 underwritten offering when the amended registration statement was filed and the DRP was subsequently terminated. No selling commissions or dealer manager fees were paid on shares sold under the DRP.
NOTE 7: Related Party Transactions and Arrangements
Fees and Expenses Paid to Our Advisor
Effective as of May 7, 2013, we entered into the Second Amended and Restated Advisory Agreement, or the amended and restated advisory agreement. The amended and restated advisory agreement was adopted primarily to adjust the advisor’s compensation and modify its duties to us.
Pursuant to the terms of the amended advisory agreement, our advisor will be compensated as follows:
For the three-month periods ended March 31, 2014 and 2013 our advisor earned $0 incentive fees. These fees are included within asset management fees in our consolidated statements of operations. As of March 31, 2014 and December 31, 2013 we had liabilities payable to our advisor for incentive fees of $0 and $65, respectively.
Property Management Fees Paid to Our Property Manager
We have entered into property management agreements with RAIT Residential, or our property manager, which is majority owned by RAIT, with respect to each of our properties. Pursuant to the property management agreements, we pay our property manager property management and leasing fees on a monthly basis of an amount up to 4.0% of the gross revenues from the property for each month. Additionally, we may pay our property manager a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Each management agreement has an initial one year term, subject to automatic one-year renewals unless either party gives prior notice of its desire to terminate the management agreement. For the three-month periods ended March 31, 2014 and 2013 our property manager earned $321 and $185, respectively, of property management and leasing fees. As of March 31, 2014 and December 31, 2013, we had liabilities payable to our property manager for property management and leasing fees of $139 and $83, respectively.
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NOTE 8: Earnings (Loss) Per Share
The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three-month periods ended March 31, 2014 and 2013:
Net Income (loss)
Net Income (loss) allocable to common shares
Weighted-average shares outstanding—Basic
Weighted-average shares outstanding—Diluted
Earnings (loss) per share—Basic
Earnings (loss) per share—Diluted
Earnings per share is computed in accordance with FASB ASC Topic 260, “Earnings per Share”, by dividing the Net Income (loss) allocable to common shares by the weighted average number of common shares outstanding during the respective periods.
NOTE 9: Commitments and Contingencies
Litigation
From time to time, we are party to various lawsuits, claims for negligence and other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition, results of operations, or financial statements, taken as a whole, if determined adversely to us.
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Forward-Looking Statements
The Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report contains or incorporates by reference such “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act.
Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. As used herein, the terms “we,” “our” and “us” refer to Independence Realty Trust, Inc. and, as required by context, Independence Realty Operating Partnership, LP, which we refer to as our operating partnership, and their subsidiaries.
We claim the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this report and they may also be incorporated by reference in this report to other documents filed with the SEC, and include, but are not limited to, statements about future financial and operating results and performance, statements about our plans, objectives, expectations and intentions with respect to future operations, products and services, and other statements that are not historical facts. These forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed in these forward-looking statements.
The risk factors discussed and identified in Item 1A of our Annual Report on Form 10-K filed with the SEC on March 11, 2014, and in other of our public filings with the SEC, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events.
Overview
We are a Maryland corporation that owns apartment properties in geographic submarkets that we believe support strong occupancy and have the potential for growth in rental rates. We seek to provide stockholders with attractive risk-adjusted returns, with an emphasis on distributions and capital appreciation. We are externally advised by a wholly-owned subsidiary of RAIT Financial Trust, or RAIT (NYSE: RAS), a multi-strategy commercial real estate company organized as an internally managed REIT with approximately $3.3 billion of assets under management as of March 31, 2014. RAIT invests primarily in commercial mortgages and, to a lesser extent, apartment properties. RAIT owns 39.3% of our outstanding common shares as of March 31, 2014. We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, commencing with our taxable year ended December 31, 2011.
We seek to acquire and operate apartment properties that:
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On January 29, 2014, we completed our underwritten public offering of our common stock raising gross proceeds of $66.8 million. The majority of the proceeds were deployed in the latter half of the first quarter ended March 31, 2014. After giving effect to this offering, the percent of our outstanding common stock held by RAIT Financial Trust, IRT’s largest stockholder and the parent company of IRT’s external advisor, was reduced from 59.7% to 39.4%. During the quarter ending March 31, 2014, we acquired seven properties totaling 2,180 units for $126.7 million. These acquisitions contributed to our substantial growth in a number of key financial measures this quarter when compared to the corresponding period in 2013 as follows: core funds from operations increased 100% to $2.6 million from $1.3 million, operating income increased 10% to $1.3 million from $1.2 million and total revenues grew 74% to $8.1 million from $4.7 million.
Key Statistics
(Unaudited and dollars in thousands, except per share and per unit information)
Financial Statistics:
Earnings (loss) per share-diluted
Funds from Operations (“FFO”) per share
Core funds from operations (“CFFO”) per share
Dividends declared per common share
Total Shares Outstanding
Apartment Property Portfolio:
Reported investments in real estate at cost
Net operating income
Number of properties owned
Multifamily units owned
Portfolio weighted average occupancy
Weighted average monthly effective rent per unit (1)
As of March 31, 2014, we own 17 apartment properties containing an aggregate of 4,970 apartment units. We refer to these apartment properties as our “existing portfolio.” As of March 31, 2014, our existing portfolio had an average occupancy of 93.9% and an average monthly effective rent per occupied apartment unit of $730.
Our Properties
The following table presents an overview of our portfolio as of March 31, 2014.
Property Name
Location
Belle Creek
Henderson, Colorado
Berkshire Square
Indianapolis, Indiana
Copper Mill
Austin, Texas
Crestmont
Marietta, Georgia
Cumberland Glen
Smyrna, Georgia
Heritage Trace
Newport News, Virginia
Phoenix, Arizona
Centrepoint
Tucson, Arizona
Runaway Bay
The Crossings
Jackson, Mississippi
Waukegan, Illinois
Windrush
Edmond, Oklahoma
Heritage Park
Oklahoma City, Oklahoma
Raindance
Augusta
Invitational
King’s Landing
Creve Coeur, Missouri
Total/Weighted Average
On May 7, 2014, we acquired a 202-unit apartment residential community located in Little Rock, Arkansas, known as Carrington. We acquired the property for an aggregate purchase price of $21.5 million exclusive of closing costs.
Non-GAAP Financial Measures
Funds from Operations and Core Funds from Operations
We believe that FFO and Core FFO, each of which is a non-GAAP financial measure, are additional appropriate measures of the operating performance of a REIT and us in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss allocated to common shares (computed in accordance
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with GAAP), excluding real estate-related depreciation and amortization expense, gains or losses on sales of real estate and the cumulative effect of changes in accounting principles.
Core FFO is a computation made by analysts and investors to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations, including acquisition expenses, expensed costs related to the issuance of shares of our common stock, gains or losses on real estate transactions and equity-based compensation expenses, from the determination of FFO. We incur acquisition expenses in connection with acquisitions of real estate properties and expense those costs when incurred in accordance with U.S. GAAP. As these expenses are one-time and reflective of investing activities rather than operating performance, we add back these costs to FFO in determining Core FFO.
Our calculation of Core FFO differs from the methodology used for calculating Core FFO by some other REITs and, accordingly, our Core FFO may not be comparable to Core FFO reported by other REITs. Our management utilizes FFO and Core FFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance after adjustment for certain non-cash items, such as depreciation and amortization expenses, and with respect to Core FFO, acquisition expenses and pursuit costs that are required by GAAP to be expensed but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, Core FFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and Core FFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs. We also use Core FFO for purposes of determining the quarterly incentive fee, if any, payable to our advisor.
Neither FFO nor Core FFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and Core FFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor Core FFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
Set forth below is a reconciliation of net income (loss) to FFO and Core FFO for the three-months ended March 31, 2014 and 2013 (in thousands, except share and per share information):
Funds From Operations:
Adjustments:
Income allocated to preferred shares
Income allocated to preferred units
Real estate depreciation and amortization
Funds From Operations
Weighted-average shares—diluted(a)
Core Funds From Operations:
Equity based compensation
Acquisition fees and expenses
Core Funds From Operations
Weighted-average shares—diluted(1)
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Results of Operations
Three-Month Period Ended March 31, 2014 Compared to the Three-Month Period Ended March 31, 2013
Revenue
Rental income. Rental revenue increased $3.2 million to $7.4 million for the three-month period ended March 31, 2014 from $4.2 million for the three-month period ended March 31, 2013. $3.0 million of the increase is due to the acquisition of seven properties during the three-months ended March 31, 2014 and from two properties acquired in September 2013 and November 2013. The remaining increase is due to improved occupancy and rental rates at the historical properties.
Tenant reimbursement income. Reimbursement income increased $0.2 million to $0.4 million for the three-month period ended March 31, 2014 from $0.2 million for the three-month period ended March 31, 2013. The increase is due to the acquisition of seven properties during the three-months ended March 31, 2014 and from two properties acquired in September 2013 and November 2013.
Other income. Other income increased $0.1 million to $0.4 million for the three-month period ended March 31, 2014 from $0.3 million for the three-month period ended March 31, 2013. The increase is due to the acquisition of seven properties during the three-months ended March 31, 2014 and from two properties acquired in September 2013 and November 2013.
Expenses
Property operating expense. Property operating expenses increased $1.8 million to $4.0 million for the three-month period ended March 31, 2014 from $2.2 million for the three-month period ended March 31, 2013. $1.5 million of the increase is due to the acquisition of seven properties during the three-months ended March 31, 2014 and from two properties acquired in September 2013 and November 2013. The remaining increase is due to an increase in real estate tax expense and repairs and maintenance expense at the historical properties.
General and administrative expense. General and administrative expense was $0.2 million for the three-month periods ended March, 31 2014 and 2013.
Asset management fees. Asset management fee expense was $0.1 for the three-month periods ended March 31, 2014 and 2013.
Acquisition expense. Acquisition expenses were $0.3 million for the three-month period ended March 31, 2014. These expenses were incurred in connection with the acquisition of seven properties during the three-months ended March 31, 2014.
Depreciation and amortization. Depreciation and amortization expense increased $1.1 million to $2.1 million for the three-month period ended March 31, 2014 from $1.0 million for the three-month period ended March 31, 2013. The increase is due to the acquisition of seven properties during the three-months ended March 31, 2014 and from two properties acquired in September, 2013 and November 2013.
Interest expense. Interest expense increased $0.4 million to $1.3 million for the three-month period ended March 31, 2014 from $0.9 for the three-month period ended March 31, 2013. The increase is due to the $18.9 million first mortgage on Eagle Ridge and the $67.8 million of debt assumed on the OKC Portfolio and King’s Landing during the three-months ended March 31, 2014.
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Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions and other general business needs.
We believe our available cash balances, and other financing arrangements and cash flows from operations will be sufficient to fund our liquidity requirements with respect to our existing portfolio for the next 12 months. We expect that our existing cash, which was obtained principally in our underwritten offering, together with borrowings we may obtain and the future acquisitions we expect to make as a result of the completion of our underwritten offering will have a significant impact on our future results of operations. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of anticipated future acquisitions of real estate. Should our liquidity needs exceed our available sources of liquidity, we believe that we could sell assets to raise additional cash. We may not be able to obtain additional financing when we desire to do so or on terms and conditions acceptable to us. If we fail to obtain additional financing, our ability to maintain or grow our business will be constrained.
Our primary cash requirements are to:
We intend to meet these liquidity requirements primarily through:
We will seek to enhance our growth through the use of prudent amounts of leverage. In general, we intend to limit our aggregate leverage to 65% of the combined initial purchase price of all of our real estate properties. During the period following the underwritten offering, we may employ greater leverage in order to more quickly build a diversified portfolio of assets.
On January 29, 2014, we completed an underwritten public offering selling 8,050,000 shares of IRT common stock for $8.30 per share raising gross and net proceeds of $66.8 million and $63.0 million, respectively.
On October 25, 2013, we entered into a $20 million secured revolving credit agreement with The Huntington National Bank to be used to acquire properties, for capital expenditures and for general corporate purposes. The facility has a 3-year term, bears interest at LIBOR plus 2.75% and contains customary financial covenants for this type of revolving credit agreement. As of March 31, 2014, there was $17.5 million of availability under this facility.
Cash Flows
As of March 31, 2014 and 2013, we maintained cash and cash equivalents of approximately $24.6 million and $2.7 million, respectively. Our cash and cash equivalents were generated from the following activities (dollars in thousands):
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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Our increased cash inflow from operating activities during the three-month period ended March 31, 2014 is primarily due to the operations of the seven additional properties acquired during the three-months ended March 31, 2014 and two properties acquired in September 2013 and November 2013.
Our increased cash outflow from investing activities during the three-month period ended March 31, 2014 is primarily due to the acquisition of seven properties during the three months ended March 31, 2014.
The increased cash flow from our financing activities during the three month period ended March 31, 2014 is primarily due to the completion of our January underwritten public offering and financing secured by our Reserve at Eagle Ridge property.
Off-Balance Sheet Arrangements
None.
Critical Accounting Estimates and Policies
Our Annual Report on Form 10-K for the year ended December 31, 2013 contains a discussion of our critical accounting policies. Management discusses our critical accounting policies and management’s judgments and estimates with our Audit Committee.
Recent Accounting Pronouncements
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We may be exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity, fund capital expenditures and expand our real estate investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment portfolio. In addition, restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. With regard to variable rate financing, our advisor assesses our interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our advisor maintains risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While this hedging strategy is designed to minimize the impact on our net income and funds from operations of changes in interest rates, the overall returns on any investment in our securities may be reduced. We currently have limited exposure to financial market risks.
We may also be exposed to credit risk in derivative contracts we may use. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.
Interest Rate Risk and Sensitivity
Interest rates may be affected by economic, geo-political, monetary and fiscal policy, market supply and demand and other factors generally outside our control, and such factors may be highly volatile. A change in market interest rates applicable to the fixed portion of our indebtedness affects the fair value, but it has no effect on interest incurred or cash flows. A change in market interest rates applicable to the variable portion of our indebtedness affects the interest incurred and cash flows, but does not affect the fair value.
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As of March 31, 2014, our only interest rate sensitive assets or liabilities related to our $188.9 million of outstanding indebtedness, of which $40.6 million is floating-rate and $148.3 million is fixed-rate indebtedness. We monitor interest rate risk routinely and seek to minimize the possibility that a change in interest rates would impact the interest incurred and our cash flows. To mitigate such risk, we may use interest rate derivative contracts. As of March 31, 2014 and December 31, 2013, we did not have any interest rate derivatives in effect.
As of March 31, 2014, the fair value of our $148.3 million of fixed-rate indebtedness was $151.9 million. The fair value estimate of our fixed rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated at March 31, 2014. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.
The following table summarizes the interest income and interest expense for a 12-month period, and the change in the net fair value of our investments and indebtedness assuming an instantaneous increase or decrease of 100 basis points in the LIBOR interest rate curve, both adjusted for the effects of our interest rate hedging activities (dollars in thousands):
Interest expense from variable-rate indebtedness
Fair value of fixed-rate indebtedness
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act). Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective at the reasonable assurance level in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
There have not been any material changes from the risk factors previously disclosed in Item 1A—“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The information called for by this item was disclosed in our current report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2014.
The following disclosure is intended to update disclosure pursuant to Item 9.01(d) of our Current Report on 8-K filed on May 7, 2014, or the 5/7/14 Form 8-K, with the Securities and Exchange Commission. The Exhibit filed as Exhibit 4.3 to this report corrects and replaces Exhibit 4.1 to the 5/7/14 Form 8-K.
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/S/ SCOTT F. SCHAEFFER
/S/ JAMES J. SEBRA
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EXHIBIT INDEX
Exhibit
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