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Section 1: 10-Q (10-Q)

irt-10q_20180930.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, 2018

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 Liberty Place

50 S. 16th Street, Suite 3575

Philadelphia, PA

19102

(Address of Principal Executive Offices)

(Zip Code)

(267) 270-4800

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

Accelerated filer

 

 

 

 

Non-Accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 October 29, 2018 there were 88,920,879 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, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2018 and September 30, 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2018 and September 30, 2017

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Equity for the Nine Months ended September 30, 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2018 and September 30, 2017

 

7

 

 

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements as of September 30, 2018

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

33

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

33

 

 

 

 

 

Item 5.

 

Other Information

 

33

 

 

 

 

 

Item 6.

 

Exhibits

 

34

 

 

 

 

 

Signatures

 

35

 

 

 


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, 2018

 

 

As of December 31, 2017

 

ASSETS:

 

 

 

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

 

 

Investments in real estate, at cost

 

$

1,572,015

 

 

$

1,504,156

 

Accumulated depreciation

 

 

(101,589

)

 

 

(84,097

)

Investments in real estate, net

 

 

1,470,426

 

 

 

1,420,059

 

Real estate held for sale (see Note 3)

 

 

141,853

 

 

 

-

 

Cash and cash equivalents

 

 

7,645

 

 

 

9,985

 

Restricted cash

 

 

8,265

 

 

 

4,634

 

Accounts receivable and other assets

 

 

6,924

 

 

 

7,556

 

Derivative assets

 

 

12,440

 

 

 

7,291

 

Intangible assets, net of accumulated amortization of $256 and $1,511, respectively

 

 

555

 

 

 

1,099

 

Total Assets

 

$

1,648,108

 

 

$

1,450,624

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

Indebtedness, net of unamortized deferred financing costs of $5,500 and $6,198, respectively

 

$

963,238

 

 

$

778,442

 

Accounts payable and accrued expenses

 

 

28,477

 

 

 

17,216

 

Accrued interest payable

 

 

540

 

 

 

249

 

Dividends payable

 

 

16,113

 

 

 

5,245

 

Other liabilities

 

 

3,697

 

 

 

3,353

 

Total Liabilities

 

 

1,012,065

 

 

 

804,505

 

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, 88,920,879 and 84,708,551 shares issued and outstanding, including 313,254 and 295,847 unvested restricted common share awards, respectively

 

 

889

 

 

 

846

 

Additional paid-in capital

 

 

739,152

 

 

 

703,849

 

Accumulated other comprehensive income

 

 

9,788

 

 

 

4,626

 

Retained earnings (accumulated deficit)

 

 

(120,924

)

 

 

(85,221

)

Total stockholders’ equity

 

 

628,905

 

 

 

624,100

 

Noncontrolling interests

 

 

7,138

 

 

 

22,019

 

Total Equity

 

 

636,043

 

 

 

646,119

 

Total Liabilities and Equity

 

$

1,648,108

 

 

$

1,450,624

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

43,418

 

 

$

35,531

 

 

$

125,951

 

 

$

105,444

 

Tenant reimbursement income

 

 

1,618

 

 

 

1,373

 

 

 

4,819

 

 

 

4,232

 

Other property income

 

 

3,608

 

 

 

2,960

 

 

 

10,224

 

 

 

8,514

 

Property management and other income

 

 

135

 

 

 

202

 

 

 

429

 

 

 

579

 

Total revenue

 

 

48,779

 

 

 

40,066

 

 

 

141,423

 

 

 

118,769

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

19,792

 

 

 

16,196

 

 

 

56,913

 

 

 

48,106

 

Property management expenses

 

 

1,661

 

 

 

1,328

 

 

 

4,936

 

 

 

4,310

 

General and administrative expenses

 

 

2,578

 

 

 

2,322

 

 

 

8,184

 

 

 

7,128

 

Acquisition and integration expenses

 

 

-

 

 

 

569

 

 

 

-

 

 

 

956

 

Depreciation and amortization expense

 

 

10,783

 

 

 

8,671

 

 

 

33,590

 

 

 

24,289

 

Total expenses

 

 

34,814

 

 

 

29,086

 

 

 

103,623

 

 

 

84,789

 

Operating income

 

 

13,965

 

 

 

10,980

 

 

 

37,800

 

 

 

33,980

 

Interest expense

 

 

(9,129

)

 

 

(6,963

)

 

 

(26,063

)

 

 

(21,573

)

Other income (expense)

 

 

-

 

 

 

12

 

 

 

144

 

 

 

(5

)

Net gains (losses) on sale of assets

 

 

-

 

 

 

(92

)

 

 

-

 

 

 

15,873

 

Gains (losses) on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(572

)

Acquisition related debt extinguishment expenses

 

 

-

 

 

 

(2,781

)

 

 

 

 

 

 

(2,781

)

Net income (loss):

 

 

4,836

 

 

 

1,156

 

 

 

11,881

 

 

 

24,922

 

(Income) loss allocated to noncontrolling interest

 

 

(49

)

 

 

(59

)

 

 

(173

)

 

 

(1,009

)

Net income (loss) allocable to common shares

 

$

4,787

 

 

$

1,097

 

 

$

11,708

 

 

$

23,913

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.02

 

 

$

0.14

 

 

$

0.34

 

Diluted

 

$

0.05

 

 

$

0.02

 

 

$

0.13

 

 

$

0.34

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

87,702,078

 

 

 

71,972,394

 

 

 

86,559,294

 

 

 

69,875,802

 

Diluted

 

 

88,046,311

 

 

 

72,144,544

 

 

 

86,818,337

 

 

 

70,105,571

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

4,836

 

 

$

1,156

 

 

$

11,881

 

 

$

24,922

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate hedges

 

 

1,072

 

 

 

(14

)

 

 

5,959

 

 

 

(424

)

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

 

 

(382

)

 

 

(14

)

 

 

(862

)

 

 

177

 

Total other comprehensive income

 

 

690

 

 

 

(28

)

 

 

5,097

 

 

 

(247

)

Comprehensive income (loss) before allocation to noncontrolling interests

 

 

5,526

 

 

 

1,128

 

 

 

16,978

 

 

 

24,675

 

Allocation to noncontrolling interests

 

 

(54

)

 

 

(33

)

 

 

(108

)

 

 

(979

)

Comprehensive income (loss)

 

$

5,472

 

 

$

1,095

 

 

$

16,870

 

 

$

23,696

 

 

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, 2018

 

 

84,708,551

 

 

$

846

 

 

$

703,849

 

 

$

4,626

 

 

$

(85,221

)

 

$

624,100

 

 

$

22,019

 

 

$

646,119

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,708

 

 

 

11,708

 

 

 

173

 

 

 

11,881

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,162

 

 

 

-

 

 

 

5,162

 

 

 

(65

)

 

 

5,097

 

Stock compensation expense

 

 

197,632

 

 

 

2

 

 

 

1,988

 

 

 

-

 

 

 

-

 

 

 

1,990

 

 

 

-

 

 

 

1,990

 

Issuance of common shares

 

 

1,923,164

 

 

 

20

 

 

 

19,184

 

 

 

-

 

 

 

-

 

 

 

19,204

 

 

 

-

 

 

 

19,204

 

Repurchase of shares related to equity award tax withholding

 

 

(38,712

)

 

 

-

 

 

 

(354

)

 

 

-

 

 

 

-

 

 

 

(354

)

 

 

-

 

 

 

(354

)

Conversion of noncontrolling interest to common shares

 

 

2,130,244

 

 

 

21

 

 

 

14,485

 

 

 

-

 

 

 

-

 

 

 

14,506

 

 

 

(14,506

)

 

 

-

 

Common dividends declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(47,411

)

 

 

(47,411

)

 

 

-

 

 

 

(47,411

)

Distribution to noncontrolling interest declared

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(483

)

 

 

(483

)

Balance, September 30, 2018

 

 

88,920,879

 

 

$

889

 

 

$

739,152

 

 

$

9,788

 

 

$

(120,924

)

 

$

628,905

 

 

$

7,138

 

 

$

636,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,881

 

 

$

24,922

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

33,590

 

 

 

24,289

 

Amortization of deferred financing costs

 

 

1,078

 

 

 

1,160

 

Stock compensation expense

 

 

1,966

 

 

 

1,548

 

Net (gains) losses on sale of assets

 

 

-

 

 

 

(15,873

)

(Gains) losses on extinguishment of debt

 

 

-

 

 

 

572

 

Change in fair value of derivative instruments

 

 

(52

)

 

 

-

 

Acquisition related debt extinguishment expenses

 

 

-

 

 

 

2,781

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other assets

 

 

59

 

 

 

(1,931

)

Accounts payable and accrued expenses

 

 

8,659

 

 

 

8,098

 

Accrued interest payable

 

 

291

 

 

 

(345

)

Other liabilities

 

 

(157

)

 

 

(165

)

Net cash provided by (used in) operating activities

 

 

57,315

 

 

 

45,056

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Disposition of real estate properties

 

 

-

 

 

 

34,519

 

Acquisition of real estate properties

 

 

(154,082

)

 

 

(169,156

)

Capital expenditures

 

 

(28,348

)

 

 

(10,100

)

Cash flow (used in) provided by investing activities

 

 

(182,430

)

 

 

(144,737

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from unsecured credit facility

 

 

169,000

 

 

 

148,190

 

Unsecured credit facility repayments

 

 

(22,000

)

 

 

(138,500

)

Mortgage principal repayments

 

 

(2,402

)

 

 

(1,969

)

Payments for deferred financing costs

 

 

(16

)

 

 

(1,166

)

Proceeds from issuance of common stock

 

 

19,204

 

 

 

125,707

 

Distributions on common stock

 

 

(36,527

)

 

 

(37,279

)

Distributions to noncontrolling interests

 

 

(499

)

 

 

(1,573

)

Payments related to extinguishment of debt

 

 

-

 

 

 

(2,781

)

Repurchase of shares related to equity award tax withholding

 

 

(354

)

 

 

(565

)

Cash flow provided by (used in) financing activities

 

 

126,406

 

 

 

90,064

 

Net change in cash and cash equivalents, and restricted cash

 

 

1,291

 

 

 

(9,617

)

Cash and cash equivalents, and restricted cash, beginning of period

 

 

14,619

 

 

 

26,410

 

Cash and cash equivalents, and restricted cash, end of the period

 

$

15,910

 

 

$

16,793

 

Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheet

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,645

 

 

$

10,128

 

Restricted cash

 

 

8,265

 

 

 

6,665

 

Total cash, cash equivalents, and restricted cash, end of period

 

$

15,910

 

 

$

16,793

 

 

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, 2018

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

 

NOTE 1: Organization

 

Independence Realty Trust, Inc., or IRT, was formed on March 26, 2009 as a Maryland corporation that elected to be taxed as a real estate investment trust, or REIT, commencing with the taxable year ended December 31, 2011.  We became an internally managed REIT on December 20, 2016. Prior to that date, we were externally managed by a subsidiary of RAIT Financial Trust, or RAIT, a publicly traded Maryland REIT (referred to as our former advisor). 

 

As of September 30, 2018, we own and operate 58 multifamily apartment properties, totaling 15,860 units, across non-gateway U.S markets, including Atlanta, Louisville, Memphis, and Raleigh. Our investment strategy is focused on gaining scale within key amenity rich submarkets that offer good school districts, high-quality retail and major employment centers. We aim to provide stockholders with attractive risk-adjusted returns through diligent portfolio management, strong operational performance, and a consistent return through distributions and capital appreciation. We own substantially all of our assets and conduct our operations through Independence Realty Operating Partnership, LP, which we refer to as IROP, of which we are the sole general partner.   

 

   As used herein, the terms “we,” “our” and “us” refer to Independence Realty Trust, Inc. and, as required by context, IROP and their subsidiaries.

 

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, 2017 included in our Annual Report on Form 10-K, or the 2017 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 its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.  Pursuant to FASB Accounting Standards Codification 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.

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.

8


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

e. Restricted Cash

Restricted cash includes escrows of our funds held by lenders to fund certain expenditures, such as real estate taxes and insurance, or to be released at our discretion upon the occurrence of certain pre-specified events.  As of September 30, 2018 and December 31, 2017, we had $8,265 and $4,634, respectively, of restricted cash.

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. For the three months ended September 30, 2018 and 2017, we recorded bad debt expense of $236 and $101, respectively. For the nine months ended September 30, 2018 and 2017, we recorded bad debt expense of $286 and $670, respectively.  

g. Investments in Real Estate

Investments in real estate are recorded at cost less accumulated depreciation. Costs that both add value and appreciably extend the useful life of an asset are capitalized. Expenditures for repairs and maintenance are expensed as incurred.

Investments in real estate are classified as held for sale in the period in which certain criteria are met including when management commits to a plan to sell, an active program to locate a buyer has been initiated, the sale is probable, and actions required to complete the plan of sale indicate that it is unlikely that significant changes to the plan of sale will be made or the plan of sale will be withdrawn.

Allocation of Purchase Price of Acquired Assets

Effective January 1, 2018, FASB ASC Topic 805, “Business Combinations” was amended to clarify the definition of a business by more clearly outlining the requirements for an integrated set of assets and activities to be considered a business and by establishing a practical framework to determine when the integrated set of assets and activities is a business. Prior to January 1, 2018, the properties we acquired were generally considered businesses and were accounted for as business combinations. Subsequent to January 1, 2018, we expect the properties we acquire to generally not be considered businesses and, therefore, to be accounted for as asset acquisitions.

Under business combination accounting, the fair value of the real estate acquired is allocated to the acquired tangible assets, generally 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. Transaction costs and fees incurred related to the acquisition are expensed as incurred.  Under asset acquisition accounting, the costs to acquire real estate, including transaction costs related to the acquisition, are accumulated and then allocated to the individual assets and liabilities acquired based upon their relative fair value.  Under both business combination and asset acquisition accounting, transaction costs and fees incurred related to the financing of an acquisition are capitalized and amortized over the life of the related financing.

We estimate the fair value of acquired tangible assets (consisting of land, building and improvements), 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.

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 three and nine months ended September 30, 2018, we acquired in-place leases with a value of $715 and $2,356, respectively, as part of related property acquisitions that are discussed further in Note 3. 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, 2018, we recorded $567 and $2,900, respectively, of amortization expense for intangible assets. For the three and nine months ended September 30, 2017, we recorded $416 and $664, respectively, of amortization expense for intangible assets. For the

9


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

three and nine months ended September 30, 2018, we wrote-off intangible assets of $1,641 and $4,155, respectively. For the three and nine months ended September 30, 2017, we did not write-off any intangible assets. As of September 30, 2018, we expect to record additional amortization expense on current in-place intangible assets of $358 for the remainder of 2018.  

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.

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, 2018, we recorded $10,216 and $30,690 of depreciation expense, respectively. For the three and nine months ended September 30, 2017, we recorded $8,255 and $23,625 of depreciation expense, respectively.

h. Revenue and Expenses

 

Rental Income

 

We apply FASB ASC Topic 840, “Leases” with respect to our accounting for rental income.  We primarily lease apartments units under operating leases generally with terms of one year or less. Rental payments are generally due monthly and rental revenues are recognized on an accrual basis when earned. 

 

Tenant Reimbursement and Other Property Income

 

We apply FASB ASC Topic 606, “Revenue from Contracts with Customers” with respect to tenant reimbursement and other property income. Tenant reimbursement income represents reimbursement from tenants for utility charges, while other property income includes cable, parking, trash, late fees, application fees, and other miscellaneous property related income. The performance obligations of providing residents with these services are stipulated within the lease agreement and may be provided over time or at a point in time.  The services provided over time include cable, parking, and trash services, which are generally provided over a monthly period for the term of the respective lease.  The services provided at a point in time include late fees and application fees.  Given the short period of time over which this revenue is then recognized and since payments with respect to tenant reimbursement and other property income are generally due monthly, no contract assets or liabilities have been recognized.  

 

For the three and nine months ended September 30, 2018, we recognized revenues of $65 and $171, 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, 2017, we recognized revenues of $11 and $96, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers.

Advertising Expenses

For the three and nine months ended September 30, 2018, we incurred $577 and $1,674 of advertising expenses, respectively. For the three and nine months ended September 30, 2017, we incurred $437 and $1,285 of advertising expenses, respectively.  

10


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

i. Derivative Instruments

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure, as well as to hedge specific anticipated transactions. While these instruments may impact our periodic cash flows, they benefit us by minimizing the risks and/or costs previously described.  The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

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 sheets as either an asset or liability.  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 and changes in the fair value of the ineffective portions of cash flow hedges, if any, are recognized in earnings.  For derivatives not designated as hedges (or designated as fair value 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 recognized in earnings.  Any derivatives that we designate in hedge relationships are done so at inception.  At inception, we determine whether or not the derivative is highly effective in offsetting changes in the designated interest rate risk associated with the identified indebtedness using regression analysis.  At each reporting period, we update our regression analysis and use the hypothetical derivative method to measure any ineffectiveness.

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 our 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.

 

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 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 or liability.

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.

11


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

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. 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 our unsecured credit facility and our former secured credit facility are classified as Level 2 fair value measurements within the fair value hierarchy. 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. There were no transfers between levels in the fair value hierarchy for the three or nine months ended September 30, 2018 or 2017. The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods indicated:

 

 

 

As of September 30, 2018

 

 

As of December 31, 2017

 

Financial Instrument

 

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,645

 

 

$

7,645

 

 

$

9,985

 

 

$

9,985

 

Restricted cash

 

 

8,265

 

 

 

8,265

 

 

 

4,634

 

 

 

4,634

 

Derivative assets

 

 

12,440

 

 

 

12,440

 

 

 

7,291

 

 

 

7,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured credit facility

 

 

249,108

 

 

 

251,005

 

 

 

101,629

 

 

 

104,005

 

Term Loan

 

 

99,155

 

 

 

100,000

 

 

 

99,105

 

 

 

100,000

 

Mortgages

 

 

614,975

 

 

 

596,310

 

 

 

577,708

 

 

 

564,333

 

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, 2018 and 2017.

12


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

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.  

m. Recent Accounting Pronouncements

Below is a brief description of recent accounting pronouncements that could have a material effect on our financial statements.  

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. Subsequently, the FASB issued amendments to this accounting standard that provided further clarification. These standards amending FASB ASC Topic 606 were effective for annual reporting periods beginning after December 15, 2017. We adopted these accounting standard updates on January 1, 2018 using the modified retrospective approach. A majority of our revenue is derived from real estate lease contracts, which are specifically excluded from the scope of these standards. The portion of our revenue that was impacted by these standards included revenue recorded within the tenant reimbursement income, other property income, and property management and other income captions of our Consolidated Statements of Operations. The adoption of these standards did not have a material impact on our consolidated financial statements and no cumulative effect adjustment was recorded upon adoption.

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. Subsequently, the FASB issued amendments to this accounting standard that required companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the statement of cash flows. The amendments were effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted these standards as of January 1, 2018. The adoption of this accounting standard resulted in a decrease in net cash used in investing activities of $1,147 for the nine months ended September 30, 2017.

In January 2017, the FASB issued an accounting standard update under FASB ASC Topic 805, “Business Combinations” that changes the definition of a business to assist entities with evaluating whether a set of transferred assets is a business. As a result, the accounting for acquisitions of real estate could be impacted. The new definition will be applied prospectively to any transactions occurring within the period of adoption. We adopted this standard on January 1, 2018. Management expects that the updated standard will result in fewer acquisitions of real estate meeting the definition of a business and fewer acquisition-related costs being expensed in the period incurred, with these costs instead being capitalized as part of the acquired asset.

In February 2017, the FASB issued an accounting standard update under FASB ASC Topic 610 “Other Income.” The amendments in this update provide guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. This new standard reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. Partial sales of nonfinancial assets are common in the real estate industry and include transactions in which the seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. This update was effective for

13


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

interim and annual periods beginning after December 15, 2017. We adopted this standard as of January 1, 2018. While this is common in the real estate industry, we have never participated in a transaction of this nature, therefore, the adoption of this accounting standard did not have any impact on our consolidated financial statements.

In May 2017, the FASB issued an accounting standard update under FASB ASC Topic 718, “Compensation – Stock Compensation.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. As a result, the accounting for share-based payment award transactions could be impacted. The updated standard was adopted by us on January 1, 2018. The new definition will be applied prospectively to an award modified on or after the adoption date. The adoption of this accounting standard did not have a material impact on our consolidated financial statements.

In August 2017, the FASB issued an accounting standard update under FASB ASC Topic 815, “Derivatives and Hedging.” The amendments in this update provide guidance about the application of the hedge accounting guidance in current GAAP based on the feedback received from preparers, auditors, and other stakeholders. As a result, the accounting for derivatives and hedging transactions could be impacted. The updated standard is effective for us on January 1, 2019 with early adoption permitted. We early adopted this update on October 1, 2017. The adoption of this update did not have a material impact on our consolidated financial statements. In accordance with this accounting standard update, upon adoption, we revised our approach to recognizing interest expense for our interest rate swap that was designated as an off-market cash flow hedge. Rather than record interest expense based on the hypothetical derivative method with differences from actual net settlements reflected as ineffectiveness, we will record actual net settlements to interest expense adjusted for the straight-line amortization of the inception clean value of the hedging instrument over the hedge term. The result will be that no ineffectiveness will be recorded in future periods related to our off-market interest rate swap. Since we entered into the off-market hedging relationship in 2017, no transition entry was necessary upon adoption.

Not Yet Adopted Within these Financial Statements

In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”.  For lessees, this accounting standard amends lease accounting by requiring (1) the recognition of lease assets and lease liabilities for those leases classified as operating leases on the balance sheet and (2) additional disclosure about leasing arrangements.  For lessors, the guidance under the new lease standard is substantially similar to existing accounting guidance.  This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  Management expects to adopt the new standard on January 1, 2019 using the modified retrospective approach and the package of practical expedients.  Therefore, a cumulative-effect adjustment will be recorded on the effective date and all prior comparative periods will be presented in accordance with legacy lease accounting standards.  Management anticipates that our apartment leases, where we are lessor, will continue to be accounted for as operating leases under the new standard and, therefore, we do not expect significant changes in accounting for these leases.  Management expects that for various corporate office leases, where we are lessee, we will record a right of use asset and a lease liability on our consolidated balance sheets upon adoption. Management will continue to evaluate the impact of the new lease standard on our consolidated financial statements.  

In June 2018, the FASB issued an accounting standard classified under FASB ASC Topic 718, “Compensation – Stock Compensation.” The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, the accounting for share-based payment award transactions could be impacted. This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this standard is permitted.  Management does not expect this standard to have a significant impact on our consolidated financial statements.  

 

14


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

NOTE 3: Investments in Real Estate

As of September 30, 2018, our investments in real estate consisted of 58 apartment properties with 15,860 units.  The table below summarizes our investments in real estate:   

 

 

 

As of September 30, 2018

 

 

As of December 31, 2017

 

 

Depreciable Lives

(In years)

 

Land

 

$

203,130

 

 

$

193,026

 

 

 

 

Building

 

 

1,313,805

 

 

 

1,279,777

 

 

 

40

 

Furniture, fixtures and equipment

 

 

55,080

 

 

 

31,353

 

 

5-10

 

Total investment in real estate

 

$

1,572,015

 

 

$

1,504,156

 

 

 

 

 

Accumulated depreciation

 

 

(101,589

)

 

 

(84,097

)

 

 

 

 

Investments in real estate, net

 

$

1,470,426

 

 

$

1,420,059

 

 

 

 

 

 

As of September 30, 2018, we owned five properties that were classified as held for sale and expect these properties to be sold in the next twelve months. The table below summarizes our held for sale properties. We did not have any properties classified as held for sale as of December 31, 2017.

 

Property Name

 

Location

 

Units

 

 

Net Carrying Value

 

Reserve at Eagle Ridge

 

Waukegan, IL

 

 

370

 

 

$

26,941

 

Carrington Park

 

Little Rock, AR

 

 

202

 

 

 

20,581

 

Arbors at the Reservoir

 

Ridgeland, MS

 

 

170

 

 

 

19,411

 

Stonebridge at the Ranch

 

Little Rock, AR

 

 

260

 

 

 

29,598

 

Aventine Greenville

 

Greenville, SC

 

 

346

 

 

 

45,322

 

Total

 

 

 

 

1,348

 

 

$

141,853

 

 

Acquisitions

The below table summarizes the acquisitions for the nine months ended September 30, 2018:

 

Property Name

 

Date of Purchase

 

Location

 

Units

 

 

Contract Price

 

Creekside Corners (1)

 

1/3/2018

 

Lithonia, GA

 

 

444

 

 

$

43,901

 

Hartshire Lakes (1)

 

1/3/2018

 

Bargersville, IN

 

 

272

 

 

 

27,597

 

The Chelsea

 

1/4/2018

 

Columbus, OH

 

 

312

 

 

 

36,750

 

Avalon Oaks

 

2/27/2018

 

Columbus, OH

 

 

235

 

 

 

23,000

 

Bridgeview

 

7/11/2018

 

Tampa, FL

 

 

348

 

 

 

43,000

 

Collier Park

 

7/26/2018

 

Grove City, OH

 

 

232

 

 

 

21,200

 

Total

 

 

 

 

 

 

1,843

 

 

$

195,448

 

 

 

(1)

These properties were acquired as the last phase of our acquisition of a nine-community portfolio, totaling 2,352 units, which we agreed to acquire on September 3, 2017 for a total purchase price of $228,144.

The following table summarizes the aggregate fair value of the assets and liabilities associated with the properties acquired during the nine-month period ended September 30, 2018, on the date of acquisition, accounted for under FASB ASC Topic 805-50-15-3.

 

15


Independence Realty Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of September 30, 2018

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

 

Description

 

Fair Value

of Assets Acquired

During the

Nine-Month Period Ended

September 30, 2018

 

Assets acquired:

 

 

 

 

Investments in real estate (a)

 

$

193,237

 

Accounts receivable and other assets

 

 

460

 

Intangible assets

 

 

2,356

 

Total assets acquired

 

$

196,053

 

Liabilities assumed:

 

 

 

 

Indebtedness

 

$

39,362

 

Accounts payable and accrued expenses

 

 

1,062

 

Other liabilities

 

 

501

 

Total liabilities assumed

 

 

40,925

 

Estimated fair value of net assets acquired

 

$

155,128

 

 

 

(a)

Included $395 of property related acquisition costs capitalized during the nine months ended September 30, 2018.

 

In October 2018, we acquired Waterford Landing, a 260-unit property located in McDonough, GA, which we purchased for $30,500.

NOTE 4: Indebtedness

The following tables contain summary information concerning our indebtedness as of September 30, 2018:

 

Debt:

 

Outstanding Principal

 

 

Unamortized Discount and Debt Issuance Costs

 

 

Carrying Amount

 

 

Type

 

Weighted Average Rate

 

 

Weighted Average Maturity (in years)

 

     Unsecured credit facility (1)

 

$

251,005

 

 

$

(1,897

)

 

$

249,108