Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

irt-10q_20190331.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 March 31, 2019

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.)

 

 

1835 Market Street, Suite 2601

Philadelphia, PA

19103

(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 April 30, 2019 there were 89,834,501 shares of the Registrant’s common stock issued and outstanding.

Securities registered pursuant to section 12(b) of the Act:

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock

 

IRT

 

NYSE

 

 


INDEPENDENCE REALTY TRUST, INC.

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2019 and March 31, 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months ended March 31, 2019 and March 31, 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the Three Months ended March 31, 2019 and March 31, 2018

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 and March 31, 2018

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements as of March 31, 2019

 

8

 

 

 

 

 

Item 2.

 

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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

23

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

23

 

 

 

 

 

Item 1A.

 

Risk Factors

 

24

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

24

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

24

 

 

 

 

 

Item 5.

 

Other Information

 

24

 

 

 

 

 

Item 6.

 

Exhibits

 

24

 

 

 

 

 

Signatures

 

26

 

 

 


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

 

 

As of

March 31, 2019

 

 

As of

December 31, 2018

 

ASSETS:

 

 

 

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

 

 

Investments in real estate, at cost

 

$

1,669,875

 

 

$

1,660,423

 

Accumulated depreciation

 

 

(124,107

)

 

 

(112,270

)

Investments in real estate, net

 

 

1,545,768

 

 

 

1,548,153

 

Real estate held for sale

 

 

77,430

 

 

 

77,285

 

Cash and cash equivalents

 

 

9,030

 

 

 

9,316

 

Restricted cash

 

 

7,122

 

 

 

6,729

 

Accounts receivable and other assets

 

 

10,984

 

 

 

8,802

 

Derivative assets

 

 

5,327

 

 

 

8,307

 

Intangible assets, net of accumulated amortization of $530 and $787, respectively

 

 

188

 

 

 

744

 

Total Assets

 

$

1,655,849

 

 

$

1,659,336

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

Indebtedness, net of unamortized deferred financing costs of $5,588 and $5,927, respectively

 

$

990,920

 

 

$

985,488

 

Accounts payable and accrued expenses

 

 

22,092

 

 

 

22,815

 

Accrued interest payable

 

 

681

 

 

 

719

 

Dividends payable

 

 

16,267

 

 

 

16,162

 

Derivative liabilities

 

 

1,460

 

 

 

-

 

Other liabilities

 

 

7,355

 

 

 

4,107

 

Total Liabilities

 

 

1,038,775

 

 

 

1,029,291

 

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, 89,834,793 and 89,184,443 shares issued and outstanding, including 341,360 and 303,819 unvested restricted common share awards, respectively

 

 

898

 

 

 

892

 

Additional paid-in capital

 

 

747,731

 

 

 

742,429

 

Accumulated other comprehensive income (loss)

 

 

(2,308

)

 

 

2,016

 

Retained earnings (accumulated deficit)

 

 

(136,120

)

 

 

(122,342

)

Total stockholders’ equity

 

 

610,201

 

 

 

622,995

 

Noncontrolling interests

 

 

6,873

 

 

 

7,050

 

Total Equity

 

 

617,074

 

 

 

630,045

 

Total Liabilities and Equity

 

$

1,655,849

 

 

$

1,659,336

 

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

 

 

3


Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

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

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

REVENUE:

 

 

 

 

 

 

 

 

 

Rental and other property revenue

 

$

49,465

 

 

$

45,616

 

 

Other revenue

 

 

75

 

 

 

139

 

 

Total revenue

 

 

49,540

 

 

 

45,755

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

19,886

 

 

 

18,418

 

 

Property management expenses

 

 

1,813

 

 

 

1,683

 

 

General and administrative expenses

 

 

3,107

 

 

 

2,734

 

 

Depreciation and amortization expense

 

 

12,447

 

 

 

11,224

 

 

Total expenses

 

 

37,253

 

 

 

34,059

 

 

Operating income

 

 

12,287

 

 

 

11,696

 

 

Interest expense

 

 

(9,721

)

 

 

(8,340

)

 

Other income

 

 

-

 

 

 

144

 

 

Net income:

 

 

2,566

 

 

 

3,500

 

 

Income allocated to noncontrolling interest

 

 

(26

)

 

 

(88

)

 

Net income allocable to common shares

 

$

2,540

 

 

$

3,412

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.04

 

 

Diluted

 

$

0.03

 

 

$

0.04

 

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

Basic

 

 

88,989,450

 

 

 

85,303,010

 

 

Diluted

 

 

89,516,224

 

 

 

85,535,089

 

 

 

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

 

 

4


Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited and dollars in thousands)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

Net income

 

$

2,566

 

 

$

3,500

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate hedges

 

 

(4,927

)

 

 

3,355

 

 

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

 

 

559

 

 

 

(174

)

 

Total other comprehensive income (loss)

 

 

(4,368

)

 

 

3,181

 

 

Comprehensive income (loss) before allocation to noncontrolling interests

 

 

(1,802

)

 

 

6,681

 

 

Allocation to noncontrolling interests

 

 

18

 

 

 

(5

)

 

Comprehensive income (loss)

 

$

(1,784

)

 

$

6,676

 

 

 

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

 

 

5


Independence Realty Trust, Inc. and Subsidiaries

Condensed 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 (loss)

 

 

Retained

Earnings

(Deficit)

 

 

Total

Stockholders’

Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance, January 1, 2019

 

 

89,184,443

 

 

$

892

 

 

$

742,429

 

 

$

2,016

 

 

$

(122,342

)

 

$

622,995

 

 

$

7,050

 

 

$

630,045

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,540

 

 

 

2,540

 

 

 

26

 

 

 

2,566

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,324

)

 

 

-

 

 

 

(4,324

)

 

 

(44

)

 

 

(4,368

)

Stock compensation expense

 

 

189,986

 

 

 

1

 

 

 

633

 

 

 

-

 

 

 

-

 

 

 

634

 

 

 

-

 

 

 

634

 

Issuance of common shares

 

 

510,000

 

 

 

5

 

 

 

5,304

 

 

 

-

 

 

 

-

 

 

 

5,309

 

 

 

-

 

 

 

5,309

 

Repurchase of shares related to equity award tax withholding

 

 

(49,636

)

 

 

-

 

 

 

(635

)

 

 

-

 

 

 

-

 

 

 

(635

)

 

 

-

 

 

 

(635

)

Common dividends declared ($0.18 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,318

)

 

 

(16,318

)

 

 

-

 

 

 

(16,318

)

Distribution to noncontrolling interest declared ($0.18 per unit)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(159

)

 

 

(159

)

Balance, March 31, 2019

 

 

89,834,793

 

 

$

898

 

 

$

747,731

 

 

$

(2,308

)

 

$

(136,120

)

 

$

610,201

 

 

$

6,873

 

 

$

617,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,412

 

 

 

3,412

 

 

 

88

 

 

 

3,500

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,264

 

 

 

-

 

 

 

3,264

 

 

 

(83

)

 

 

3,181

 

Stock compensation expense

 

 

194,622

 

 

 

1

 

 

 

469

 

 

 

-

 

 

 

-

 

 

 

470

 

 

 

-

 

 

 

470

 

Repurchase of shares related to equity award tax withholding

 

 

(41,912

)

 

 

-

 

 

 

(345

)

 

 

-

 

 

 

-

 

 

 

(345

)

 

 

-

 

 

 

(345

)

Conversion of noncontrolling interest to common shares

 

 

2,112,136

 

 

 

21

 

 

 

14,287

 

 

 

-

 

 

 

-

 

 

 

14,308

 

 

 

(14,308

)

 

 

-

 

Common dividends declared ($0.18 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,772

)

 

 

(15,772

)

 

 

-

 

 

 

(15,772

)

Distribution to noncontrolling interest declared ($0.18 per unit)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(163

)

 

 

(163

)

Balance, March 31, 2018

 

 

86,973,397

 

 

$

868

 

 

$

718,260

 

 

$

7,890

 

 

$

(97,581

)

 

$

629,437

 

 

$

7,553

 

 

$

636,990

 

 

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

 

6


Independence Realty Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited and dollars in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,566

 

 

$

3,500

 

Adjustments to reconcile net income to cash flow from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,447

 

 

 

11,224

 

Amortization of deferred financing costs

 

 

339

 

 

 

444

 

Stock compensation expense

 

 

622

 

 

 

470

 

Change in fair value of derivative instruments

 

 

76

 

 

 

(53

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other assets

 

 

722

 

 

 

829

 

Accounts payable and accrued expenses

 

 

(2,607

)

 

 

(633

)

Accrued interest payable

 

 

(37

)

 

 

124

 

Other liabilities

 

 

76

 

 

 

(67

)

Net cash provided by (used in) operating activities

 

 

14,204

 

 

 

15,838

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of real estate properties

 

 

(520

)

 

 

(89,297

)

Disposition of real estate properties

 

 

1,081

 

 

 

-

 

Capital expenditures

 

 

(8,688

)

 

 

(4,954

)

Cash flow (used in) provided by investing activities

 

 

(8,127

)

 

 

(94,251

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from unsecured credit facility and term loans

 

 

64,000

 

 

 

90,000

 

Unsecured credit facility repayments

 

 

(58,000

)

 

 

(4,000

)

Mortgage principal repayments

 

 

(907

)

 

 

(736

)

Proceeds from issuance of common stock

 

 

5,309

 

 

 

-

 

Distributions on common stock

 

 

(16,208

)

 

 

(5,245

)

Distributions to noncontrolling interests

 

 

(164

)

 

 

(181

)

Cash flow provided by (used in) financing activities

 

 

(5,970

)

 

 

79,838

 

Net change in cash and cash equivalents, and restricted cash

 

 

107

 

 

 

1,425

 

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

 

 

16,045

 

 

 

14,619

 

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

 

$

16,152

 

 

$

16,044

 

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

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,030

 

 

$

10,399

 

Restricted cash

 

 

7,122

 

 

 

5,645

 

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

 

$

16,152

 

 

$

16,044

 

 

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

 

 

 

7


 

Independence Realty Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of March 31, 2019

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

 

NOTE 1: Organization

 

Independence Realty Trust, Inc. (“IRT”), is a self-administered and self-managed Maryland real estate investment trust, or REIT, which was formed on March 26, 2009.  Our primary purposes are to acquire, own, operate, improve and manage multifamily apartment communities in non-gateway markets. As of March 31, 2019, we owned and operated 58 multifamily apartment properties, totaling 15,880 units across non-gateway U.S markets, including Atlanta, Louisville, Memphis, and Raleigh. 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, 2018 included in our 2018 Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

b. Principles of Consolidation

The consolidated financial statements reflect our accounts and the accounts of 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.

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 March 31, 2019 and December 31, 2018, we had $7,122 and $6,729, respectively, of restricted cash.

8


 

f. 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

The properties we acquire are generally accounted for as asset acquisitions. 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.  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. The value assigned to in-place lease assets is amortized over the assumed lease up period, typically six months. During the three months ended March 31, 2019, we did not acquire any in-place leases as part of related property acquisitions. For the three months ended March 31, 2019 and 2018, we recorded $556 and $1,291, respectively, of amortization expense for intangible assets. For the three months ended March 31, 2019 and 2018, we wrote-off fully amortized intangible assets of $813 and $1,963, respectively. As of March 31, 2019, we expect to record additional amortization expense on current in-place intangible assets of $188 for the remainder of 2019.  

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 months ended March 31, 2019 and 2018, we recorded $11,891 and $9,931 of depreciation expense, respectively.

g. Revenue and Expenses

 

Rental and other property revenue

 

We apply FASB ASC Topic 842, “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.  We have elected to account for lease (i.e. fixed payments including base rent) and non-lease components (i.e. tenant reimbursements and other certain service fees) as a single combined operating lease component since (1) the timing and pattern of transfer of the lease and non-lease components is the same and (2) the lease component is the predominant element and (3) the combined single lease component would be classified as an operating lease.  As a result of this treatment, certain amounts classified within prior revenue captions tenant reimbursement income and other property income have been

9


 

combined into rental and other property revenue in the consolidated statements of operations and prior period amounts have been adjusted to conform to current period presentation.      

 

Effective January 1, 2019, we make ongoing estimates of the collectability of our base rents, tenant reimbursements, and other service fees included within rental and other property revenue.  If collectability is not probable, we adjust rental and other property income for the amount of uncollectible revenue.  For the three months ended March 31, 2019, we adjusted rental and other property income by $299 for uncollectible rental revenue.  Prior to January 1, 2019, we maintained an allowance for doubtful accounts based on an ongoing analysis of collectability and recorded changes in the allowance for doubtful accounts as bad debt expense within property operating expenses.  For the three months ended March 31, 2018, we recorded bad debt expense of $164 within property operating expenses in the consolidated statements of operations.

 

For the three months ended March 31, 2019 and 2018, we recognized revenues of $6 and $42, 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 months ended March 31, 2019 and 2018, we incurred $548 and $533 of advertising expenses, respectively.

h. 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), 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.

i. 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.

10


 

 

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.

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 months ended March 31, 2019. The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods indicated:

 

 

 

As of March 31, 2019

 

 

As of December 31, 2018

 

Financial Instrument

 

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,030

 

 

$

9,030

 

 

$

9,316

 

 

$

9,316

 

Restricted cash

 

 

7,122

 

 

 

7,122

 

 

 

6,729

 

 

 

6,729

 

Derivative assets

 

 

5,327

 

 

 

5,327

 

 

 

8,307

 

 

 

8,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured credit facility

 

 

110,145

 

 

 

111,743

 

 

 

153,983

 

 

 

155,743

 

Term Loan

 

 

298,451

 

 

 

300,000

 

 

 

248,380

 

 

 

250,000

 

Mortgages

 

 

582,324

 

 

 

583,741

 

 

 

583,125

 

 

 

577,112

 

11


 

j. 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.

k. Office Leases

We apply FASB ASC Topic 842, “Leases”, which requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet at the lease commencement date for all leases, except those leases with terms of less than a year.  We lease corporate office space under leases with terms of up to 10 years and that may include extension options, but that do not include any residual value guarantees or restrictive covenants. As of March 31, 2019, we have $3,172 of operating lease right-of-use assets and operating lease liabilities related to our corporate office leases. The operating lease right-of-use assets are presented within other assets and the operating lease liabilities are presented within other liabilities in our consolidated balance sheet. We recorded $112 of total operating lease expense during the three months ended March 31, 2019, which is recorded within property management expense and general and administrative expenses in our consolidated statements of operations.    

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 months ended March 31, 2019 and 2018.

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 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.

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 legacy lease accounting standards.  This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  In July 2018, the FASB issued an amendment to the new standard, which provides a package of practical expedients that (1) allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease and (2) provides a transition option that permits entities to not recast the comparative periods presented when transitioning to the standard. We adopted the new standard on January 1, 2019 using the modified retrospective approach and the package of practical expedients. We did not record a cumulative-effect adjustment

12


 

on the effective date and all prior comparative periods are presented in accordance with legacy lease accounting standards.  Our apartment leases, where we are lessor, continued to be accounted for as operating leases under the new standard and, therefore, there were not significant changes in accounting for these leases.  For our various corporate office leases, where we are lessee, we recorded a $308 right of use asset and a lease liability on our consolidated balance sheets upon adoption.

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. We adopted the new standard on January 1, 2019. As we have not issued share-based payments to non-employees since prior to our management internalization, the adoption of this standard has not had an effect on our consolidated financial statements.

 

NOTE 3: Investments in Real Estate

As of March 31, 2019, our investments in real estate consisted of 58 apartment properties with 15,880 units.  The table below summarizes our investments in real estate:   

 

 

 

As of

March 31, 2019

 

 

As of

December 31, 2018

 

 

Depreciable Lives

(In years)

 

Land

 

$

209,111

 

 

$

209,111

 

 

 

 

Building

 

 

1,384,840

 

 

 

1,384,810

 

 

 

40

 

Furniture, fixtures and equipment

 

 

75,924

 

 

 

66,502

 

 

5-10

 

Total investment in real estate

 

$

1,669,875

 

 

$

1,660,423

 

 

 

 

 

Accumulated depreciation

 

 

(124,107

)

 

 

(112,270

)

 

 

 

 

Investments in real estate, net

 

$

1,545,768

 

 

$

1,548,153

 

 

 

 

 

 

As of March 31, 2019 and December 31, 2018, we owned three properties that were classified as held for sale. The table below summarizes our held for sale properties.

 

Property Name

 

Location

 

Units

 

 

Net Carrying Value

 

Reserve at Eagle Ridge

 

Chicago, IL

 

 

370

 

 

$

27,093

 

Carrington Park

 

Little Rock, AR

 

 

202

 

 

 

20,655

 

Stonebridge at the Ranch

 

Little Rock, AR

 

 

260

 

 

 

29,682

 

Total

 

 

 

 

832

 

 

$

77,430

 

 

Acquisitions

In April 2019, we acquired a 224-unit property located in Atlanta, GA for $28,000.

Dispositions

In April 2019, we disposed of a 370-unit property located in Chicago, IL for $42,000. This property was previously held for sale. We expect to record a gain of approximately $12,513.

 

NOTE 4: Indebtedness

The following tables contain summary information concerning our indebtedness as of March 31, 2019:

Debt:

 

Outstanding Principal

 

 

Unamortized Discount and Debt Issuance Costs

 

 

Carrying Amount

 

 

Type

 

Weighted Average Rate

 

 

Weighted Average Maturity (in years)

 

     Unsecured credit facility (1)

 

$

111,743

 

 

$

(1,598

)

 

$

110,145

 

 

Floating

 

4.1%

 

 

 

2.5

 

Unsecured term loans

 

 

300,000

 

 

 

(1,549

)

 

 

298,451

 

 

Floating

 

4.1%

 

 

 

5.1

 

     Mortgages

 

 

584,765

 

 

 

(2,441

)

 

 

582,324

 

 

Fixed

 

3.8%

 

 

 

4.9

 

Total Debt

 

$

996,508

 

 

$

(5,588

)

 

$

990,920

 

 

 

 

3.9%

 

 

 

4.7

 

 

(1)

The unsecured credit facility total capacity is $300,000, of which $111,743 was outstanding as of March 31, 2019.   

 

13


 

 

 

Original maturities on or before December 31,

 

Debt:

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

Thereafter

 

Unsecured credit facility

 

$

-

 

 

$

-

 

 

$

61,743

 

 

$

50,000

 

 

$

-

 

 

$

-

 

Unsecured term loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

300,000

 

Mortgages

 

 

4,042

 

 

 

8,135

 

 

 

76,033

 

 

 

70,700

 

 

 

107,202

 

 

 

318,653

 

Total

 

$

4,042

 

 

$

8,135

 

 

$

137,776

 

 

$

120,700

 

 

$

107,202

 

 

$

618,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019, we were in compliance with all financial covenants contained in documents governing our indebtedness.

The following table contains summary information concerning our indebtedness as of December 31, 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)

 

$

155,743

 

 

$

(1,760

)

 

$

153,983

 

 

Floating

 

3.9%

 

 

 

2.7

 

Unsecured term loans

 

 

250,000

 

 

 

(1,620

)