The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
NOTE 1: Organization
Independence Realty Trust, Inc. was formed on March 26, 2009 as a Maryland corporation that has elected to be taxed as a real estate investment trust, or REIT, commencing with the taxable year ended December 31, 2011. We are currently externally managed by a subsidiary of RAIT Financial Trust, or RAIT, a publicly traded Maryland REIT whose common shares are listed on the New York Stock Exchange under the symbol “RAS.” As used herein, the terms “we,” “our” and “us” refer to Independence Realty Trust, Inc. and, as required by context, Independence Realty Operating Partnership, LP, which we refer to as IROP, and their subsidiaries. We own apartment properties in geographic submarkets that we believe support strong occupancy and have the potential for growth in rental rates. We seek to provide stockholders with attractive risk-adjusted returns, with an emphasis on distributions and capital appreciation. We own substantially all of our assets and conduct our operations through IROP, of which we are the sole general partner.
On September 27, 2016, we entered into an agreement, or the internalization agreement, with RAIT and RAIT affiliates providing for transactions which will change us from being externally managed to being internally managed and will separate us from RAIT. We refer to the consummation of these transactions as the management internalization. The management internalization consists of two parts: (i) our acquisition of our external advisor, which is a subsidiary of RAIT, and (ii) our acquisition of certain assets and the assumption of certain liabilities relating to the multifamily property management business of RAIT, including property management contracts relating to apartment properties owned by us, RAIT and third parties. The purchase price for the management internalization is $43,000, subject to certain prorations at closing. The internalization agreement provides that the closing of the management internalization will occur no earlier than December 20, 2016. Pursuant to the internalization agreement, on October 5, 2016, we repurchased all of the 7,269,719 shares of our common stock owned by certain of RAIT’s subsidiaries and retired these shares. See Note 11: Subsequent Events for further information.
NOTE 2: Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in the United States, or GAAP. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2015 included in our Annual Report on Form 10-K or the 2015 annual report. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position and consolidated results of operations and cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
b. Principles of Consolidation
The consolidated financial statements reflect our accounts and the accounts of IROP and other wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Pursuant to the accounting standard issued in February 2015 classified under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 810, “Consolidation”, IROP is considered a variable interest entity. As our significant asset is our investment in IROP, substantially all of our assets and liabilities represent the assets and liabilities of IROP.
c. Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
8
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
d. Cash and Cash Equivalents
Cash and cash equivalents include cash held in banks and highly liquid investments with maturities of three months or less when purchased. Cash, including amounts restricted, may at times exceed the Federal Deposit Insurance Corporation deposit insurance limit of $250 per institution. We mitigate credit risk by placing cash and cash equivalents with major financial institutions. To date, we have not experienced any losses on cash and cash equivalents.
e. Restricted Cash
Restricted cash includes tenant escrows and our funds held by lenders to fund certain expenditures or to be released at our discretion upon the occurrence of certain pre-specified events.
f. Accounts Receivable and Allowance for Bad Debts
We make estimates of the collectability of our accounts receivable related to base rents, expense reimbursements and other revenue. We analyze accounts receivable and historical bad debt levels, tenant credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants experiencing financial difficulties are analyzed and estimates are made in connection with expected uncollectible receivables. Our reported operating results are affected by management’s estimate of the collectability of accounts receivable.
g. Investments in Real Estate
Allocation of Purchase Price of Acquired Assets
We account for acquisitions of properties that meet the definition of a business pursuant to FASB ASC Topic 805, “Business Combinations”. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities associated with the real estate acquired. Transaction costs and fees incurred related to acquisitions are expensed as incurred. Transaction costs and fees incurred related to the financing of an acquisition are capitalized and amortized over the life of the related financing.
Upon the acquisition of properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements) and identified intangible assets (consisting of in-place leases), and assumed debt at the date of acquisition, based on the evaluation of information and estimates available at that date. Based on these estimates, we allocate the initial purchase price to the applicable assets and liabilities. As final information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments will be made to the purchase price allocation, in no case later than twelve months of the acquisition date. During the nine months ended September 30, 2016, we made an adjustment related to the TSRE acquisition as described in NOTE 3: Investments in Real Estate.
The aggregate value of in-place leases is determined by evaluating various factors, including the terms of the leases that are in place and assumed lease-up periods. During the nine months ended September 30, 2016, we did not acquire any properties and, therefore, did not acquire any in-place leases. The value assigned to this intangible asset is amortized over the assumed lease up period, typically six months. For the three and nine months ended September 30, 2016 we recorded $0 and $3,735, respectively, of amortization expense for intangible assets. For the three and nine months ended September 30, 2015 we recorded $109 and $3,397, respectively, of amortization expense for intangible assets. During the nine months ended September 30, 2016, $7,471 of intangible assets became fully amortized and were written off.
Impairment of Long-Lived Assets
Management evaluates the recoverability of our investment in real estate assets, including related identifiable intangible assets, in accordance with FASB ASC Topic 360, “Property, Plant and Equipment”. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that recoverability of the assets is not assured.
9
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
Managem
ent 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 f
air 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 curr
ent 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 cou
ld result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial.
Depreciation Expense
Depreciation expense for real estate assets is computed using a straight-line method based on a life of 40 years for buildings and improvements and five to ten years for equipment and fixtures. For the three and nine months ended September 30, 2016 we recorded $7,765 and $23,192 of depreciation expense, respectively. For the three and nine months ended September 30, 2015 we recorded $4,594 and $13,064 of depreciation expense, respectively.
h. Revenue and Expenses
Minimum rents are recognized on an accrual basis, over the terms of the related leases on a straight-line basis. Any above market lease value and the capitalized below-market lease values are amortized as an adjustment to rental income over the lease term. Recoveries from residential tenants for utility costs are recognized as revenue in the period that the applicable costs are incurred.
For the three and nine months ended September 30, 2016, we recognized revenues of $38 and $151, respectively, related to recoveries of lost rental revenue due to natural disasters and other insurable events from our insurance providers.
For the three and nine months ended September 30, 2016, we incurred $435 and $1,325 of advertising expenses, respectively. For the three and nine months ended September 30, 2015, we incurred $318 and $941 of advertising expenses, respectively.
i. Derivative Instruments
We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings.
In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, we measure each derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record such amounts in our consolidated balance sheet as either an asset or liability. For derivatives designated as fair value hedges, derivatives not designated as hedges, or for derivatives designated as cash flow hedges associated with debt for which we elected the fair value option under FASB ASC Topic 825, “Financial Instruments”, the changes in fair value of the derivative instrument are recorded in earnings. For derivatives designated as cash flow hedges, the changes in the fair value of the effective portions of the derivative are reported in other comprehensive income. Changes in the ineffective portions of cash flow hedges, if any, are recognized in earnings.
j. Fair Value of Financial Instruments
In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:
|
•
|
Level 1
: Valuations are based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are equity securities listed in active markets. As such, valuations of these investments do not entail a significant degree of judgment.
|
10
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
|
•
|
Level 2
: Valuations are based on quoted prices for similar instruments in active markets or q
uoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
•
|
Level 3
: Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.
|
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of investment, whether the investment is new, whether the investment is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that management believes are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be transferred from Level 1 to Level 2 or Level 2 to Level 3.
Fair value for certain of our Level 3 financial instruments is derived using internal valuation models. These internal valuation models include discounted cash flow analyses developed by management using current interest rates, estimates of the term of the particular instrument, specific issuer information and other market data for securities without an active market. In accordance with FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, the impact of our own credit spreads is also considered when measuring the fair value of financial assets or liabilities, including derivative contracts. Where appropriate, valuation adjustments are made to account for various factors, including bid-ask spreads, credit quality and market liquidity. These adjustments are applied on a consistent basis and are based on observable inputs where available. Management’s estimate of fair value requires significant management judgment and is subject to a high degree of variability based upon market conditions, the availability of specific issuer information and management’s assumptions.
11
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
FA
SB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of mortgage indebtedness is based on a discounted cash flows valuation technique. As
this technique utilizes current credit spreads, which are generally unobservable, this is classified as a Level 3 fair value measurement within the fair value hierarchy. We determine appropriate credit spreads based on the type of debt and its maturity.
The fair value of our secured credit facility, term loan facility, cash and cash equivalents and restricted cash as of September 30, 2016 and December 31, 2015 approximated their respective unpaid principal balances due to the nature of these instruments.
Given that cash and cash equivalents and restricted cash are short term in nature with limited fair value volatility, the carrying amount is deemed to be a reasonable approximation of fair value and the fair value input is classified as a Level 1 fair val
ue measurement. The fair value input for the derivatives is classified as a Level 2 fair value measurement within the fair value hierarchy. The fair value inputs for the secured credit facility and term loan facility are classified as Level 2 fair value m
easurements within the fair value hierarchy. The following table summarizes the carrying amount and the fair value of our financial instruments as of the periods indicated:
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
Financial Instrument
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,247
|
|
|
$
|
29,247
|
|
|
$
|
38,301
|
|
|
$
|
38,301
|
|
Restricted cash
|
|
|
8,028
|
|
|
|
8,028
|
|
|
|
5,413
|
|
|
|
5,413
|
|
Derivative assets
|
|
|
—
|
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured credit facility
|
|
|
244,019
|
|
|
|
247,335
|
|
|
|
267,155
|
|
|
|
271,500
|
|
Term loan
|
|
|
39,606
|
|
|
|
40,000
|
|
|
|
118,418
|
|
|
|
120,000
|
|
Mortgages
|
|
|
596,956
|
|
|
|
605,746
|
|
|
|
581,038
|
|
|
|
589,320
|
|
Derivative liabilities
|
|
|
696
|
|
|
|
696
|
|
|
|
—
|
|
|
|
—
|
|
k
. Deferred Financing Costs
Costs incurred in connection with debt financing are deferred and classified within indebtedness and charged to interest expense over the terms of the related debt agreements, under the effective interest method.
l. Income Taxes
We have elected to be taxed as a REIT beginning with the taxable year ended December 31, 2011. Accordingly, we recorded no income tax expense for the three and nine months ended September 30, 2016 and for the three and nine months ended September 30, 2015.
To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders; however, we believe that we are organized and operate in such a manner as to qualify and maintain treatment as a REIT and intend to operate in such a manner so that we will remain qualified as a REIT for federal income tax purposes.
12
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
m. Recent Accounting Pronouncements
Adopted Within these Financial Statements
In February 2015, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. This accounting standard amends the consolidation analysis required under GAAP and requires management to reevaluate all previous consolidation conclusions. This standard considers limited partnerships to be VIEs, unless the limited partners have either substantive kick-out or participating rights. The presumption that a general partner should consolidate a limited partnership has also been eliminated. The standard amends the effect that fees paid to a decision maker or service provider have on the consolidation analysis, as well as amends how variable interests held by a reporting entity’s related parties affect the consolidation conclusion. This standard also clarifies how to determine whether equity holders as a group have power over an entity. This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with an early adoption permitted. The adoption of this accounting standard did not have an impact on our consolidated financial statements as it did not change any of our existing consolidation conclusions.
In April 2015, the FASB issued an accounting standard classified under FASB ASC Topic 835, “Interest”. This accounting standard amends existing guidance to change reporting requirements for debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the debt liability. This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with an early adoption permitted. Retrospective application to prior periods is required. The adoption of this accounting standard resulted in the reclassification in our December 31, 2015 consolidated balance sheet of $9,226 of net deferred costs to total indebtedness on our consolidated balance sheet.
In September 2015, the FASB issued an accounting standard classified under FASB ASC Topic 805, “Business Combinations”. This accounting standard amends existing guidance related to measurement period adjustments by requiring the adjustments to be recognized prospectively with disclosure of the impact of the adjustments had they been applied previously. This standard was effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. As this standard only applied to measurement period adjustments that occur after the effective date, this standard did not have a material impact on our consolidated financial statements.
Not Yet Adopted Within these Financial Statements
In May 2014, the FASB issued an accounting standard classified under FASB ASC Topic 606, “Revenue from Contracts with Customers”. This accounting standard generally replaces existing guidance by requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This accounting standard applies to all contracts with customers, except those that are within the scope of other Topics in the FASB ASC. During 2016, the FASB issued three amendments to this accounting standard which provide further clarification to this accounting standard. These standards amending FASB ASC Topic 606 are currently effective for annual reporting periods beginning after December 15, 2017. Management is currently evaluating the impact that these standards may have on our consolidated financial statements.
In January 2016, the FASB issued an accounting standard classified under FASB ASC Topic 825, “Financial Instruments”. This accounting standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other things, the amendment (i) eliminates certain disclosure requirements for financial instruments measured at amortized cost; (ii) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation, in other comprehensive income, of the change in fair value of a liability, when the fair value option has been elected, resulting from a change in the instrument-specific credit risk; and (iv) requires separate presentation of financial instruments by measurement category and form. This standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the separate presentation of changes in fair value due to changes in instrument-specific credit risk. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.
In February 2016, the FASB issued an accounting standard classified under FASB ASC Topic 842, “Leases”. This accounting standard amends lease accounting by requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the balance sheet and disclosing key information about leasing arrangements. This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the
13
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
amendments in this standard is permitted. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.
In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management does not expect this standard to have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 815, “Derivatives and Hedging”. This accounting standard clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This accounting standard clarifies what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management does not expect this standard to have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued an accounting standard classified under FASB ASC Topic 718, “Compensation – Stock Compensation”. This accounting standard simplifies several aspects of the accounting for share-based payment award transactions, including: (i) income tax consequences; (ii) classification of awards as either equity or liabilities; and (iii) classification on the statement of cash flows. This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.
In August 2016, the FASB issued an accounting standard classified under FASB ASC Topic 230, “Statement of Cash Flows”. This accounting standard provides guidance on eight specific cash flow issues: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact that this standard may have on our consolidated statement of cash flows.
In October 2016, the FASB issued an accounting standard classified under FASB ASC Topic 810, “Consolidation”. The amendments in this accounting standard provide guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this accounting standard do not change the characteristics of a primary beneficiary in current GAAP. A primary beneficiary of a VIE has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a VIE), the amendments in this accounting standard require that the reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interest in a VIE and, on a proportionate basis, its indirect variable interest in a VIE held through related parties, including related parties that are under common control with the reporting entity. If after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have the characteristics of a primary beneficiary, the amendments continue to require that the reporting entity to evaluate whether it and one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2016,
14
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
including interim periods within those fiscal y
ears. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact that this standard may have on our consolidated financial statements.
NOTE 3: Investments in Real Estate
As of September 30, 2016, our investments in real estate consisted of 46 apartment properties with 12,982 units (unaudited). The table below summarizes our investments in real estate:
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
|
Depreciable
Lives
(In years)
|
|
Land
|
|
$
|
178,515
|
|
|
$
|
190,585
|
|
|
|
—
|
|
Building
|
|
|
1,119,422
|
|
|
|
1,168,453
|
|
|
|
40
|
|
Furniture, fixtures and equipment
|
|
|
18,788
|
|
|
|
12,977
|
|
|
5-10
|
|
Total investment in real estate
|
|
$
|
1,316,725
|
|
|
$
|
1,372,015
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(52,824
|
)
|
|
|
(39,638
|
)
|
|
|
|
|
Investments in real estate, net
|
|
$
|
1,263,901
|
|
|
$
|
1,332,377
|
|
|
|
|
|
Acquisitions
During the first quarter of 2016, we received additional information regarding estimates we had made for certain accrued expenses related to our acquisition of Trade Street Residential Inc., or the TSRE acquisition, that was completed on September 17, 2015. This information led to an increase in fair value of the net assets we acquired of $91, which we recognized during the nine months ended September 30, 2016. During the third quarter of 2016, we finalized our purchase accounting process related to the TSRE acquisition. As part of this process, we received additional information regarding estimates we had made for certain accrued expenses related to the TSRE acquisition which led to an increase in fair value of the net assets we acquired of $641, which we recognized during the three months ended September 30, 2016.
Dispositions
During the nine months ended September 30, 2016 we recognized a $9 loss related to the sale of a multifamily property which occurred in the prior year as we settled remaining amounts with buyers. The below table summarizes the dispositions for the nine months ended September 30, 2016 and also presents each property’s contribution to net income (loss) allocable to common shares, excluding the impact of the gain (loss) on sale:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable to common shares
|
|
Property Name
|
|
Date of Sale
|
|
Sale Price
|
|
|
Gain (loss) on sale
|
|
|
For the Three Months Ended September 30, 2016
|
|
|
For the Nine Months Ended September 30, 2016
|
|
Cumberland Glen
|
|
02/18/2016
|
|
$
|
18,000
|
|
|
$
|
2,452
|
|
|
$
|
—
|
|
|
$
|
35
|
|
Belle Creek
|
|
04/07/2016
|
|
|
23,000
|
|
|
|
14,191
|
|
|
|
2
|
|
|
|
252
|
|
Tresa
|
|
05/05/2016
|
|
|
47,000
|
|
|
|
15,139
|
|
|
|
1
|
|
|
|
354
|
|
Total
|
|
|
|
$
|
88,000
|
|
|
$
|
31,782
|
|
|
$
|
3
|
|
|
$
|
641
|
|
Related to the dispositions of Belle Creek and Tresa, we paid $211 and $275 of exit fees to RAIT, respectively, pursuant to the contractual terms of the mortgage indebtedness. See Note 4: Indebtedness for further information. These amounts were recognized in net gains (losses) on sale of assets.
15
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
NOTE 4: Indebtedness
The following tables contain summary information concerning our indebtedness as of September 30, 2016:
Debt:
|
|
Outstanding
Principal
|
|
|
Unamortized Discount and Debt Issuance Costs
|
|
|
Carrying
Amount
|
|
|
Type
|
|
Weighted Average Rate
|
|
|
Weighted Average Maturity (in years)
|
|
Secured credit facility (1)(2)
|
|
$
|
247,335
|
|
|
$
|
(3,316
|
)
|
|
$
|
244,019
|
|
|
Floating
|
|
|
2.8%
|
|
|
|
2.0
|
|
Term loan (2)
|
|
|
40,000
|
|
|
|
(394
|
)
|
|
|
39,606
|
|
|
Floating
|
|
|
4.5%
|
|
|
|
2.0
|
|
Mortgages-Fixed rate
|
|
|
600,743
|
|
|
|
(3,787
|
)
|
|
|
596,956
|
|
|
Fixed
|
|
|
3.8%
|
|
|
|
7.0
|
|
Total Debt
|
|
$
|
888,078
|
|
|
$
|
(7,497
|
)
|
|
$
|
880,581
|
|
|
|
|
|
3.5%
|
|
|
|
5.3
|
|
|
(1)
|
The secured credit facility total capacity is $325,000, of which $247,335 was outstanding as of September 30, 2016.
|
|
(2)
|
As of September 30, 2016, IRT maintained a float-to-fixed interest rate swap with a $150,000 notional amount. This swap, which expires on June 17, 2021 and has a fixed rate of 1.145%, has converted $150,000 of our floating rate debt to fixed rate debt.
|
|
|
Original maturities on or before December 31,
|
|
Debt:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
Secured credit facility
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
247,335
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Term loan
|
|
|
-
|
|
|
|
600
|
|
|
|
39,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Mortgages-Fixed rate
|
|
|
509
|
|
|
|
2,792
|
|
|
|
3,545
|
|
|
|
4,593
|
|
|
|
15,892
|
|
|
|
573,412
|
|
Total
|
|
$
|
509
|
|
|
$
|
3,392
|
|
|
$
|
290,280
|
|
|
$
|
4,593
|
|
|
$
|
15,892
|
|
|
$
|
573,412
|
|
As of September 30, 2016 we were in compliance with all financial covenants contained in our indebtedness.
The following table contains summary information concerning our indebtedness as of December 31, 2015:
Debt:
|
|
Outstanding
Principal
|
|
|
Unamortized Discount and Debt Issuance Costs
|
|
|
Carrying
Amount
|
|
|
Type
|
|
Rate
|
|
|
Weighted Average Maturity (in years)
|
|
Secured credit facility
(1)
|
|
$
|
271,500
|
|
|
$
|
(4,345
|
)
|
|
$
|
267,155
|
|
|
Floating
|
|
|
2.9%
|
|
|
|
2.7
|
|
Bridge term loan
|
|
|
120,000
|
|
|
$
|
(1,582
|
)
|
|
|
118,418
|
|
|
Floating
|
|
|
5.4%
|
|
|
|
0.7
|
|
Mortgages-Fixed rate
|
|
|
545,956
|
|
|
|
(2,993
|
)
|
|
|
542,963
|
|
|
Fixed
|
|
|
3.8%
|
|
|
|
6.9
|
|
Mortgages-Floating rate
|
|
|
38,075
|
|
|
|
-
|
|
|
|
38,075
|
|
|
Floating
|
|
|
2.8%
|
|
|
|
5.4
|
|
Total Debt
|
|
$
|
975,531
|
|
|
$
|
(8,920
|
)
|
|
$
|
966,611
|
|
|
|
|
|
3.7%
|
|
|
|
4.9
|
|
|
(1)
|
The secured credit facility total capacity was $325,000, of which $271,500 was outstanding as of December 31, 2015.
|
As of September 30, 2016, the weighted average interest rate of our mortgage indebtedness was 3.8%. As of September 30, 2016 and December 31, 2015, RAIT held $0 and $38,075 of our mortgage indebtedness, respectively. For the three and nine months ended September 30, 2016, we incurred approximately $0 and $361, respectively, of interest expense related to the RAIT indebtedness. For the three and nine months ended September 30, 2015, we incurred approximately $243 and $722, respectively, of interest expense related to the RAIT indebtedness.
Secured Credit Facility
On September 17, 2015, IROP entered into a credit agreement with KeyBank with respect to a $325,000
senior secured credit facility
, or the secured credit facility, which will mature on September 17, 2018. The secured credit facility is available for additional loans, may be increased to $450,000 and/or extended for two 12-month terms. At September 30, 2016, amounts outstanding under the
16
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
secured credit facility bear interest
at 245 basis points over 1-month LIBOR. As of September 30, 2016, there was $77,665 of availability under the senior secured credit facility. An unused fee of 0.25% is charged on this amount.
In March of 2016, IROP drew down $8,000 on the secured credit facility, which was used to repay $6,000 of the interim facility, discussed below.
In March of 2016, IROP drew down $45,476 on the secured credit facility, which was used to satisfy the existing mortgages and closing costs relating to the Oklahoma City portfolio of properties which were acquired in 2014.
In May of 2016, IROP repaid $77,665 on the secured credit facility with the proceeds received from entering into permanent financing relating to Aston, Avenues at Craig Ranch and Waterstone at Big Creek which were all acquired in 2015.
In October of 2016, IROP paid down $107,335 on the secured credit facility with the proceeds received from a public offering. See Note 11: Subsequent Events for further information.
Term Loan
On September 17, 2015, IROP entered into a credit agreement with respect to a $120,000 senior interim term loan facility, or the interim facility. The interim facility was amended and restated to replace the interim facility with a $40,000 senior secured term loan, as described below.
In January and February of 2016, IROP repaid $23,784 of the interim facility subsequent to two property dispositions.
In April and May of 2016, IROP repaid $30,000 of the interim facility subsequent to two property dispositions.
In May of 2016, IROP repaid $26,704 of the interim facility subsequent to the permanent financing of two properties with seven and ten year fixed-rate mortgages.
As noted above, the interim facility was amended and restated to provide for a $40,000 senior secured term loan, or the term loan, on June 24, 2016. Upon entering into the term loan, IROP borrowed $40,000, using $416 to pay closing costs and $33,512 to repay the remaining balance under the interim facility. The maturity date of the term loan is September 17, 2018, subject to acceleration in the event of customary events of default. The term loan requires monthly payments of interest only through June 30, 2017. IROP is required to reduce the principal amount outstanding under the term loan by $100 per month beginning July 2017 and must apply 50% of all net proceeds from equity issuances, sales of assets, or refinancings of assets towards repaying the term loan. At IROP’s option, borrowings under the term loan will bear interest at a rate equal to either (i) LIBOR plus a margin of 400 basis points, or (ii) a base rate plus a margin of 300 basis points. IROP may prepay the term loan, in whole or in part, at any time without fee or penalty, except for breakage costs associated with LIBOR borrowings. At September 30, 2016, the term loan bears interest at 400 basis points over 1-month LIBOR and the balance is $40,000.
In October of 2016, IROP repaid the $40,000 term loan with the proceeds received from a public offering. See Note 11: Subsequent Events for further information.
Mortgages-Fixed Rate
In February of 2016, we repaid $6,659 of mortgage indebtedness as part of a property disposition.
In March of 2016, we repaid $43,694 of mortgage indebtedness related to the Oklahoma City portfolio of properties we acquired in 2014 through a refinancing whereby IROP drew down on the secured credit facility.
On May 26, 2016, we entered into a loan agreement for a $25,050 loan secured by a first mortgage on our Aston property. The loan bears interest at a rate of 3.4% per annum, provides for monthly payments of interest only through December 2019, when principal and interest payments will be due monthly based on a 30-year amortization schedule, and matures June 2023.
17
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
On May 17, 2016, we entered into a loan agreement for a $31,25
0 loan secured by a first mortgage on our Avenues at Craig Ranch property. The loan bears interest at a rate of 3.3% per annum, provides for monthly payments of interest only through May 2019, when principal and interest payments will be due monthly based
on a 30-year amortization schedule, and matures June 2023.
On May 20, 2016, we entered into a loan agreement for a $49,680 loan secured by a first mortgage on our Waterstone at Big Creek property. The loan bears interest at a rate of 3.7% per annum, provides for monthly payments of interest only through June 2019, when principal and interest payments will be due monthly based on a 30-year amortization schedule, and matures June 2026.
Mortgages-Floating Rate
In April of 2016, we repaid $10,575 of mortgage indebtedness as part of a property disposition. This indebtedness was held by RAIT. During the nine months ended September 30, 2016, we paid $211 in exit fees pursuant to the contractual terms of the mortgage indebtedness to RAIT.
In May of 2016, we repaid $27,500 of mortgage indebtedness as part of a property disposition. This indebtedness was held by RAIT. During the nine months ended September 30, 2016, we paid $275 in exit fees pursuant to the contractual terms of the mortgage indebtedness to RAIT.
NOTE 5: Derivative Financial 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.
Interest Rate Swaps and Caps
We have entered into an interest rate cap contract and an interest rate swap contract to hedge interest rate exposure on floating rate indebtedness.
On September 30, 2015, we entered into an interest rate cap contract with a notional value of $200 million, a strike rate of 3.0% based on 1-month LIBOR and a maturity date of October 17, 2017. Through June 23, 2016 this interest rate cap was designated as a cash flow hedge. Through that date, we concluded that this hedging relationship was highly effective in offsetting interest rate fluctuations associated with the identified indebtedness and, using the hypothetical derivative method, did not recognize any ineffectiveness. On June 24, 2016, this interest rate cap was de-designated and, as of June 30, 2016, this interest rate cap was accounted for as a freestanding derivative. The change in fair value of this interest cap was $1 for the nine months ended September 30, 2016.
On June 24, 2016, we entered into an interest rate swap contract with a notional value of $150 million, a strike rate of 1.145% and a maturity date of June 17, 2021. We designated this interest rate swap as a cash flow hedge at inception and determined that the hedge is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. We concluded that this hedging relationship was and will continue to be highly effective, and using the hypothetical derivative method, did not recognize any ineffectiveness.
18
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as
of September 30, 2016 and December 31, 2015:
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Notional
|
|
|
Fair Value of
Assets
|
|
|
Fair Value of
Liabilities
|
|
|
Notional
|
|
|
Fair Value of
Assets
|
|
|
Fair Value of
Liabilities
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
$
|
(696
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate cap
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
24
|
|
|
|
—
|
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
(696
|
)
|
|
|
200,000
|
|
|
|
24
|
|
|
|
—
|
|
Freestanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net fair value
|
|
$
|
350,000
|
|
|
$
|
—
|
|
|
$
|
(696
|
)
|
|
$
|
200,000
|
|
|
$
|
24
|
|
|
$
|
—
|
|
Effective interest rate swaps and caps are reported in accumulated other comprehensive income and the fair value of these hedge agreements is included in other assets or other liabilities.
For interest rate swaps and caps that are considered effective hedges, we reclassified realized losses of $251 and $271, respectively, to earnings within interest expense for the three and nine months ended September 30, 2016. For interest rate swaps and caps that are considered effective hedges, we expect $721 to be reclassified out of accumulated other comprehensive income to earnings over the next 12 months.
NOTE 6: Shareholder Equity and Noncontrolling Interests
Stockholder Equity
Common Shares
Our board of directors has declared the following dividends:
Month
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend
Declared
Per Share
|
|
January 2016
|
|
January 14, 2016
|
|
January 29, 2016
|
|
February 16, 2016
|
|
$
|
0.06
|
|
February 2016
|
|
January 14, 2016
|
|
February 29, 2016
|
|
March 15, 2016
|
|
$
|
0.06
|
|
March 2016
|
|
January 14, 2016
|
|
March 31, 2016
|
|
April 15, 2016
|
|
$
|
0.06
|
|
April 2016
|
|
April 14, 2016
|
|
April 29, 2016
|
|
May 16, 2016
|
|
$
|
0.06
|
|
May 2016
|
|
April 14, 2016
|
|
May 31, 2016
|
|
June 15, 2016
|
|
$
|
0.06
|
|
June 2016
|
|
April 14, 2016
|
|
June 30, 2016
|
|
July 15, 2016
|
|
$
|
0.06
|
|
July 2016
|
|
July 14, 2016
|
|
July 29, 2016
|
|
August 15, 2016
|
|
$
|
0.06
|
|
August 2016
|
|
July 14, 2016
|
|
August 31, 2016
|
|
September 15, 2016
|
|
$
|
0.06
|
|
September 2016
|
|
July 14, 2016
|
|
September 30, 2016
|
|
October 17, 2016
|
|
$
|
0.06
|
|
October 2016
|
|
October 12, 2016
|
|
October 31, 2016
|
|
November 15, 2016
|
|
$
|
0.06
|
|
November 2016
|
|
October 12, 2016
|
|
November 30, 2016
|
|
December 15, 2016
|
|
$
|
0.06
|
|
December 2016
|
|
October 12, 2016
|
|
December 30, 2016
|
|
January 17, 2017
|
|
$
|
0.06
|
|
During the three and nine months ended September 30, 2016, we also paid $0 and $42, respectively, of dividends on restricted common share awards that vested during the period.
On September 27, 2016 we announced a public offering of our common stock, which was completed on October 5, 2016. See Note 11: Subsequent Events for information regarding events that occurred in October of 2016 involving our equity including the completion of a public offering of our common stock and the repurchase of certain shares of our common stock.
19
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
Noncontrolling Interest
On February 1, 2016, holders of IROP units exchanged 204,115 units for 204,113 shares of our common stock with fractional units being settled in cash. On August 1, 2016, holders of IROP units exchanged 35,808 units for 35,808 shares of our common stock. As of September 30, 2016, 2,915,008 IROP units held by unaffiliated third parties remain outstanding with a redemption value of $26,235, based on IRT’s stock price as of September 30, 2016.
Our board of directors has declared the following distributions on IROP’s LP units:
Month
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Dividend
Declared
Per Share
|
|
January 2016
|
|
January 14, 2016
|
|
January 29, 2016
|
|
February 16, 2016
|
|
$
|
0.06
|
|
February 2016
|
|
January 14, 2016
|
|
February 29, 2016
|
|
March 15, 2016
|
|
$
|
0.06
|
|
March 2016
|
|
January 14, 2016
|
|
March 31, 2016
|
|
April 15, 2016
|
|
$
|
0.06
|
|
April 2016
|
|
April 14, 2016
|
|
April 29, 2016
|
|
May 16, 2016
|
|
$
|
0.06
|
|
May 2016
|
|
April 14, 2016
|
|
May 31, 2016
|
|
June 15, 2016
|
|
$
|
0.06
|
|
June 2016
|
|
April 14, 2016
|
|
June 30, 2016
|
|
July 15, 2016
|
|
$
|
0.06
|
|
July 2016
|
|
July 14, 2016
|
|
July 29, 2016
|
|
August 15, 2016
|
|
$
|
0.06
|
|
August 2016
|
|
July 14, 2016
|
|
August 31, 2016
|
|
September 15, 2016
|
|
$
|
0.06
|
|
September 2016
|
|
July 14, 2016
|
|
September 30, 2016
|
|
October 17, 2016
|
|
$
|
0.06
|
|
October 2016
|
|
October 12, 2016
|
|
October 31, 2016
|
|
November 15, 2016
|
|
$
|
0.06
|
|
November 2016
|
|
October 12, 2016
|
|
November 30, 2016
|
|
December 15, 2016
|
|
$
|
0.06
|
|
December 2016
|
|
October 12, 2016
|
|
December 30, 2016
|
|
January 17, 2017
|
|
$
|
0.06
|
|
NOTE 7: Equity Compensation Plans
Long Term Incentive Plan
On April 5, 2011, our board of directors approved and adopted the Long Term Incentive Plan, or the incentive plan, and the Independent Directors Compensation Plan, or the director plan. Our incentive plan provides for the grant of awards to our directors, officers and full-time employees (in the event we ever have employees), full-time employees of our advisor and its affiliates, full-time employees of entities that provide services to our advisor, directors of our advisor or of entities that provide services to it, certain of our consultants and certain consultants to our advisor and its affiliates or to entities that provide services to our advisor. The incentive plan authorizes the grant of restricted or unrestricted shares of our common stock, non-qualified and incentive stock options, restricted stock units, stock appreciation rights, dividend equivalents and other stock- or cash-based awards. On July 29, 2013, our board of directors and stockholders approved the amendment and restatement of our incentive plan to reduce the number of shares of common stock issuable thereunder to 800,000 shares.
Under the director plan, which operated as a sub-plan of our incentive plan, each of our independent directors has received 3,000 shares of common stock annually. In addition, our independent directors could elect to receive their annual cash fee in the form of our common shares or a combination of common shares and cash.
In March 2016, our board of directors adopted the 2016 Long Term Incentive Plan, or the 2016 LTIP, which was approved by stockholders at IRT’s Annual Meeting held on May 12, 2016. The number of shares of common stock issuable thereunder is 4,300,000 shares of common stock. The term of the 2016 LTIP was extended so that the 2016 LTIP will terminate on May 12, 2026. The director plan was terminated and future director awards will be made under the 2016 LTIP.
On February 12, 2016, our compensation committee awarded 210,000 restricted stock awards valued at $6.22 per share, or $1,306, in the aggregate. The awards vest over a three-year period.
On May 12, 2016, our compensation committee made a stock grant under the 2016 LTIP so that our independent directors received 18,000 shares of our common stock, in the aggregate, valued at $137 using our closing stock price of $7.60. These awards vested immediately.
20
Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
NOTE 8: Related Party Transactions and Arrangements
Fees and Expenses Paid to Our Advisor
As of September 25, 2015 we entered into the Second Amendment to the Second Amended and Restated Advisory Agreement. The Second Amendment amends the advisory agreement to extend its term to October 1, 2020, and to provide for compensation to our Advisor for periods subsequent to October 1, 2015 as follows:
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Quarterly base management fee of 0.375% of our cumulative equity raised; and
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Quarterly incentive fee equal to 20% of our Core FFO, as defined in the advisory agreement, in excess of $0.20 per share.
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Prior to the Second Amendment, the Second Amended and Restated Advisory Agreement, which was effective as of May 7, 2013 through September 30, 2015, provided that our Advisor was compensated as follows:
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Quarterly base management fee of 0.1875% of average gross real estate assets as of the last day of such quarter. Average gross real estate assets means the average of the aggregate book value of our real estate assets before reserves for depreciation or other similar noncash reserves and excluding the book values attributable to the eight properties that were acquired prior to August 16, 2013. We computed average gross real estate assets by taking the average of these book values at the end of each month during the quarter for which we are calculated the fee.
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An incentive fee based on our pre-incentive fee core funds from operations, or Core FFO. The incentive fee was computed at the end of each fiscal quarter as follows:
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no incentive fee in any fiscal quarter in which our pre-incentive fee Core FFO did not exceed the hurdle rate of 1.75% (7% annualized) of the cumulative gross amount of equity capital we have obtained; and
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20% of the amount of our pre-incentive fee Core FFO that exceeded 1.75% (7% annualized) of the cumulative gross proceeds from the issuance of equity securities.
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For the three and nine months ended September 30, 2016, our Advisor earned $1,727 and $5,141 of asset management fees, respectively. For the three and nine months ended September 30, 2015, our Advisor earned $1,259 and $3,306 of asset management fees, respectively.
For the three and nine months ended September 30, 2016, our Advisor earned $206 and $350 of incentive fees, respectively. For the three and nine months ended September 30, 2015, our Advisor earned $0 and $425 of incentive fees, respectively. These fees are included within asset management fees in our consolidated statements of operations.
As of September 30, 2016 and December 31, 2015 we had liabilities payable to our Advisor for asset management fees and incentive fees of $3,726 and $1,854, respectively. These liabilities are presented within accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Property Management Fees Paid to Our Property Manager
We have entered into property management agreements with RAIT Residential, or our property manager, which is wholly owned by RAIT, with respect to each of our properties. Pursuant to the property management agreements, we pay our property manager property management and leasing fees on a monthly basis of an amount up to 4.0% of the gross revenues from the property for each month. Additionally, we may pay our property manager a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties, in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Each management agreement has an initial one year term, subject to automatic one-year renewals unless either party gives prior notice of its desire to terminate the management agreement. For the three and nine months ended September 30, 2016 our property manager earned $1,219 and $3,710 of property management and construction management fees, respectively. For the three and nine months ended September 30, 2015 our property manager earned $861 and $2,381 of property management and construction management fees, respectively. As of September 30, 2016 and December 31, 2015, we had liabilities payable to our property manager for property
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Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
management
and construction management fees of $0 and $440, respectively. These liabilities are presented within
accounts payable and accrued expenses in the accompanying consolidated balance sheets
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Dividends Paid to Affiliates of our Advisor
As of September 30, 2016 and December 31, 2015, RAIT owned 15.4% and 15.5% of the outstanding shares of our common stock, respectively. For the three and nine months ended September 30, 2016, we declared and subsequently paid dividends of $1,309 and $3,927, respectively, related to shares of common stock owned by RAIT. For the three and nine months ended September 30, 2015, we declared and subsequently paid dividends of $1,309 and $3,926 respectively, related to shares of common stock owned by RAIT. As of September 30, 2016 and December 31, 2015, we had distributions payable to RAIT of $436 and $436, respectively.
RAIT Indebtedness
In the second quarter of 2016, we repaid $38,075 of mortgage indebtedness with proceeds from two property dispositions. This indebtedness was held by RAIT. During the three and nine months ended September 30, 2016, we paid $0 and $486, respectively, in exit fees pursuant to the contractual terms of the mortgage indebtedness to RAIT.
Management Internalization and Stock Repurchase
On September 27, 2016, we announced the management internalization, which involved the acquisition of our external advisor as well as the acquisition of certain assets and the assumption of certain liabilities relating to the multifamily property management business of RAIT, and the repurchase of up to all of the approximately 7,269,719 shares of our common stock owned by certain of RAIT’s subsidiaries. See Note 1: The Company and Note 11: Subsequent Events for further information.
NOTE 9: Earnings (Loss) Per Share
The following table presents a reconciliation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2016 and 2015:
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For the Three Months Ended September 30,
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For the Nine Months Ended September 30,
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2016
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2015
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2016
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2015
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Net income (loss)
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$
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2,407
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$
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25,636
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$
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33,151
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$
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25,748
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(Income) loss allocated to non-controlling interests
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(140
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)
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(1,621
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)
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(1,972
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)
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(1,629
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)
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Net income (loss) allocable to common shares
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2,267
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24,015
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31,179
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24,119
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Weighted-average shares outstanding—Basic
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47,215,918
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33,962,015
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47,164,543
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32,516,470
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Weighted-average shares outstanding—Diluted
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47,314,629
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33,962,015
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47,190,139
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32,520,684
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Earnings (loss) per share—Basic
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$
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0.05
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$
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0.71
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$
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0.66
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$
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0.74
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Earnings (loss) per share—Diluted
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$
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0.05
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$
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0.71
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$
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0.66
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$
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0.74
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Certain IROP units, stock appreciation rights, or SARs, and unvested shares were excluded from the earnings (loss) per share computation because their effect would have been anti-dilutive, totaling 2,915,008 and 3,091,380 for the three and nine months ended September 30, 2016, respectively, and 3,278,935 and 3,184,326 for the three and nine months ended September 30, 2015, respectively.
NOTE 10: Other Disclosures
Litigation
We are subject to various other legal proceedings and claims that arise in the ordinary course of our business operations. Matters which arise out of allegations of bodily injury, property damage, and employment practices are generally covered by insurance. While the resolution of these other matters cannot be predicted with certainty, we currently believe the final outcome of such matters will not have a material adverse effect on our financial position, results of operations or cash flows.
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Independence Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016
(Unaudited and dollars in thousands, except share and per share data)
Other Matters
To the extent that a natural disaster or similar event occurs with more than a remote risk of having a material impact on the consolidated financial statements, we will disclose the estimated range of possible outcomes, and, if an outcome is probable, accrue an appropriate liability.
NOTE 11: Subsequent Events
On October 5, 2016, we completed the underwritten public offering that was announced on September 27, 2016. We issued and sold 25,000,000 common shares, par value $0.01 per share, at a public offering price of $9.00 per common share. We received approximately $211,750 of net proceeds of the public offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
On October 5, 2016, we used these proceeds as follows: (i) $40,000 of the proceeds were used to prepay in full and terminate our $40,000 senior secured term loan facility; (ii) $62,156 of the proceeds were used to repurchase and retire 7,269,719 shares of our common stock from certain of RAIT’s subsidiaries at a purchase price of $8.55 per share; (iii) $47,335 of the proceeds were used to partially pay down the $325,000 senior secured credit facility; (iv) $43,000 of the proceeds were reserved to consummate the management internalization; and v) the remaining $19,259 was held for general corporate purposes.
On October 11, 2016, we partially paid down an additional $30,000 on the $325,000 senior secured credit facility using proceeds received from the offering and cash on our balance sheet.
As part of the offering, we granted the underwriters an option, exercisable for 30 days from the date of the underwriting agreement, to purchase up to an additional 3,750,000 common shares. On October 21 2016, the underwriters exercised their option to purchase an additional 3,750,000 common shares at a purchase price of $9.00 per common share. We received $32,062 of net proceeds, after deducting underwriting discounts and commissions.
On October 24, 2016, we partially paid down an additional $30,000 on the $325,000 senior secured credit facility using the proceeds received from the exercise of the underwriters’ option.
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