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EX-32.2 - EX-32.2 - INDEPENDENCE REALTY TRUST, INC.irt-ex322_9.htm
EX-32.1 - EX-32.1 - INDEPENDENCE REALTY TRUST, INC.irt-ex321_10.htm
EX-31.2 - EX-31.2 - INDEPENDENCE REALTY TRUST, INC.irt-ex312_7.htm
EX-31.1 - EX-31.1 - INDEPENDENCE REALTY TRUST, INC.irt-ex311_8.htm
EX-12.1 - EX-12.1 - INDEPENDENCE REALTY TRUST, INC.irt-ex121_6.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-36041

 

INDEPENDENCE REALTY TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

26-4567130

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

Two Logan Square

100 N. 18th St., 23rd Floor

Philadelphia, PA

19103

(Address of Principal Executive Offices)

(Zip Code)

(215) 207-2100

(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      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      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):

 

Large Accelerated filer

Accelerated filer

 

 

 

 

Non-Accelerated filer

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 2, 2016 there were 68,996,070 shares of the Registrant’s common stock issued and outstanding.

 

 

 

 

 


 

INDEPENDENCE REALTY TRUST, INC.

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and September 30, 2015

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2016 and September 30, 2015

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Equity for the Nine Months ended September 30, 2016

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and September 30, 2015

 

7

 

 

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements as of September 30, 2016 (unaudited)

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

PART II—OTHER INFORMATION

 

37

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

37

 

 

 

 

 

Item 1A.

 

Risk Factors

 

38

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

39

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

Item 5.

 

Other Information

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

39

 

 

 

 

 

Signatures

 

40

 

 

 

 


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Independence Realty Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited and dollars in thousands, except share and per share data)

 

 

 

As of September 30, 2016

 

 

As of December 31, 2015

 

ASSETS:

 

 

 

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

 

 

Investments in real estate, at cost

 

$

1,316,725

 

 

$

1,372,015

 

Accumulated depreciation

 

 

(52,824

)

 

 

(39,638

)

Investments in real estate, net

 

 

1,263,901

 

 

 

1,332,377

 

Cash and cash equivalents

 

 

29,247

 

 

 

38,301

 

Restricted cash

 

 

8,028

 

 

 

5,413

 

Accounts receivable and other assets

 

 

5,066

 

 

 

3,362

 

Intangible assets, net of accumulated amortization of $0 and $3,736, respectively

 

 

 

 

 

3,735

 

Total Assets

 

$

1,306,242

 

 

$

1,383,188

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

Indebtedness, net of unamortized discount and deferred financing costs of $7,497 and $8,920, respectively

 

$

880,581

 

 

$

966,611

 

Accounts payable and accrued expenses

 

 

22,231

 

 

 

19,304

 

Accrued interest payable

 

 

830

 

 

 

1,239

 

Dividends payable

 

 

3,009

 

 

 

3,006

 

Derivative liabilities

 

 

696

 

 

 

-

 

Other liabilities

 

 

2,857

 

 

 

2,998

 

Total Liabilities

 

 

910,204

 

 

 

993,158

 

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, 47,509,731 and 47,070,678 shares issued and outstanding, including 284,339 and 117,000 unvested restricted common share awards, respectively

 

 

475

 

 

 

471

 

Additional paid-in capital

 

 

381,106

 

 

 

378,187

 

Accumulated other comprehensive income

 

 

(727

)

 

 

(8

)

Retained earnings (accumulated deficit)

 

 

(8,833

)

 

 

(14,500

)

Total stockholders’ equity

 

 

372,021

 

 

 

364,150

 

Noncontrolling interests

 

 

24,017

 

 

 

25,880

 

Total Equity

 

 

396,038

 

 

 

390,030

 

Total Liabilities and Equity

 

$

1,306,242

 

 

$

1,383,188

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

3


 

Independence Realty Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited and dollars in thousands, except share and per share data)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

34,333

 

 

$

22,758

 

 

$

103,271

 

 

$

62,469

 

Tenant reimbursement income

 

 

1,351

 

 

 

1,039

 

 

 

4,194

 

 

 

2,980

 

Other income

 

 

2,680

 

 

 

1,695

 

 

 

7,892

 

 

 

4,418

 

Total revenue

 

 

38,364

 

 

 

25,492

 

 

 

115,357

 

 

 

69,867

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

17,326

 

 

 

11,945

 

 

 

51,298

 

 

 

32,557

 

General and administrative expenses

 

 

485

 

 

 

329

 

 

 

1,750

 

 

 

1,171

 

Stock compensation expense

 

 

247

 

 

 

217

 

 

 

832

 

 

 

297

 

Asset management fees

 

 

1,933

 

 

 

1,259

 

 

 

5,492

 

 

 

3,731

 

Acquisition and integration expenses

 

 

19

 

 

 

12,830

 

 

 

37

 

 

 

13,031

 

Depreciation and amortization expense

 

 

7,765

 

 

 

4,704

 

 

 

26,927

 

 

 

16,462

 

Total expenses

 

 

27,775

 

 

 

31,284

 

 

 

86,336

 

 

 

67,249

 

Operating income

 

 

10,589

 

 

 

(5,792

)

 

 

29,021

 

 

 

2,618

 

Interest expense

 

 

(8,820

)

 

 

(5,094

)

 

 

(27,815

)

 

 

(13,393

)

Other income (expense)

 

 

(2

)

 

 

18

 

 

 

(2

)

 

 

19

 

Net gains (losses) on sale of assets

 

 

(1

)

 

 

 

 

 

31,773

 

 

 

 

Gains (losses) on extinguishment of debt

 

 

 

 

 

 

 

 

(558

)

 

 

 

TSRE financing extinguishment and employee separation expenses

 

 

 

 

 

(27,508

)

 

 

 

 

 

(27,508

)

Gains (losses) on TSRE merger and property acquisitions

 

 

641

 

 

 

64,012

 

 

 

732

 

 

 

64,012

 

Net income (loss):

 

 

2,407

 

 

 

25,636

 

 

 

33,151

 

 

 

25,748

 

(Income) loss allocated to noncontrolling interest

 

 

(140

)

 

 

(1,621

)

 

 

(1,972

)

 

 

(1,629

)

Net income (loss) allocable to common shares

 

$

2,267

 

 

$

24,015

 

 

$

31,179

 

 

$

24,119

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.71

 

 

$

0.66

 

 

$

0.74

 

Diluted

 

$

0.05

 

 

$

0.71

 

 

$

0.66

 

 

$

0.74

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

47,215,918

 

 

 

33,962,015

 

 

 

47,164,543

 

 

 

32,516,470

 

Diluted

 

 

47,314,629

 

 

 

33,962,015

 

 

 

47,190,139

 

 

 

32,520,684

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

Independence Realty Trust, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income (loss)

 

$

2,407

 

 

$

25,636

 

 

$

33,151

 

 

$

25,748

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate hedges

 

 

217

 

 

 

5

 

 

 

(990

)

 

 

5

 

Realized (gains) losses on interest rate hedges reclassified to earnings

 

 

251

 

 

 

 

 

 

 

271

 

 

 

 

Total other comprehensive income

 

 

468

 

 

 

5

 

 

 

(719

)

 

 

5

 

Comprehensive income (loss) before allocation to noncontrolling interests

 

 

2,875

 

 

 

25,641

 

 

 

32,432

 

 

 

25,753

 

Allocation to noncontrolling interests

 

 

(140

)

 

 

(1,621

)

 

 

(1,972

)

 

 

(1,629

)

Comprehensive income (loss)

 

$

2,735

 

 

$

24,020

 

 

$

30,460

 

 

$

24,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

Independence Realty Trust, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

(Unaudited and dollars in thousands, except share information)

 

 

 

Common

Shares

 

 

Par

Value

Common

Shares

 

 

Additional

Paid In

Capital

 

 

Accumulated Other Comprehensive Income

 

 

Retained

Earnings

(Deficit)

 

 

Total

Stockholders’

Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance, January 1, 2016

 

 

47,070,678

 

 

$

471

 

 

$

378,187

 

 

$

(8

)

 

$

(14,500

)

 

$

364,150

 

 

$

25,880

 

 

$

390,030

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31,179

 

 

 

31,179

 

 

 

1,972

 

 

 

33,151

 

Common dividends declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(25,512

)

 

 

(25,512

)

 

 

-

 

 

 

(25,512

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(719

)

 

 

-

 

 

 

(719

)

 

 

-

 

 

 

(719

)

Stock compensation expense

 

 

228,000

 

 

 

2

 

 

 

830

 

 

 

-

 

 

 

-

 

 

 

832

 

 

 

-

 

 

 

832

 

Common share activity related to equity compensation

 

 

(28,868

)

 

 

-

 

 

 

(143

)

 

 

-

 

 

 

-

 

 

 

(143

)

 

 

-

 

 

 

(143

)

Conversion of noncontrolling interest to common shares

 

 

239,921

 

 

 

2

 

 

 

2,232

 

 

 

-

 

 

 

-

 

 

 

2,234

 

 

 

(2,234

)

 

 

-

 

Distribution to noncontrolling interest declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,601

)

 

 

(1,601

)

Balance, September 30, 2016

 

 

47,509,731

 

 

$

475

 

 

$

381,106

 

 

$

(727

)

 

$

(8,833

)

 

$

372,021

 

 

$

24,017

 

 

$

396,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6


 

Independence Realty Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

33,151

 

 

$

25,748

 

Adjustments to reconcile net income (loss) to cash flow from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,927

 

 

 

16,462

 

Amortization of deferred financing costs and premium on indebtedness, net

 

 

2,236

 

 

 

(339

)

Stock compensation expense

 

 

832

 

 

 

297

 

TSRE financing extinguishment expenses

 

 

-

 

 

 

23,219

 

Net (gains) losses on sale of assets

 

 

(31,773

)

 

 

-

 

(Gains) losses on extinguishment of debt

 

 

558

 

 

 

-

 

(Gains) losses on TSRE merger and property acquisitions

 

 

(732

)

 

 

(64,012

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other assets

 

 

(1,377

)

 

 

3,332

 

Accounts payable and accrued expenses

 

 

3,895

 

 

 

2,302

 

Accrued interest payable

 

 

(376

)

 

 

379

 

Other liabilities

 

 

(11

)

 

 

(2,421

)

Net cash provided by operating activities

 

 

33,330

 

 

 

4,967

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Disposition of real estate properties

 

 

39,690

 

 

 

-

 

Acquisition of real estate properties

 

 

-

 

 

 

(24,746

)

TSRE merger, net of cash acquired

 

 

-

 

 

 

(137,094

)

Capital expenditures

 

 

(8,039

)

 

 

(5,641

)

(Increase) in restricted cash

 

 

(2,615

)

 

 

(2,124

)

Cash flow provided by (used in) investing activities

 

 

29,036

 

 

 

(169,605

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

(Payments related to) proceeds from issuance of common stock

 

 

(143

)

 

 

(190

)

Proceeds from Secured Credit Facility and mortgage indebtedness

 

 

199,481

 

 

 

488,725

 

Secured Credit Facility and mortgage principal repayments

 

 

(242,198

)

 

 

(272,295

)

TSRE financing extinguishment expenses

 

 

-

 

 

 

(23,219

)

Payments for deferred financing costs

 

 

(1,450

)

 

 

(8,356

)

Distributions on common stock

 

 

(25,495

)

 

 

(17,166

)

Distributions to noncontrolling interests

 

 

(1,615

)

 

 

(685

)

Cash flow (used in) provided by financing activities

 

 

(71,420

)

 

 

166,814

 

Net change in cash and cash equivalents

 

 

(9,054

)

 

 

2,176

 

Cash and cash equivalents, beginning of period

 

 

38,301

 

 

 

14,763

 

Cash and cash equivalents, end of the period

 

$

29,247

 

 

$

16,939

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

25,988

 

 

$

13,354

 

Non-cash decrease in noncontrolling interest from conversion of common limited

   partnership units to share of common stock

 

$

2,234

 

 

$

493

 

Mortgage debt assumed

 

$

-

 

 

$

121,885

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

7


 

Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

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 currently 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 IROP, 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 IROP, of which we are the sole general partner.

On September 27, 2016, we entered into an agreement, or the internalization agreement, with RAIT and RAIT affiliates providing for transactions which will change us from being externally managed to being internally managed and will separate us from RAIT.  We refer to the consummation of these transactions as the management internalization.  The management internalization consists of two parts: (i) our acquisition of our external advisor, which is a subsidiary of RAIT, and (ii) our acquisition of certain assets and the assumption of certain liabilities relating to the multifamily property management business of RAIT, including property management contracts relating to apartment properties owned by us, RAIT and third parties.  The purchase price for the management internalization is $43,000, subject to certain prorations at closing.  The internalization agreement provides that the closing of the management internalization will occur no earlier than December 20, 2016.  Pursuant to the internalization agreement, on October 5, 2016, we repurchased all of the 7,269,719 shares of our common stock owned by certain of RAIT’s subsidiaries and retired these shares.  See Note 11: Subsequent Events for further information.  

 

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 generally accepted accounting principles in the United States, 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, 2015 included in our Annual Report on Form 10-K or the 2015 annual report. 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 IROP and other wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.  Pursuant to the accounting standard issued in February 2015 classified under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, “Consolidation”, IROP is considered a variable interest entity.  As our significant asset is our investment in IROP, substantially all of our assets and liabilities represent the assets and liabilities of IROP.    

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.

8


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

d. Cash and Cash Equivalents

Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased.  Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250 per institution.  We mitigate credit risk by placing cash and cash equivalents with major financial institutions.  To date, we have not experienced any losses on cash and cash equivalents.

e. Restricted Cash

Restricted cash includes tenant escrows and our funds held by lenders to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events.  

f. Accounts Receivable and Allowance for Bad Debts

We make estimates of the collectability of our accounts receivable related to base rents, expense reimbursements and other revenue.  We analyze accounts receivable and historical bad debt levels, tenant credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts.  In addition, tenants experiencing financial difficulties are analyzed and estimates are made in connection with expected uncollectible receivables.  Our reported operating results are affected by management’s estimate of the collectability of accounts receivable.

g. 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 related financing.

Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets (consisting of in-place leases), 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. During the nine months ended September 30, 2016, we made an adjustment related to the TSRE acquisition as described in NOTE 3: Investments in Real Estate.  

The aggregate value of in-place leases is determined by evaluating various factors, including the terms of the leases that are in place and assumed lease-up periods.  During the nine months ended September 30, 2016, we did not acquire any properties and, therefore, did not acquire any in-place leases. The value assigned to this intangible asset is amortized over the assumed lease up period, typically six months. For the three and nine months ended September 30, 2016 we recorded $0 and $3,735, respectively, of amortization expense for intangible assets. For the three and nine months ended September 30, 2015 we recorded $109 and $3,397, respectively, of amortization expense for intangible assets.  During the nine months ended September 30, 2016, $7,471 of intangible assets became fully amortized and were written off.  

Impairment of Long-Lived Assets

Management evaluates the recoverability of our 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.

9


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

Management reviews its long-lived assets on an ongoing basis and evaluates the recoverability of the carrying value when there is an indicator of impairment. An impairment charge is recorded when it is determined that the carrying value of the asset exceeds the fair value. 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 Expense

Depreciation expense for real estate assets is 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. For the three and nine months ended September 30, 2016 we recorded $7,765 and $23,192 of depreciation expense, respectively. For the three and nine months ended September 30, 2015 we recorded $4,594 and $13,064 of depreciation expense, respectively.

h. Revenue and Expenses

Minimum rents are recognized on an accrual basis, over the terms of the related leases on a straight-line basis. Any above market lease value and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term. Recoveries from residential tenants for utility costs are recognized as revenue in the period that the applicable costs are incurred.

For the three and nine months ended September 30, 2016, we recognized revenues of $38 and $151, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers.

For the three and nine months ended September 30, 2016, we incurred $435 and $1,325 of advertising expenses, respectively.  For the three and nine months ended September 30, 2015, we incurred $318 and $941 of advertising expenses, respectively.

i. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings.  

In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability.  For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings.  For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income.  Changes in the ineffective portions of cash flow hedges, if any, are recognized in earnings.

j. 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:

 

Level 1: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.

10


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

 

Level 2: Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

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.

11


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

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. As this technique utilizes current credit spreads, which are generally unobservable, this is classified as a Level 3 fair value measurement within the fair value hierarchy.  We determine appropriate credit spreads based on the type of debt and its maturity. The fair value of our secured credit facility, term loan facility, cash and cash equivalents and restricted cash as of September 30, 2016 and December 31, 2015 approximated their respective unpaid principal balances due to the nature of these instruments. Given that cash and cash equivalents and restricted cash are short term in nature with limited fair value volatility, the carrying amount is deemed to be a reasonable approximation of fair value and the fair value input is classified as a Level 1 fair value measurement. The fair value input for the derivatives is classified as a Level 2 fair value measurement within the fair value hierarchy.  The fair value inputs for the secured credit facility and term loan facility are classified as Level 2 fair value measurements within the fair value hierarchy.  The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods indicated:

 

 

 

As of September 30, 2016

 

 

As of December 31, 2015

 

Financial Instrument

 

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,247

 

 

$

29,247

 

 

$

38,301

 

 

$

38,301

 

Restricted cash

 

 

8,028

 

 

 

8,028

 

 

 

5,413

 

 

 

5,413

 

Derivative assets

 

 

 

 

 

 

 

24

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured credit facility

 

 

244,019

 

 

 

247,335

 

 

 

267,155

 

 

 

271,500

 

Term loan

 

 

39,606

 

 

 

40,000

 

 

 

118,418

 

 

 

120,000

 

Mortgages

 

 

596,956

 

 

 

605,746

 

 

 

581,038

 

 

 

589,320

 

Derivative liabilities

 

 

696

 

 

 

696

 

 

 

 

 

 

 

 

k. Deferred Financing Costs

Costs incurred in connection with debt financing are deferred and classified within indebtedness and charged to interest expense over the terms of the related debt agreements, under the effective interest method.

l. Income Taxes

We have elected to be taxed as a REIT beginning with the taxable year ended December 31, 2011.  Accordingly, we recorded no income tax expense for the three and nine months ended September 30, 2016 and for the three and nine months ended September 30, 2015.

To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders.  As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders.  If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions.  Such an event could materially adversely affect our net income and net cash available for distribution to stockholders; however, we believe that we are organized and operate in such a manner as to qualify and maintain treatment as a REIT and intend to operate in such a manner so that we will remain qualified as a REIT for federal income tax purposes.  

12


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

m. Recent Accounting Pronouncements

Adopted Within these Financial Statements

In February 2015, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. This accounting standard amends the consolidation analysis required under GAAP and requires management to reevaluate all previous consolidation conclusions. This standard considers limited partnerships to be VIEs, unless the limited partners have either substantive kick-out or participating rights. The presumption that a general partner should consolidate a limited partnership has also been eliminated. The standard amends the effect that fees paid to a decision maker or service provider have on the consolidation analysis, as well as amends how variable interests held by a reporting entity’s related parties affect the consolidation conclusion. This standard also clarifies how to determine whether equity holders as a group have power over an entity. This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with an early adoption permitted. The adoption of this accounting standard did not have an impact on our consolidated financial statements as it did not change any of our existing consolidation conclusions.

In April 2015, the FASB issued an accounting standard classified under FASB ASC Topic 835, “Interest”. This accounting standard amends existing guidance to change reporting requirements for debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the debt liability. This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with an early adoption permitted. Retrospective application to prior periods is required. The adoption of this accounting standard resulted in the reclassification in our December 31, 2015 consolidated balance sheet of $9,226 of net deferred costs to total indebtedness on our consolidated balance sheet.

In September 2015, the FASB issued an accounting standard classified under FASB ASC Topic 805, “Business Combinations”.  This accounting standard amends existing guidance related to measurement period adjustments by requiring the adjustments to be recognized prospectively with disclosure of the impact of the adjustments had they been applied previously.  This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted.  As this standard only applied to measurement period adjustments that occur after the effective date, this standard did not have a material impact on our consolidated financial statements.  

Not Yet Adopted Within these Financial Statements

In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This accounting standard applies to all contracts with customers, except those that are within the scope of other Topics in the FASB ASC. During 2016, the FASB issued three amendments to this accounting standard which provide further clarification to this accounting standard. These standards amending FASB ASC Topic 606 are currently effective for annual reporting periods beginning after December 15, 2017. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.

In January 2016, the FASB issued an accounting standard classified under FASB ASC Topic 825, “Financial Instruments”. This accounting standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Among other things, the amendment (i) eliminates certain disclosure requirements for financial instruments measured at amortized cost; (ii) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation, in other comprehensive income, of the change in fair value of a liability, when the fair value option has been elected, resulting from a change in the instrument-specific credit risk; and (iv) requires separate presentation of financial instruments by measurement category and form.  This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted for the separate presentation of changes in fair value due to changes in instrument-specific credit risk. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”.  This accounting standard amends lease accounting by requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the balance sheet and disclosing key information about leasing arrangements.  This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.  Early application of the

13


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

amendments in this standard is permitted.  Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”.  This accounting standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.  This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.  Management does not expect this standard to have a significant impact on our consolidated financial statements.

In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.  This accounting standard clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative.  Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.  This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period. Management does not expect this standard to have a significant impact on our consolidated financial statements.

In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 718, “Compensation – Stock Compensation”.  This accounting standard simplifies several aspects of the accounting for share-based payment award transactions, including: (i) income tax consequences; (ii) classification of awards as either equity or liabilities; and (iii) classification on the statement of cash flows.  This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

In August 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”.  This accounting standard provides guidance on eight specific cash flow issues: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.  Management is currently evaluating the impact that this standard may have on our consolidated statement of cash flows.

In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”.  The amendments in this accounting standard provide guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE.  The amendments in this accounting standard do not change the characteristics of a primary beneficiary in current GAAP.  A primary beneficiary of a VIE has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.  If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a VIE), the amendments in this accounting standard require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a VIE and, on a proportionate basis, its indirect variable interest in a VIE held through related parties, including related parties that are under common control with the reporting entity.  If after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that the reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary.  The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2016,

14


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

including interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  Management is currently evaluating the impact that this standard may have on our consolidated financial statements.

 

 

 

 

 

NOTE 3: Investments in Real Estate

As of September 30, 2016, our investments in real estate consisted of 46 apartment properties with 12,982 units (unaudited).  The table below summarizes our investments in real estate:

 

 

 

As of September 30, 2016

 

 

As of December 31, 2015

 

 

Depreciable Lives

(In years)

 

Land

 

$

178,515

 

 

$

190,585

 

 

 

 

Building

 

 

1,119,422

 

 

 

1,168,453

 

 

 

40

 

Furniture, fixtures and equipment

 

 

18,788

 

 

 

12,977

 

 

5-10

 

Total investment in real estate

 

$

1,316,725

 

 

$

1,372,015

 

 

 

 

 

Accumulated depreciation

 

 

(52,824

)

 

 

(39,638

)

 

 

 

 

Investments in real estate, net

 

$

1,263,901

 

 

$

1,332,377

 

 

 

 

 

 

Acquisitions

During the first quarter of 2016, we received additional information regarding estimates we had made for certain accrued expenses related to our acquisition of Trade Street Residential Inc., or the TSRE acquisition, that was completed on September 17, 2015.  This information led to an increase in fair value of the net assets we acquired of $91, which we recognized during the nine months ended September 30, 2016.  During the third quarter of 2016, we finalized our purchase accounting process related to the TSRE acquisition.  As part of this process, we received additional information regarding estimates we had made for certain accrued expenses related to the TSRE acquisition which led to an increase in fair value of the net assets we acquired of $641, which we recognized during the three months ended September 30, 2016.

Dispositions

During the nine months ended September 30, 2016 we recognized a $9 loss related to the sale of a multifamily property which occurred in the prior year as we settled remaining amounts with buyers. The below table summarizes the dispositions for the nine months ended September 30, 2016 and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale:      

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) allocable to common shares

 

Property Name

 

Date of Sale

 

Sale Price

 

 

Gain (loss) on sale

 

 

For the Three Months Ended September 30, 2016

 

 

For the Nine Months Ended September 30, 2016

 

Cumberland Glen

 

   02/18/2016

 

$

18,000

 

 

$

2,452

 

 

$

 

 

$

35

 

Belle Creek

 

   04/07/2016

 

 

23,000

 

 

 

14,191

 

 

 

2

 

 

 

252

 

Tresa

 

   05/05/2016

 

 

47,000

 

 

 

15,139

 

 

 

1

 

 

 

354

 

Total

 

 

 

$

88,000

 

 

$

31,782

 

 

$

3

 

 

$

641

 

 

Related to the dispositions of Belle Creek and Tresa, we paid $211 and $275 of exit fees to RAIT, respectively, pursuant to the contractual terms of the mortgage indebtedness.  See Note 4: Indebtedness for further information.  These amounts were recognized in net gains (losses) on sale of assets.  

 

 

15


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2016

(Unaudited and dollars in thousands, except share and per share data)

 

NOTE 4: Indebtedness

The following tables contain summary information concerning our indebtedness as of September 30, 2016:

 

Debt:

 

Outstanding Principal

 

 

Unamortized Discount and Debt Issuance Costs

 

 

Carrying Amount

 

 

Type

 

Weighted Average Rate

 

 

Weighted Average Maturity (in years)

 

     Secured credit facility (1)(2)

 

$

247,335

 

 

$

(3,316

)

 

$

244,019

 

 

Floating

 

 

2.8%

 

 

 

2.0

 

     Term loan (2)

 

 

40,000

 

 

 

(394

)

 

 

39,606

 

 

Floating

 

 

4.5%

 

 

 

2.0

 

     Mortgages-Fixed rate

 

 

600,743

 

 

 

(3,787

)

 

 

596,956

 

 

Fixed

 

 

3.8%

 

 

 

7.0

 

Total Debt

 

$

888,078

 

 

$

(7,497

)

 

$

880,581